SHORT NOTE ON LAW OF INSURANCE

Chapter One: Introduction to Law of Insurance

This chapter is aimed at providing theoretical support to law of insurance. The unit does not is concerned
with the legal issues which revolve around insurance rather it is devoted with defining insurance,
identifying the nature of insurance, the significance of insurance and requirements necessary to carry out
insurance business in Ethiopia.
1.1. Definition of Insurance
Insurance is defined in various ways. The main ones are the following.
1.From the point view of an individual
Insurance is a risk transfer mechanism or an economic device whereby a person, called the
insured/assured transfers a risk of a possible financial loss resulting from unforeseeable events
affecting property, life or body to a person called the insurer for consideration.
2. From the point of view of the insurer
Insurance is a mechanism through which a risk is distributed among the group of persons who are
exposed to the same type of risk, i.e., persons who bear the risk of suffering a financial loss as a result of
events affecting property, life or body.
In sum, from cumulative reading of the above definitions insurance does not and cannot prevent
(protect) loss of property, incurring civil liability, death, or injury or illness; rather it provides financial
compensation for the effects of misfortune.

1.2. Legal definition of insurance contract (insurance policy)

Art 654 of the Commercial Code of Ethiopia defines insurance as follows:

Insurance (policy) is a contract whereby a person, called the insurer, undertakes, against payment of one
or more premiums, to pay to a person, called the beneficiary, a sum of money where a specified risk
materializes.
1.3. Nature of Contracts of Insurance
A contract of insurance is a type of contingent or conditional contract. As the name indicates, a
contingent or conditional contract is a contract to do or not to do something, if some event, collateral to
such contract, does or does not happen.

 In other words, it is a contract in which the performance of the obligation arising there from by the
parties or one of them is dependent upon the condition or contingency agreed upon by them.

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 Accordingly, as the obligation of the insurer/assurer to pay compensation or the agreed

amount to the insured or the beneficiary is dependent upon materialization of the risk or risks
specified in the policy. Thus, for instance, if X Insurance Company agrees to pay Birr 100,000 in
exchange for B paying Birr 2500 as premium, if B's house is destroyed by fire; there will be
contingent contract, the performance of which depends upon the happening of an uncertain event,
i.e. the destruction of the house by fire.

Although a contract of insurance resembles, to a certain extent, a wagering or gambling agreement

whereby the insurer bets with the insured that his house will not be burnt and giving him the odds
of its value, it is a legal and enforceable contract with important economic and social purposes.

Note: Wagering or gambling agreements are considered void in almost all legal systems. For instance,
Art 713(2) of the Commercial Code of Ethiopia provides that games and gambling shall not give rise to
valid claims for payment unless they are related to activities enumerated under Art 714, such as stock
exchange speculations, sporting activities and lottery or betting authorized by the government.

A contract of insurance differs from a contract of wagering or gambling for the following reasons:

1. The object or purpose of an insurance contract is to protect the insured against economic losses
resulting from a certain unforeseen future event, while the object of a wagering or gambling agreement
is to gamble for money and money alone.

2. In an insurance contract, the insured has an insurable interest in the life or property sought to be
insured. In a wagering or gambling agreement, neither party has any pecuniary or insurable interest
in the subject matter of the agreement except the resulting gain or loss. This is the main
distinguishing feature of a valid contingent contract as compared to a wagering agreement.

3. A contract of insurance (except life, accident and sickness insurances) is based on the principle of
indemnity. However, in a wagering agreement there is no question of indemnity, as it does not cover
any risk.

4. A contract of insurance is based on scientific calculation of risks and the amount of premium is
ascertained after taking into account the various factors affecting the risk. In a wager, there is no
question of any calculation what so ever, it being a mere gamble.

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1.4. Distinguishing Characteristics of Insurance

Insurance contracts have the following distinct legal characteristics that make them different from other
contracts.
1. An insurance contract is aleatory rather than commutative
Aleatory contracts have a chance element and an uneven exchange. And the performance of at least
one of the parties is dependent on chance. Such type of contracts are also involves an uneven
exchange in which one of the parties promises to do much more than the other party. In contrast,
other commercial contracts are commutative in which the values exchanged by both parties are
theoretically even. For example, the purchaser of a real estate normally pays a price that is viewed to be
equal to the value of the property.
3. An insurance contract is a conditional contract.
This means the insurer’s obligation to pay a claim depends on whether or not the beneficiary has
complied with all policy conditions. If the insured does not adhere to the conditions of the contract,
payment is not made even though an insured peril causes a loss. Conditions are provisions inserted in the
policy that qualify or place limitations on the insurer’s promise to perform.
The conditions section imposes certain duties on the insured if he or she wishes to be compensated for a
loss. The insurer is not obligated to pay a claim if the policy conditions are not met. Typical
conditions include payment of premium, providing adequate proof of loss, and giving immediate
notice to the insurer of a loss. For example, under a homeowner’s policy, the insured must give
immediate notice of loss. If the insured delays for an unreasonable period in reporting the loss, the
company can refuse to pay the claim because a policy condition has been violated.
4.The insurance contract is said to be a contract of adhesion
The terms and conditions are not the result of negotiations between the parties, and one party has to
agree to the terms and conditions prepared by the other. In such types of contracts, ambiguities or
uncertainties in the wording of the agreement will be construed against the drafter- the insurer. If the
policy is ambiguous, the insured gets the benefit of the doubt. This principle is due to the fact that the
insurer had the advantage of writing the terms of the contract to suit its particular purposes and the
insured has no opportunity to bargain over conditions, stipulations, and exclusions. Therefore, the
courts place the insurer under a duty to make the terms of a contract clear to all parties. In the absence of
doubt as to meaning, the courts will enforce the contract as it is.

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The general rule that ambiguities in insurance contracts shall be construed against the insurer is reinforced
by the principle of reasonable expectations. The principle of reasonable expectations states that an insured
is entitled to coverage under a policy that he or she reasonably expects it to provide, and that to be
effective, exclusions or qualifications must be conspicuous, plain, and clear.
1.4. The Requirements to Carry on Insurance Business
Art 656 of the Commercial Code provides that the law shall determine the conditions under which
physical persons or business organizations may carry on insurance business.
 Art 6(1) of the Licensing and Supervision of Insurance Business Pro No 86/1994 provides that no
person may engage in insurance business of any type unless it applies to and acquires a license
from the National Bank of Ethiopia for the particular class or classes of insurance.
 Furthermore, Art 4(1) and Art 2(3) of the same proclamation provide that such person has to
be a share company as defined under Art 304 of the commercial code.
 According to this article, a share company is a company whose capital is fixed in advance and
divided into shares and whose liabilities are met only by the assets of the company.
 The capital of the company to be established as an insurance company must be wholly owned by
Ethiopian nationals and/or business organizations wholly owned by Ethiopian nationals, and
it must be established and registered under Ethiopian law and must have its head office in
Ethiopia.
 The other condition that a person must fulfill to obtain a license relates to the minimum capital of
the company,.
 it must have a minimum capital of 3 million Birr if it is applying for license to
undertake general insurance business i.e., insurances other than insurance of
persons, and
 4 million Birr if it is applying for a license to undertake long term insurance business,
i.e., insurance of persons
 7 million where the application is to undertake both classes of insurance. Such capital
has to be paid up in cash and deposited in a bank in the name of the company to be
established as an insurance company.
Chapter Two: Basic Principles of Insurance
This chapter is more concerned with the underlining principle of insurance which are also reflected under
law of insurance. In particular the objective of this chapter is enabling students to have basic knowledge as

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to the rights and duties of the parties to the contract of insurance in light of basic principles governing
insurance. Understanding the basic principle of insurance is very important so as to analyze and
understand the key legal questions commonly arise in connection to insurance. Some of the basic
principles of insurance are:
 The principle of utmost good faith
 The principle of indemnity
 The principle of insurable interest
 The principle of subrogation
 The principle of proximate cause
 The principle of contribution

1. Principle of Utmost Good Faith ( Art. 667 of the commercial code)

Insurance shifts risk from one party to another. As a result it is the inherent duty of the proposer to
make full and fair disclosure of all material facts relating to the subject matter of the proposed
insurance.
What is material fact?
A material fact for this purpose is a fact, which would affect the judgment of a prudent insurer in
considering whether he would enter into a contract at all or enter into it at one premium rate or
another. For example, in life insurance suffering from a disease like asthma or diabetes is a material fact
whereas having occasionally a headache is not a material fact.
Who is under duty? Why?
This duty rests highly on the insured because he knows or is expected to know more about the subject-
matter. The proposer must disclose all material facts truly and fully.
 There should not be any false statement or half-truths or any silence on a material fact.
 This applies to all material facts whether considered by him as material or not and whether
known to him or not.
 The proposer is expected to know every circumstance, which in the ordinary course of business
ought to be known by him.
 He cannot rely on his own inefficiency or neglect.
The extent of utmost good faith under law
Under the Ethiopian law the principle of utmost good faith requires the insured;

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A) To disclose to the insurer, at the time of the conclusion of the contract, all facts related to the object,
liability or person to be insured and of which he is aware and which he thinks will help the insurer
to fully understand the risks it undertakes to insure (Art 667). The insured is required to disclose
facts which may influence the decision of the insurer to enter into the contract or not or if it decides to
enter into the contract if it would affect the amount of premium it would charge (Art 668(1))
B) To notify the insurer of changes that may occur after the conclusion of the contract. The insured
must notify the insurer of changes in facts and circumstances surrounding the object or liability
insured if such changes are capable of increasing the probability of occurrence of the insured
risks.
The test of materiality is also applicable here as the insured has to notify of changes if they are of such
a nature or importance that, had they existed at the time of the conclusion of the contract and had the
insurer known them, they would have influenced the decision of the insurer to enter into the contract or
not and the level of premium it would have imposed. /Art 669/1/.
 For instance, where the insured changes the purpose or use of his house from residence to a
business purpose, let us say, distribution of gases /fuel.
When to notify?
The insured has to notify the insurer of such change within fifteen days from the date he changed the
purpose of the house and started the business, because the house is more exposed to risk of fire than when
it was being used for residence.
The notification of increase of risks has to be made within 15 days from the date of occurrences of such
change, which increased the risk, where such change or occurrence is the result of the act of the
insured. However, where such change resulted from the act of a third party, the insured is required to
notify the insurer of such change within 15 days from the day when he became of aware such change.
The effect of breach of the principle of utmost good faith
Failure to comply with these elements of the principle of utmost good faith may have one of the
following effects depending on the motive of the insured person.
 If the insured concealed material facts or made false statements there in intentionally with the
motive to benefit from a lower rate /amount of premium, the contract will have no effect and
the insurer shall retain the premium. Failure to notify the increase of risks according to Art
669(1) internationally and with similar motive shall have the same effect.

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 if the failure to comply with these obligations is not intentional or fraudulent, i.e., if it is not a
result of a motive to benefit from lower rates of premium, the policy shall remain in force.
However, the insurer may terminate the contract by giving a notice of 30 days or maintain it
by increasing the premium. This is in case insurer discovers the existence of such concealment or
false statement or failure to notify increase of the risk before the materialization of the risk.
 However, if such concealment, false statement or failure to notify increase of risks is discover`ed
after the risk has materialized, the insurer shall not have the obligation to compensate the
insured. Rather it shall pay a reduced amount of money which shall be determined by taking into
account the amount of premium actually paid and the premium that should have been paid
had the insured not concealed facts or made false statements or failed to notify increase of
risks.
C) To refrain from any fraudulent act aimed at making a net profit or obtaining undeserved benefit
out of a contract of insurance. For instance
 Over-Insurance: the insured must refrain from intentional /fraudulent over-insurance of the
object, which occurs where on the date of conclusion of the contract, the sum insured/amount of
guarantee provided in the policy exceeds the value of the object /Art. 680/1// or
 Cumulative insurance : where the insured purchases several insurance policies from several
insurers in respect of the same object, covering the same types of risks and the sum insured
or amount of guarantee provided by the policies exceed the actual value of the object. Over
insurance where it is intentional or fraudulent may result in the termination of the contract by
the court upon the application of the insurer to this effect and in addition, the insurer may be
entitled to payment of compensation for any damage the insurer might have suffered because of
the violation of the duty to act in good faith.
However, if over insurance was not the result of intentional act of the insured to make a net profit
from the insurance or insurances, the contract shall remain in force but only to the extent of the actual
value of the object. In other words, the amount of guarantee /sum insured provided in the policy shall
be reduced to the actual value of the object. (Art 680 (2) & Art 681(2).

D) To refrain from purchasing an insurance policy in respect of goods or objects which are already
lost or damaged or destroyed or in respect of goods or objects which are no longer exposed to a risk

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with the motive of receiving compensation for the loss or damage sustained before the conclusion of
the contract./Art 682/2/
For instance, a person who purchases a motor insurance policy in respect of his motor vehicle which was
already lost or damaged or totally destroyed at the time of the contract violates the principle of utmost
good faith if he was aware of such facts and purchased the policy with the intention of receiving
compensation for the already lost or damaged or destroyed property. In such cases, the insurer is
entitled to retain all premium paid and may further claim payment of compensation for expenses it
might have incurred.
2. Principle of Insurable Interest
The object of insurance is:
 To protect the pecuniary interest of the insured in the subject matter of the insurance and
 Not to protect the object of insurance- the material property.
A person is said to have an insurable interest in the subject matter insured where he will derive
pecuniary benefit from its existence or will suffer pecuniary loss from its destruction.
 Insurable interest is thus a financial interest in the preservation of the subject matter of
insurance.
 A purely sentimental (romantic) interest or a non-monetary benefit will not cause an insurable
interest.
 For example:
 A person has an insurable interest in his/her life
 Husband has an insurable interest in his wife and vice versa
 a creditor has an insurable interest in the life of the debtor,
 A son has no insurable interest in the life of his mother who is supported by him.
 Fire insurance, it is not only the owner who has an insurable interest but also all those
other persons who run a risk because of the loss or damage to the property or goods
insured.
 A person who has advanced money on the security of a house has an insurable
interest in the house.
 Agent –principal relationship
Thus, insurable interest’ is an essential pre-requisite in effecting a contract of insurance. And to claim
compensation or payment.

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 The insured must possess an insurable interest in the subject matter of the insurance at the
time of contract.
What is the purpose of insurable interest? It serve has two primary purposes both of which are rooted
in public policy.
1) The first is the elimination of insurance as a vehicle for gambling, an activity to which has been
attributed idleness, vice, a socially parasitic way of life, increase in impoverishment and crime,
and the discouragement of useful business and industry. Otherwise, the contract of insurance will
be a wagering agreement which shall be void and unenforceable.
2) The second is the removal of the temptation provided by a prospect of a net profit through
insurance proceeds to deliberately bring about the event insured against, whether it is the
destruction of property or human life.
Insurable Interest under Law
The Ethiopian Insurance Law does not sufficiently incorporate the principle of insurable interest.
Art 675 of the commercial code, which is applicable to property insurances, is the only provision that
deals with the subject.
 According to this provision any person who has a direct economic interest arising from property
rights, such as ownership, usufruct or use right or indirect economic interest, arising out of
contracts such as mortgage or pledge may insure such property to protect his interests.
Sections which govern liability insurance and insurance of persons failed to incorporate rules on the
principle of insurable interest.
 However, the principle is applicable based experience of insurance business and the purpose
of insurance.
TIME FOR EXITANCE OF INSURABLE INTEREST
Life Insurance,
Insurable interest must be present only at the time of contract (i.e., when the insurance is effected).
 It need not exist at the time of death or when the claim is made because it is not a contract of
indemnity. Thus, a life insurance policy is freely assignable.

Fire Insurance,
Insurable interest must be present both at the time when the insurance is concluded and at the time of
loss.

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 Being a contract of indemnity, a fire insurance policy can be assigned only to one who has
acquired some interest in the subject matter
 as a purchaser, mortgagee or bailee
 Because unless the assignee has interest at the time of loss, he cannot be indemnified.
3. Principle of Indemnity
The second fundamental principle of contract of insurance is principle of indemnity.This principle applies
to insurance of objects (property insurances) and liability insurances.Hence, in cases of insurance of
objects, the liability of the insurer, if the risk materializes, shall be to pay compensation i.e., the actual
value of object on the day of occurrence, where the object is totally destroyed or lost or the cost of repair
in cases of partial damage, provided that such compensation cannot exceed the amount of
guarantee/sum insured provided in the policy. (Arts 678, 665(2)).
 In case of loss, the insured can recover from the insurer the actual amount of loss, not
exceeding the amount of policy. If there is no loss under the policy, the insurer is under no
obligation to indemnify the insured.
 The purpose of indemnity is to place the insured, after a loss, in the same position he
occupied immediately before the event.
 Under no circumstances, is the insured allowed to benefit more than the loss suffered by him. This
is because, if that were so, the temptation would always be present to desire the insured event
and thus to obtain the policy proceeds. This would obviously be contrary to public interest.
The principle of indemnity implies that the sum insured or the amount of guarantee provided in the
policy is not necessarily payable. This is in line with purpose of insurance, i.e., reinstating a person who
has suffered a financial loss to his original financial position. It also shows that the insured cannot claim
its payment where the risk materializes unless the sum insured is equal to actual value of the object at
the time of loss or damage .
Exceptions to the principle of indemnity
 The insurer does not have the obligation to compensate the insured person in case where the object
or liability is under-insured. Under-insurance occurs where the amount of guarantee /sum insured
agreed upon in the policy is lesser than the actual value of the object or the amount of potential
liability of the insured. In such cases, the insurer’s obligation is to pay the amount of guarantee/
sum insured, rather than compensation of the insured (Art 679).

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 The second exption related to insurance of persons, where the parties freely fix the amount of
guarantee. This is mainly because it is generally accepted that human life or limb cannot be valued
in terms of money and are irreplaceable and the insured or beneficiary who receives it cannot be
considered to have made a net profit out of ithe nsurance. (Art 689)
4. Doctrine of Subrogation
The doctrine of subrogation is a corollary to the principle of indemnity and as such, it applies only to
property insurances. According to the principle of indemnity, the insured can recover only the actual
amount of loss caused by the peril insured against and is not allowed to benefit more than the loss he
suffered.
 In case the loss to the property insured has arisen without any fault on anybody’s part, the
insured can make the claim against the insurer only.
 In case the loss has arisen out of tort or fault of a third party, the insured becomes entitled to
proceed against both the insurer as well as the wrongdoer.
However, since a contract of insurance is a contract of indemnity, the insured cannot be allowed to
recover from both and thereby make a profit from his insurance claim. He can make a claim against
either the insurer or the wrong doer.
 If the insured chooses to be indemnified by the insurer, the doctrine of subrogation comes into
play and as a result, the insurer shall be subrogated to all the rights and remedies of the insured
against third parties in respect of the property destroyed or damaged.
The points which are worth noting in connection with the doctrine of subrogation:
1. This doctrine will not apply until the assured has recovered a full indemnity in respect of his loss
from the insurer.
 If the amount of the insurance claim is less than actual loss suffered, the assured can keep the
compensation amount received from any third party with himself to the extent of deficiency, and
 if after full indemnification there remains some surplus he will hold it in trust for the insurer,
to the extent the insurer has paid under the policy.
2. The insured should provide all such facilities to the insurer that may be required by the insurer
for enforcing his rights against third parties. Any action taken by the insurer is generally in the
name of the insured, but the cost is to be borne by the insurer.

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3. The insurer gets only such rights that are available to the insured. He gets no superior rights than
the assured. As such, the insurer can recover under this doctrine, only that which the assured himself
could have recovered.
ILLUSTRATION
R owned two ships, A and B and got them insured with different insurers. The ships collided due to the
fault of the crew of ship B, because of which ship A was damaged. The insurer of the ship A indemnified
the owner and then sued him as owner of the ship B for negligence, claiming the amount they had paid in
respect of ship A. The court held that the insurer could not recover, as both vessels were owned by one
and the same person, no remedy has been transferred to the insurer, because a person cannot file a suit
against himself.

Art 683 of the Commercial Code provides that the insurer that has compensated the insured for the
financial losses he has suffered because of loss of or damage to property have the right to substitute the
insured and to proceed against the third party who caused the damage.
 This provision transfers to the insurer all the rights and remedies that are available to the
insured against the party responsible for the loss or the damage to the property.
 The extent of right of subrogation of the insurer is limited to the amount of money it has paid
to the insured.
 Therefore, where the insurer has not fully compensated the insured for the losses he has
suffered, as in the case of under insurance, both the insurer and the insured may proceed
against the third party who is responsible for the loss or damage.
 The insurer for the amount it has paid
 The insured for damage he has not received compensation.
The law imposes on the insured an obligation to cooperate with the insurer to enable the latter to
exercise its right of subrogation and to refrain from any act, which may damage such right or prevent the
insurer from proceeding against the third party responsible. For instance;
 The insured has to provide the insurer with all the necessary information and evidences
showing that the third party is responsible for the loss or damage to the property insured.
 He is also required to refrain from collusive agreements intended to release the third party
from liability and assumption of responsibility with the intention of procuring a financial
benefit to himself or helping the third party.

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Restriction on the exercise of subrogation right of insurer

The insurer may not exercise its right of subrogation against certain group of people. Art 683/3/
provides that the insurer cannot proceed against ascendants, descendants, and employees, agents of the
insured and against persons living with him. This restriction on the right of insurer is not totally
acceptable and is not based on legally justifiable grounds.
 As the insured does not have remedy against his minor children, his employees and agents who
caused damage to the property while performing their duties and while acting within the scope of
their power/ Art. 2130, Art 2222/, the restriction on the right of the insurer is based on acceptable
legal ground and appropriate.
 However, preventing the insurer from proceeding against the ascendants and descendants of the
insurer who are not his dependents and who may have their own businesses, for instance, does
not seem to be legally explainable.
The purpose of subrogation

 The primary purpose of subrogation is to make sure that insurance is a means of compensation
or reinstatement of the insured who has suffered a financial loss and not a mechanism to make a
net profit out of loss or damage covered by insurance. How?
 It denies the insured the opportunity to claim payment twice, from the insurer on the basis of
the contract of insurance and the third party who is responsible for the loss or damage to the
insured object on the basis of tort law, for instance, and thereby making a net profit.
 Secondly, it is also intended to make sure that the third party /the tort feasor/ does not escape
liability because the owner of the property happens to have insurance and bears the consequence
of his negligence or intentional act.

5. Principle of Proximate Cause

Meaning of proximate cause

Proximate cause is not the latest, but the direct, dominant, operative and efficient cause that must be considered
as proximate. When an insurance policy is bought it is issued with respect to some peril, which may result in loss
to the policyholder. No policy covers all types of risks. The insurance company is liable to indemnify only
against the insured perils.The term “Proximate cause” literally means the nearest cause or direct cause. In
insurance manner of speaking, it relates to the immediate cause of the accident, which resulted in the loss. The real

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cause must be seen while payment of the loss. If the real cause of loss is insured, the insurer is liable to
compensate the loss; otherwise the insurer may not be responsible for loss.

The efficient cause of a loss is called the proximate cause of the loss. For the policy to cover, the loss
must have an insured peril as the proximate cause of the loss. The proximate cause is not necessarily the
cause that was nearest to the damage, but is rather the cause that was actually responsible for loss.

Determination of Proximate Cause

Where the accident occurs as a single event the determination of Proximate Cause is simple and that
particular event can be attributed for the loss. In case where the loss occurs as a chain of events in
succession with one event setting off the other it may be difficult to determine the exact cause of the
damage. In such an eventuality the parties have to carefully examine and find out the correct reason
for the loss, the extent to which the loss has been caused by the proximate cause and the amount of
compensation to be paid based upon it. It may happen that the actual peril, which has caused the loss in
turn, is caused by another peril.

It has to be noted that while determining ‘proximate cause’ the sequence of events according to their time
of occurrence is irrelevant. The deciding factor is the correct cause of loss.

Many court judgments act as precedents in arriving at decisions while making settlements. They
have been set out below:

I. The insurer is liable:

When the peril is a single event and it is insured.

Where the insured peril (the event for which the policy has been taken for protection) occurs first
and it is followed by an excluded peril (the event which has not been covered by the policy, i.e.,
which is not insured). Here the insurer has to pay for the loss, which had occurred up to the
happening of the excluded peril only if the two perils can be distinguished from each other.
Where the excluded peril causes the insured peril and the events occur in a broken sequence
the insurer has to pay for the loss caused by the insured peril.
Where both the perils are occurring concurrently and both the events are independent of each
other.
II. The insurer is not liable

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Where the excluded peril is the cause of the insured peril and they act consecutively
Where the insured peril is followed by the excluded peril and both cannot be distinguished from
each other.
Where both covered and excluded perils are occurring concurrently
Examples: (1) In the case of the fire was caused by an earthquake. If earthquake was not part of covered
risk hence the insurer was not liable as the loss was proximate to an excluded peril. (2) In the case of ABC
Company had insured its property from any risk except fire. Eventually, a fire occurred in the neighboring
premises and following the disorder some gangster broke into the premises of the insured and committed
theft insured property. As per the principle of the proximate cause, the insurer is liable for the loss since
the cause of loss is theft, it is not the fire.

The question as to which is the causa proxima of a loss, can only arise where there has been a succession
of causes. When a result has been brought about by two causes, you must, in insurance law, look to the
nearest cause, although the result would not have happened without the remote cause. The law will not
allow the assured to go back in the succession of causes to find out what is the original cause of loss. See
the following illustrations.

(A) In a marine policy, the cargo was a shipment of oranges. The peril insured against was collision with
another ship. During the course of voyage the ship collided with another ship, resulting in delay and
mishandling of shipment which made oranges unfit for human consumption. It was held that the loss was
due to mishandling and delays and not due to collision, which was a remote cause, though without it no
mishandling or delay would have resulted. As such, the insurer was not held liable. (For mishandling, the
crew and their principal could be made liable but not the insurer.)

(B) In a marine policy, the goods were insured against damage by seawater. Some rats on board bored a
hole in a zinc pipe in the bath, which caused seawater to pour out and damage the goods. The underwriters
contended that as they had not insured against the damage by rats, they were not bound to pay. It was held
that the proximate cause of damage being seawater the insured was entitled to damages, the rats being a
remote cause.

Thus, in deciding whether the loss has arisen through any of the risks insured against, the proximate or
the last of the causes is to be looked into and others rejected. If loss is caused by the operation of more
than one peril simultaneously and if one of the perils is excluded (uninsured) peril, the insurer shall be

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liable to the extent of the effects of insured peril if it can be separately ascertained. The insurer shall not be
liable at all if the effects of the insured peril and excepted peril cannot be separated.

6. Doctrine of Contribution
The doctrine of contribution states that ‘in case of double insurance all insurers must share the burden of
payment in proportion to the amount assured by each. If an insurer pays more than his ratable proportion
of the loss, he has a right to recover the excess from his co-insurers, who have paid less than their retable
proportion.’

Like the doctrine of subrogation, the doctrine of contribution also applies only to contracts of indemnity,
i.e., to property insurances. Double insurance occurs where the same subject matter is insured against the
same risk with more than one insurer. If two different policies are taken from the same insurer, it is not a
case of double insurance. It will be termed as ‘full insurance.’ Under double insurance, the same risk and
the same subject matter must be insured with two or more different insurers. In the event of loss under
double insurance, the assured may claim payment from the insurers in such order as he thinks fit, but he
cannot recover more than the amount of actual loss, as the contract of property insurance is a contract of
indemnity.

The following are the essential conditions required for the application of the doctrine of contribution.
First, there must be double insurance, i.e., there must be more than one policy from different insurers
covering the same interest, the same subject matter and the same peril which has caused the loss. Second,
there must be either over-insurance or only partial loss. If the amount of different policies is just equal to
the value of the subject matter destroyed, the different insurers are liable to contribute towards the loss up
to the full amount of their respective policies and as such, the question of contribution as between
themselves does not arise. See the following illustrations.

A building is insured against fire for BIRR 20,000 with insurer X and for BIRR 10,000 with insurer Y.
There occurs a fire and the damage is estimated at BIRR 15,000. X and Y should share the loss in
proportion to the amount assured by each of them, i.e., in the proportion of 2:1. X should pay BIRR
10,000 and Y should pay BIRR 5,000. The policyholder can sue both the insurers together or insurer X
only. Suppose that he sues X only and recovers from him the full amount of loss, i.e., BIRR 15,000, X is
entitled to claim contribution from Y to the extent of BIRR 5,000.

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