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Page 7 of 83and it is clear that many major brokers operate computer systems which select policies onthat basis rather than on the basis of any detailed examination of their relative merits.BROKERS’ DUTIES: COMPLETING THE PROPOSALThe law requires that the proposal form be completed correctly and that all material factsbe properly disclosed. It is not uncommon for the proposer to seek advice from theinsurance broker on filling in the form. He may also ask the broker to verify that theproposal has been completed correctly. Given that the broker’s power here is limited todetecting obvious errors or a complete failure to answer a question, his responsibility inthis respect is also limited. It may be observed, however, that a broker should be readilyable to identify those questions on a proposal form which are most likely to give rise todifficulties and to recognise also the kinds of ambiguous answers which are prone tocause problems in the event of a claim. The value and importance of the broker’sexperience of similar types of form should not be underestimated.BROKERS’ DUTIES: PAYING THE PREMIUMGENERAL INSURANCEIn general insurance it is common for the premium to be paid through the broker. Inmarine insurance (but not in non-marine general insurance) there is a fiction as betweeninsurer and insured that the broker has paid the premium, but this seems to be ofimportance only in that it brings the cover into effect sooner than might otherwise be thecase. It does not mean that the broker must in fact pay the premium. In personal linesgeneral insurance many brokers offer a facility for the premium to be paid by instalments.However, this does not usually mean that the insurer receives the premium in instalments.Rather, the usual practice is that the broker pays the insurer the full premium at the outsetand then provides credit facilities (at a fee) to the policyholder.LIFE ASSURANCEIn life assurance it is not normally the duty of the broker to arrange for payment of thepremium. Where premiums are paid by instalments (as is usual) arrangements arenormally made for payment by standing order or direct debit through the policyholder’sbank account.BROKERS’ POST-CONTRACTUAL DUTIES: INTRODUCTIONIn both general and life assurance a number of situations may arise in which the brokerhas a continued post-contractual involvement.BROKERS’ POST-CONTRACTUAL DUTIES: LAPSE OF POLICYIf premiums are not paid, the policy will eventually lapse. It is not in principle the duty ofthe broker to monitor this: indeed, he will normally have no means of doing so, since hewill not be handling the payments. Occasionally the fact of lapse may be notified to thebroker who arranged the policy, but even then it is not clear that he has any ongoing dutyto alert the policyholder as to the position.

Page 8 of 83BROKERS’ POST-CONTRACTUAL DUTIES: MATURITYThis can arise only in endowment policies. When an endowment policy reaches maturity,notice of this fact may be sent to the broker, who in such a case acts merely as amessenger to transmit the information to the policyholder. The same applies if thematurity cheque is sent to the policyholder. It appears that the broker has no duties in thisregard beyond the transmission of documents.BROKERS’ POST-CONTRACTUAL DUTIES: INSOLVENCY OF INSURERThe insolvency of an insurer is happily a rare situation, but it may occasionally happenthat the broker becomes aware that a particular insurer is in some degree of financialdifficulty. Cases about this have mostly concerned motor insurance [see the case ofOsman infra], where the issue is made most immediate by the statutory requirement forsuch insurance. However, the problem may for different reasons be significant in cases oflife assurance. Where the policyholder has a simple term assurance, the insurer’sinsolvency threatens to leave him without cover. It is suggested that the broker has a dutyto bring this point to the policyholder’s attention without delay. In the case of aninvestment policy the position is rather different. Although insurance cover will notnormally be the primary motive for having such a policy, the policyholder will need to beaware of the situation so that he can consider withdrawing his investment and switching itto another insurer. The broker is therefore under a similar duty to advise him of thesituation.BROKERS’ POST-CONTRACTUAL DUTIES: RENEWAL OF THE POLICYThis is an issue which arises only in general insurance since long term policies do notrequire to be renewed. It is common practice for renewal notices to be sent to the brokerwho arranged the original policy. The broker should remember that the ‘renewal’ is infact a new policy, so that all his original duties in advising the insured arise again. Inparticular, the broker should remind the insured of the need to disclose any materialchange in circumstances3 and should consider the question whether renewal of the policyis in fact in the insured’s best interests or whether there is now a better alternativeavailable.BROKERS’ POST-CONTRACTUAL DUTIES: EFFECTING CLAIMSWhere a claim is made under the policy the broker may become involved in completingthe claim form. Although the broker is under no duty to give such assistance, generalprinciples would suggest that there is a duty of care to the insured if this task isundertaken [see Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, [1963]2 All ER 575].BROKERS’ POST-CONTRACTUAL DUTIES: REMUNERATIONBrokers are normally paid commission by the company whose policies they recommend,though there are a small number of insurance companies which do not pay commission tobrokers. On the face of it this situation appears to give rise to obvious possibilities forconflicts of interest, and it does seem hard to deny that a broker who is faced with thequestion whether a client should invest in, for example, a building society savings

Page 9 of 83account (on which the broker will receive no commission) or an insurance policy onwhich commission will be paid faces a difficult task in acting solely in the best interestsof the client. It is hardly surprising if some brokers occasionally succumb to thetemptation to lean towards recommending the insurance policy, even though this is aclear breach of duty unless it happens to coincide with the client’s interests.CONSEQUENCES OF BREACH OF BROKER’S DUTYA breach of duty by the broker is in principle capable of giving rise to an action fordamages by the client. Such damages are of course compensatory in nature, and it followsthat the client must be able to identify loss caused to him directly by the breach. Wherethe failure consists in a failure to arrange insurance at all there may be no identifiableloss. There will obviously be loss if the client dies without insurance which he wouldotherwise have had or if his circumstances change to the point where he can no longer getinsurance at the same premium or at all. Where the failure consists in recommending thewrong policy, compensation is a matter of calculating how much better off thepolicyholder would have been with the right policy. It should be observed in this contextthat a person buying an investment policy is not automatically entitled to the best possibleinvestment performance; such contracts are necessarily speculative and the investor’sentitlement is only to the exercise of reasonable diligence in recommending a suitablecontract [United Mills Agencies Ltd v R E Harvey, Bray & Co [1952] 1 All ER 225].Similar principles apply in relation to post-contractual failure, where the nature andextent of the loss will again depend heavily on the circumstances.THE ROLE OF THE AGENTThe insurance salesperson is the agent of the insurer. Thus, the insurer must acceptresponsibility for the agent’s actions. Communication to the agent is effectivecommunication to the insurer. This is a point which gives rise to many disputes in nondisclosurecases, the insured alleging that the facts were fully disclosed, notwithstandingthat they do not appear on the proposal form. The law has generally been reluctant toaccept the validity of this argument, since there is normally a clause in the proposal formwhere the proposer declares that he has read the form and that the statements contained init are true [See Newsholme Bros v Road Transport and General Insurance Co Ltd [1929]2 KB 356, [1929] All ER Rep 442].TRANSFERRED AGENCY CLAUSES: PRINCIPLESWhere a person is employed as the representative of the insurance company, he will ofcourse normally be considered to be that company’s representative, and thus not to be theagent of the proposer. However, it has been the practice of some companies to include ontheir proposal forms a statement to the effect that where the agent fills in the proposalform on behalf of the proposer he is to be treated for that purpose as being the agent ofthe proposer and not the agent of the company. The purpose of such a clause is to fix onthe proposer the responsibility for any errors which may be found in the proposal form;were the agent still the agent of the insurance company, it would be possible to argue thatthe errors were the fault of the company, which was therefore precluded from relying on

Page 10 of 83them. The attitude of the courts to these clauses, known as ‘transferred agency clauses’has varied over the years.COMPANY REPRESENTATIVES AND INSURANCE COMPANIESTied agents may only sell the products of the company to which they are tied: this rule isof fundamental importance and admits of no exceptions. Many important consequencesfollow from the characterisation of the company representative as being solely the agentof the insurance company. Most importantly, the company must take responsibility forthe agent’s actions. This rule is in addition to the common law principles and is moreonerous.THE DUTIES OF COMPANY REPRESENTATIVESAlthough company representatives are the agents of the insurance company, the lawimposes on them certain duties in respect of their conduct towards prospectivepolicyholders.The most important of these duties is the duty to give best advice. So far as companyrepresentatives are concerned the duty of best advice must be carefully defined andunderstood. It is their duty not to advise the prospect to purchase one policy of thecompany when there is another policy of the company which would suit his needs better.There is, however, no requirement that the company representative should considerwhether an insurance policy of any kind is in the best interests of the client.‘SWITCHING’ AND ‘CHURNING’The common law deals with the responsibilities of the company representative in relationto advising the investor to convert cancel or allow to lapse any investment contract or torealise any investment under an investment contract. This is one of the most importantpart of the law for inappropriate advice of this kind is a very common way of earningunjustified commission at the expense of the investor. This part of the common lawtherefore imposes severe restrictions on the giving of such advice.DISCLOSUREA representative must disclose to an investor all relevant consequences and disadvantageslikely to follow from the action advised. A point of greater practical importance now isthat the early surrender of an existing policy is likely to lead to loss since the surrendervalue may well be less than the premiums paid, and that taking out a new policy willincur a further round of commission charges. It is for this reason that advice to surrenderor switch can rarely be justified.THE INTERESTS OF THE INVESTORThe restrictions imposed by the law are supplemented by the overriding rule that therepresentative must not advise the taking of any action unless he bona fide believes it tobe in the best interests of the investor.

Page 11 of 83PENSIONSThe restrictions apply equally his advising an investor on the giving up of rights under anoccupational pension scheme. Representatives need to bear this point in mind whenselling personal pension policies which involve the investor contracting out of either orboth of the above types of scheme.INSURABLE INTERESTThe law of insurance has long sought to distinguish between legitimate insurance on theone hand and gambling on the other. It was in these circumstances that the UK passedlegislation in 1774 to address the question of which matters might legitimately beinsured.THE LIFE ASSURANCE ACT 1774 AND ITS EFFECT ON ALL FORMS OF INSURANCEThe Life Assurance Act 1774 governs the requirements of insurable interest in insurancepolicies. As the preamble to that Act makes clear, it was introduced to prevent thepractice of gambling on lives, i.e. seeking to make a profit by insuring the life of a personwith whom one had no legitimate connection. The Life Assurance Act 1774 provides:‘From and after the passing of this Act no insurance shall be made by any person orpersons, bodies politick or corporate, on the life or lives of any person or persons or onany other event or events whatsoever, wherein the person or persons for whose use,benefit, or on whose account such policy or policies shall be made shall have no interest,or by way of gaming or wagering; and that every assurance made contrary to the trueintent and meaning hereof shall be null and void to all intents and purposes whatsoever.’Despite the title of the Life Assurance Act 1774 Section 1 of such Act is clearlyexpressed to apply to all forms of insurance. However, the Life Assurance Act 1774Section 4 then provides that the Act does not apply to insurance bona fide made on ships,goods or merchandises. Insurance of ships is subject to the Marine Insurance Act 1906.The difficulties arising in relation to goods policies are considered below.THERE IS ALWAYS AN INSURABLE INTEREST IN ONE’S OWN LIFEA person always has an insurable interest in his own life [Wainewright (or Wainwright) vBland (1835) 1 Mood & R 481, (1836) 1 M & W 32] and the amount of this interest isunlimited. Thus, he may insure his own life for any amount he chooses, the onlyconstraint being his ability to pay the premiums. This was established in Wainewright vBland. In principle this would seem to act as an effective check on gross over-insurance,since a relatively poor person is not likely to be able to afford the premiums for a veryhigh level of cover. However, it may be suggested that a proposal for an own life policywhere the sum insured is obviously greatly excessive should not necessarily be acceptedwithout question. There may well be some particular reason why the policy is being takenout for that amount at that time and that reason may itself be a material factor indetermining whether and on what terms to accept the risk [Pan Atlantic Insurance Co Ltdv Pine Top Insurance Co Ltd [1995] 1 AC 501, [1994] 3 All ER 581, HL].THERE IS NOT ALWAYS AN INSURABLE INTEREST IN THE LIFE OF ANOTHERThe rules on policies insuring the life of another person are more complex. In a strictlylimited class of case there is automatic insurable interest, that is to say that the interest

Page 12 of 83exists without the need to prove any financial loss in the event of the death of the lifeassured.SPOUSESThe only situation in which it has been held that there is automatic insurable interest isthat of husband and wife. Reed and Royal Exchange Assurance Co, [(1795) Peake AddCas 70, NP] is usually treated as establishing that a wife has an automatic interest in thelife of her husband, though in fact the point never came to be decided in that case. InGriffiths v Fleming[1909] 1 KB 805,CA.] it was held that the converse also applied.PARENTS, CHILDREN AND SIBLINGSParents do not have an automatic interest in the lives of their children [Halford v Kymer10 B & C 724, 109 ER 619] , nor vice versa, and siblings do not have automatic interestin each other’s lives [Harse v Pearl Life Assurance Co [1904] 1 KB 558, 73 LJKB 373,CA]. These principles apply even in cases where it might appear that the assured has areasonable moral (but not legal) expectation of being supported by the life assured andtherefore stands to lose from the death of the life assured[Halford v Kymer 10 B & C724, 109 ER 619].OTHER RELATIONSHIPSEven where there is no automatic interest, there may still be a recognised interest in thelife of another, but this will depend upon showing the expectation of loss in the event thatthe life assured dies.CREDITORS INSURING AGAINST THE DEATH OF THEIR DEBTORSIt is common for creditors to insure against the death of their debtors. This practiceappears to have originated in the nineteenth century, when an action in respect of the debtdied with the debtor.An example of this rule is to be found in Lindenau v Desborough [(1828) 8 B & C 586,[1824-34] All ER Rep 117], where the Duke of Saxe Gotha entered into an agreementwith his predecessor’s creditors under which the debts would be paid off over five years.It was held that the creditors had an insurable interest in his life during that period.A practical problem arises in relation to the amount of the insurance. As is explainedbelow, the Life Assurance Act 1774 forbids the insured to recover more than the amountof his interest. As this is not a case of unlimited interest, it is necessary to value theinterest, and it would appear that such value cannot exceed the amount currentlyoutstanding on the loan. Where, as is usual, the loan is to be repaid in instalments, theamount outstanding will diminish steadily over the lifetime of the loan. Although theoriginal policy will be for the full amount of the loan, some of this may have been paidoff by the date of death. However, it appears that the full sum insured can still berecovered. At the present day a common practice in personal loans is for the lender tooffer credit protection insurance, paid for by the debtor, under which the outstandingbalance of the loan will be written off if the debtor dies before the loan is paid off.

Page 13 of 83DEBTORS INSURING AGAINST THE DEATH OF THEIR CREDITORSA more unusual case occurs where the debtor seeks to insure the life of his creditor. Theclassic example of this was seen in Hebdon v West, where the plaintiff was indebted to athird party, who was the manager of a bank (though it appears from the report that he wasindebted to the third party in the latter’s personal capacity, rather than being indebted tothe bank). The third party had promised that he would not call in the loan during hislifetime. The plaintiff was also employed by the third party under a contract for a fixedterm of six years at £700 per annum. The plaintiff effected two policies on the life of thethird party, one for £5,000, the other for £2,500. When the third party died, the insurersunder the £5,000 policy paid out, but the insurers under the £2,500 policy refusedpayment, and the plaintiff sued. This is a somewhat confusing case in which the plaintiffarguably had an interest in the third party’s life in two distinct capacities; firstly as debtorand secondly as potential creditor under the contract of employment. It was held that theplaintiff as debtor had no such interest, because the third party’s promise not to call in thedebt during his lifetime was unenforceable in the absence of consideration. As creditorthe plaintiff did have an interest, but this was limited to the value of the possible wagesunder the contract, a total of £4,200. The payment of the £5,000 more than exhausted thisinterest, and the plaintiff was therefore not entitled to recover any further sum.The case should not be treated as establishing that a debtor may never have an interest inthe life of his creditor. There may be cases where the agreement not to enforce the debtduring lifetime is legally enforceable, either because it is a term of a contract between theparties or by means of the doctrine of promissory estoppel. Indeed, it may be suggestedthat were Hebdon v West to recur at the present day, the result could possibly bedifferent, since promissory estoppel would arguably prevent the third party from resilingfrom his promise not to enforce the debt [Central London Property Trust Ltd v HighTrees House Ltd [1947] KB 130, [1956] 1 All ER 256n]. The rule that the insured mayrecover only the total value of his interest applies in cases where there are multiplepolicies as well as where there is only a single policy. Further, it appears that the insurersunder the £5,000 policy would have been justified in refusing to pay the full amountunder that policy.EMPLOYERS INSURING AGAINST THE DEATH OF THEIR EMPLOYEES: ‘KEY STAFF’POLICIESAnother common practice is that of effecting what are sometimes called ‘key staff’policies, under which the life of a particular employee of a business is insured. As thename of the policy implies, this is normally done in cases where the employee’scontribution to the business is so vital that the business cannot afford to lose theemployee in question. Given that there is an obvious financial risk involved, it is acceptedthat the employer can have an insurable interest. Indeed, there is no reason of principlewhy there should not be such interest in every employee, though in the majority of cases,where the employee can be fairly readily replaced, the amount of the loss (and thereforethe amount of the interest) is likely to be relatively small. Although ‘key staff’ policiesought in principle to be treated as indemnity policies, it appears that in practice they aretreated as contingency policies, the full sum insured being paid out on death withoutenquiry as to the actual loss.

Page 14 of 83PARTNERS INSURING AGAINST THE DEATH OF THEIR FELLOW PARTNERSIt is generally understood that persons who are partners within the meaning of thePartnership Act 1890 are to be treated as having an insurable interest in each other’slives. There is no authority to support the idea that there is automatic interest in thesecases, but it is likely that there will normally be actual interest, especially in the commonsituation where the partnership agreement requires the survivors to buy out the share of adeceased partner.THE ROLE OF FAMILY RELATIONSHIPS IN QUESTIONS OF INSURABLE INTEREST:GENERAL PRINCIPLESAlthough there is no authority for an automatic interest outside the relationship betweenspouses, it is possible for family relationships to give rise to insurable interest wherethere is discernible risk of financial loss.The usual objection to the recognition of insurable interest in these cases has been thatthere is no legal obligation to support even where there is a moral obligation. Thisobjection would of course not apply in the case of a child in whose favour there was amaintenance order against one parent. In any case, it seems that this objection is ratheroutdated, and that at the present day mere moral obligations may be recognised. Thus, itmay be possible for a dependent child to insure against the financial loss resulting fromthe death of one or more parents, and a parent who, perhaps because of age, is nowfinancially dependent on his/her children ought to be able to insure the lives of one ormore of those children. In appropriate cases there is no reason why interest should notexist between siblings or other more distant relations. On a similar principle, unmarriedcouples ought to be able to insure each other’s lives (whether or not they are engaged tobe married). This is most clearly seen in cases where one partner is entirely financiallydependent on the other, but ought to apply even in cases where both partners are working,since the death of either will in such circumstances certainly lead to a reduction in theliving standards of the other. Although there is no authority on the point, it is submittedthat these principles apply to homosexual couples as much as to heterosexual couples.Given the changes in social attitudes in recent years, it is plausible to suppose that thecourts might now accept this principle.THE ROLE OF FAMILY RELATIONSHIPS IN QUESTIONS OF INSURABLE INTEREST: THEEFFECT OF SOCIAL AND DEMOGRAPHIC CHANGEIt seems unlikely that any other family relationships will regularly give rise to insurableinterest, though it cannot be denied that social and demographic changes over the lastfifty years have led to a much greater variety of family relationships, so that thepossibility of identifying new situations containing the necessary element of dependenceshould not be ruled out.In particular, step-children and step-parents might well have an insurable interest in eachothers’ lives, and in cases where a couple live together outside marriage but with thechildren of one or other of them, those children might be allowed an insurable interest inthe adult on whom they are dependent, even though the law recognises no familyrelationship between them.

Page 15 of 83JOINT MORTGAGORSIf a joint life policy is taken out, as will usually happen since this is cheaper than havingtwo or more separate own life policies, then a question of insurable interest may arise,since each is in effect insuring the life of the other. Although there is no authority on thepoint, it is suggested that in this situation there is insurable interest, since each stands tolose financially by the death of the other: effectively, the insurance is on the life of adebtor whose indebtedness is contingent. If there is a joint mortgage, each is in principlefully liable to the mortgagee for the debt, and is in fact relying on the other party to payhis/her share. This financial interest in the continued survival of the joint mortgagorought to be enough to constitute a recognised insurable interest. This principle wouldapply with equal force both to siblings and homosexual partners who had a jointmortgage.THE NECESSITY FOR A LEGAL OR EQUITABLE INTEREST IN THE SUBJECT MATTER OFTHE POLICYInsurable interest in general insurance cases involves having some recognised legal orequitable relationship to the subject matter of the policy, [Lucena v Craufurd (1806) 2Bos & PNR 269, 127 ER 630, HL]. This is a deliberately imprecise formulation, since itis not clear exactly what relationship is sufficient. For the most part this principle givesrise to little difficulty, but there are a number of borderline cases which may be regardedas doubtful and some special cases which require examination.THE ISSUE OF INSURABLE INTEREST IN MARINE INSURANCEThe issue of insurable interest in marine insurance is governed by the Marine InsuranceAct 1906. Section 5(1) provides that every person has an insurable interest who isinterested in a marine adventure; and Section 5(2) adds that: ‘in particular a person isinterested in a marine adventure where he stands in any legal or equitable relation to theadventure or to any insurable property at risk therein, in consequence of which he maybenefit by the safety or due arrival of insurable property, or may be prejudiced by its loss,or damage thereto, or by the detention thereof, or may incur liability in respect thereof.’This definition set out in Section 5(2) extends insurable interest to the owner of the ship(as well as any mortgagee of it that section reads as follows: ‘where the subject matterinsured is mortgaged, the mortgagor has an insurable interest in the full value thereof, andthe mortgagee has an insurable interest in respect of any sum due or to become due underthe mortgage’) to the owner of goods laden or to be laden on board, to a person whoexpects to earn freight as a result of a successful voyage, and to a person who has lentmoney on the security of the cargo.THE ISSUE OF INSURABLE INTEREST IN THE INSURANCE OF REAL PROPERTYIn the case of land it is accepted that the holder of the Right of Occupancy and the lesseehave an insurable interest, though it is not certain whether licensees have. If the principlein Lucena v Craufurd is applied, it can be seen that licensees ought to be regarded ashaving interest, at least to the extent of the loss which they can expect to suffer fromdamage to the property.

Page 16 of 83It is common for property subject to a lease to be insured by the landlord on behalf ofhimself and all tenants to the extent of their respective interests. The premium is in effectpaid pro rata by the tenants, either by the express inclusion of insurance rent in the leaseor by increasing the rent to cover the cost of the insurance.THE ISSUE OF INSURABLE INTEREST IN THE INSURANCE OF GOODSOWNERS AND BAILEESIn the case of goods policies both owners and bailees are accepted as having insurableinterest. However, the Life Assurance Act 1774 Section 42 makes insurable intereststrictly unnecessary in the case of goods policies; instead, the principle of indemnityprevents a policyholder from recovering more than his actual loss.MAJORITY SHAREHOLDERSIn Macaura v Northern Assurance [[1925] AC 619, [1925] All ER Rep 51, HL] theplaintiff was the majority shareholder in a company which grew and dealt in timber. Thecompany was holding a quantity of cut timber, and the plaintiff affected a policy in hisown name insuring this against loss or damage. When the timber was destroyed by firethe insurers refused to pay on the policy, alleging lack of insurable interest. The PrivyCouncil upheld this defence, pointing out that the company’s property is owned by thecompany, not by its shareholders. This statement is right as far as it goes, but does notaddress the real issue. Given that the cut timber was surely ‘goods’ (a contract for the saleof it would have been subject to the Sale of Goods Act 1893, the statute then in force)why did not the Life Assurance Act 1774 Section 43 serve to remove the need forinsurable interest? Unfortunately, the court did not advert to the statutory provision at all.POLICYHOLDERSBy contrast, in Prudential Staff Union v Hall, [1947] KB 685, [1948] LJR 618, it washeld that money paid by policyholders as premiums and in the possession of insuranceagents could be ‘goods’ so as to be covered by a goods policy taken out on their behalf. Itwas then further held that the effect of the Life Assurance Act 1774 Section 4 was toremove any need for the agents to have any insurable interest in the money. Similarly, inThomas v National Farmers Union Mutual Insurance Society Ltd [1961] 1 All ER 363,[1961] 1 WLR 386, it was held that there could be recovery under a goods policy evenwhere the policyholder clearly had no insurable interest because the goods belonged tosomeone else.OBSTACLES TO RECOVERY: THE PRINCIPLE OF INDEMNITYIt does not, however, follow that anyone may make a valid claim under a policy ofinsurance in respect of absolutely any goods. There are two possible obstacles to such aclaim:The first is the principle of indemnity. There is a presumption that a contract of insurance(outside the limited area of policies established as being contingency policies) is intendedto do no more than indemnify the policyholder against losses actually suffered by him.Thus, whatever the situation with regard to insurable interest, the policyholder will notnormally be able to recover more than his actual loss. In most cases where he has no

Page 17 of 83insurable interest, the loss will be nil, so there will be no recovery. There are a fewsituations, of which Macaura v Northern Assurance Co Ltd would appear to be one,where there can be loss even though there is no insurable interest, and in these cases thecorrect result is that the policyholder can recover up to his actual loss. It is also necessaryto mention the special case of marine insurance. The Marine Insurance Act 1906 Section27 allows for ‘valued’ policies, i.e. policies where the value of the insured property isagreed at the outset. The section provides that in the absence of fraud the agreedvaluation is conclusive. This scheme allows the parties to settle their maximum exposureat the inception of the policy and is so practically convenient that valued policies aremore or less universal in marine insurance. Although the Marine Insurance Act 1906 doesnot expressly apply to any area of insurance other than marine insurance, it appears thatthere is no reason in principle why valued policies should not be used in other areas,provided of course that they are clearly expressed as such. It is usually understood thatthe mere statement in the policy of the value of the insured property does not of itselfmake the policy a valued policy.The second obstacle to recovery in the case of a person without an insurable interest isfound in the Gaming Act 1845 Section 18 which provides that every contract by way ofgaming or wagering shall be void; however, the Act gives no definition of the concept of‘gaming or wagering’. The vital distinction is between the case where the person enteringinto the contract is at risk of loss independently of the contract, the contract merely beingdesigned to protect against that loss and there being no prospect of making a profit fromthe contract, and the case where the risk of loss (and conversely the possibility of gain)arise solely from the fact of the contract. The latter type of contract is a gaming orwagering contract, whereas the former is not; indeed, the characteristics of the formertype of contract are essentially those of a contract of indemnity insurance. Section 18therefore strikes down the more blatant attempts at ‘insurance’ by persons having nointerest in the goods and not standing to suffer any loss from the loss of, or damage to,the goods.There is a further important difference between the operation of the principle ofindemnity and the operation of Section 18. The former can be applied to each individualloss within a policy, and may mean that some claims are paid in full, others in part andothers again not at all. It does not affect the underlying validity of the policy. Section 18,by contrast, renders the entire policy void in those cases in which it applies. Theconsequences of this voidness are discussed below.THE INSURANCE OF INTANGIBLE INTERESTSTHE ISSUE OF INSURABLE INTEREST IN THE INSURANCE OF INTANGIBLE INTERESTSIn the case of insurance of intangible interests, such as liability policies (especiallyprofessional indemnity policies) and business interruption insurance, the fact that aperson is at risk of loss arising from the happening of the insured event is by itselfregarded as giving rise to an insurable interest. The same principle applies to reinsurance,where the interest of the reinsured is in the risk that the insured event may materialiserather than in the underlying property which forms the subject matter of the primaryinsurance policy.

Page 18 of 83THE CONSEQUENCES OF A LACK OF INSURABLE INTERESTThe Life Assurance Act 1774 Section 11 declares that policies effected without interestare ‘null and void’. It follows that no claim can be made on any such policy. It is to benoted also that it is not possible to contract out of the statute, which was enacted for theprotection of the public at large rather than for the protection of either of the parties to thepurported contract. There is, however, nothing to prevent an insurance company fromgranting a policy in the absence of interest, nor from paying on it when a claim arises,and it is generally understood that at the present day many such policies are effected andcarried out.THE DUTY OF THE COURT TO RAISE THE QUESTION OF ILLEGALITYIn an action on a void policy, it is the duty of the court to raise the question of illegalityeven if the insurer does not do so and seeks to defend the action on some otherground[1900] 2 QB 214, [1900-1903] All ER Rep 179]. This follows from the principlethat illegality is a matter of public policy and cannot be waived by agreement between theparties. On the other hand an insurer who purports to effect a void policy does notnecessarily commit any criminal offence. Moreover, it is not a criminal offence to pay outon a void policy. Thus, the parties can in practice enter into and carry through a voidpolicy; the effect of the Life Assurance Act 1774 is merely that the court will not assisteither side in relation to the transaction.It appears that at the present day insurers will refuse a proposal for a policy which isobviously void for want of interest: in life of another policies, for example, it is commonto include on the proposal form a question about the proposer’s relationship to the lifealthough where a void policy slips through this net, insurers will often pay an otherwisevalid claim, at least in relation to life policies.PAYMENT BY AN INSURED UNDER A VOID POLICYCurious results may follow where an insurer makes a payment under a void policy. Sucha payment will not normally be recoverable, even if made under a mistake of fact, and itappears that the payee will be entitled to keep the money as against anyone else, since noone else will have a better title to it than he does [Worthington v Curtis (1875) 1 Ch D419, 45 LJ Ch 259, CA] This may be regarded as following from the general rule inillegal contracts that money paid or property transferred is not recoverable where theparties are equally guilty.THE EFFECT OF THE POLICYHOLDER’S FRAUDThe position might therefore be different if the contract had been induced by the fraud ofthe policyholder in leading the insurer to believe that an insurable interest existed. Theprinciple that a payment under a void policy is effective is taken to considerable lengths.In A-G v Murray [1904] 1 KB 165, 73 LJKB 66, CA] a father insured his son’s life andassigned the benefit of the policy to the trustees of his son’s marriage settlement. Afterthe death of the son the insurers paid the policy proceeds to the trustees of the settlement,notwithstanding that the policy was obviously void. In an action by the Attorney-General,it was held that the payment was liable to estate duty. The same result would appear to

Page 19 of 83arise at the present day in relation to inheritance tax. In both cases the point, for taxpurposes, is that the money has been received and is liable to tax accordingly.NO RECOVERY OF PREMIUMS UNDER A VOID POLICYOne consequence of the voidness of a policy is that the policyholder may not reclaim thepremiums he has paid. This is not a general rule in contracts which are merely void, butthe position under the Life Assurance Act 1774 was considered in Harse v Pearl LifeAssurance Co [1904] 1 KB 558, 73 LJKB 373] . In that case it was held that policieseffected without insurable interest are not merely void, but also illegal, and that thegeneral principle of not allowing any action on an illegal contract must apply to thesituation so that premiums paid under a void policy cannot be recovered by thepolicyholder. The rule is of course applicable only in those cases where the parties areequally guilty in relation to the illegality.COMPARING HARSE V PEARL LIFE ASSURANCE CO AND HUGHES V LIVERPOOLVICTORIA LEGAL FRIENDLY SOCIETYThe effect of the principle that a policyholder may not recover premiums paid under avoid policy may be seen by comparing the result in Harse v Pearl Life Assurance Co withthat in Hughes v Liverpool Victoria Legal Friendly Society [1916] 2 KB 482.In the former case the plaintiff effected a policy of insurance on his mother’s life for thepurpose of covering the funeral expenses. Unfortunately, the plaintiff had no insurableinterest in his mother’s life, and the policy was therefore void. The question was whetherhe could recover the premiums which he had paid. It was held that the insurance agentwho had led the policyholder to believe that the policy would be valid had actednegligently but not fraudulently. Consequently the parties were treated as being equallyguilty, and the premiums were not recoverable.By contrast, in the latter case valid policies of life assurance had been taken out, but hadbeen allowed to lapse for non-payment of premium. The agent of the defendant societyrepresented to the plaintiff that she could take over these policies, though they had lapsedand though she had in any event no interest in the lives assured. It was held that the agentwas fraudulent in his representations to the policyholder. The parties were therefore notequally guilty, and the premiums were recoverable.It is clear that distinctions of this kind depend entirely upon the court’s findings as to thestate of knowledge of the parties.WRITING POLICIES IN TRUSTWhere it is desired to effect an insurance for the benefit of a person who has no insurableinterest in the life assured a possible solution is for the policy to be written in trust, i.e.for it to be effected by a person who does have an interest (often the life assured himself)but for the policy to state that it is held in trust for the intended beneficiary.ASSIGNING POLICIESA possible solution to the absence of an appropriate insurable interest is for the policy tobe affected by someone with an interest and then assigned to the intended beneficiary.However, assigning policies raises further questions:

Page 20 of 83(a) It may be held that the policy was in reality always that of the assignee and that itis accordingly void for lack of insurable interest [Shilling v Accidental DeathInsurance Co (1857) 2 H & N 42, 26 LJ Ex 266](b) An alternative argument which may be encountered here is that the policy is voidbecause it contravenes the Life Assurance Act 1774 Section 23 by failing to statethe name of the person for whose benefit it was made. This argument may beraised even where that person does have an insurable interest in the life, since therequirement of Section 2 is additional to the requirement of interest. The responseto such an argument depends upon whether the policy was in fact always intendedto benefit the third party. If so, then the argument is in principle correct, and thepolicy should be regarded as contravening Section 24.SUBSEQUENT ASSIGNING OF POLICIESCases where a policy is effected by someone with an interest and then assigned to anintended beneficiary should be carefully distinguished from cases where a policy was infact intended for the benefit of the original policyholder, who subsequently chooses toassign the policy. The distinction is not always easy to draw, for all depends upon theintention of the policyholder at the time when the policy was taken out, and this will notalways be easy to ascertain. Sometimes there may be extrinsic evidence of intention, suchas letters written by the policyholder at or about the relevant time, but more often theonly evidence will be that of the policyholder himself, who clearly has an incentive to saythat he originally intended the policy for himself. It is suggested that, except in a clearcase, the court will be slow to conclude that the policy is void on this ground. Again, itappears that insurance companies are generally not anxious to take points of this kind.GUIDANCE FROM THE LIFE ASSURANCE ACT 1774The Life Assurance Act 1774 does not state when an insurable interest is required. It isimplicit in the wording of Section 1 of the Act that the requirement applies at the timewhen the policy is taken out, since that section prohibits the making of policies withoutsuch an interest. It might be thought that the requirement ought also to apply at the timewhen the life assured dies, since the lapsing of an interest in the life of another deprivesthe insured of any legitimate reason for keeping the policy on foot, and might even besaid to turn it in effect into a gaming policy.GUIDANCE FROM DALBY V INDIA AND LONDON LIFE ASSURANCE COIn Dalby v India and London Life Assurance Co [(1854) 15 CB 365] the plaintiff was theprimary insurer in respect of a policy on the life of the Duke of Cambridge, and hadreinsured that risk with the defendant. There was no doubt that at the time when both theprimary policy and the policy of reinsurance were effected all parties had the necessaryinsurable interests. The primary policy was allowed to lapse through non-payment of thepremiums, so that the plaintiff no longer had any interest in the risk, but the plaintiffmaintained the policy of reinsurance. On the Duke’s death the reinsurers refused to payon this policy, alleging lack of interest. It was held that the plaintiff could recover on thepolicy. The requirement of insurable interest applies only at the time when the policy istaken out. This decision appears to negate a significant part of the purpose of the Life

Page 21 of 83Assurance Act 1774, and it has been much criticised, [Merkin (1980) 4 Anglo-Am LR345] but it remains law at the present day. Thus, for example, employers may maintain‘key staff’ policies on employees who are no longer with the firm, and ex-spouses maymaintain policies on each other’s lives effected during the marriage.THE ROLE OF REINSURANCE IN DALBY V INDIA AND LONDON LIFE ASSURANCE COThe argument and decision in Dalby v India and London Life Assurance Co proceededupon the basis that the plaintiff had reinsured the life of the Duke of Cambridge. This isnot the normal way of effecting reinsurance. It would be more usual to reinsure the riskof becoming liable on the primary policy. The requirement of insurable interest wouldstill apply to such a policy, but there would be other important consequences:(a) First, such a policy would apparently not be a life policy, but a liability policy,and it would be necessary to consider whether the rules on timing of interestapplied in the same way outside life cases or indeed whether the requirement ofinterest applies at all in such a case(b) Secondly, such a policy would be a policy of indemnity, not a contingencypolicy4, and whatever the rules as to insurable interest the principle of indemnitywould prevent the plaintiff from recovering in respect of a loss which he had notsuffered.Despite this the case remains good authority for the proposition that in life policiesinsurable interest is required only when the policy is taken out.GUIDANCE FROM THE MARINE INSURANCE ACT 1906Timing of interest in non-life policies may give rise to other difficulties.So far as the Life Assurance Act 1774 Section 1 is concerned, it might well be thoughtthat the rules on timing would be the same as in life assurance, since there is an obviousanomaly if the same statutory wording is found to produce different results as betweendifferent classes of insurance.However, in marine insurance the Marine Insurance Act 1906 expressly provides that theinsured must be interested at the time of the loss, though he need not be interested at thetime when the policy is effected. From the point of view of the mischief at which the LifeAssurance Act 1774 is aimed, it might be supposed that in the case of indemnity policiesthe rule ought to be that interest is required only at the time of effecting the policy. Thiswould have the advantage of unifying the rule for all types of policy, whilst leaving theprinciple of indemnity to deal with the policyholder who has no interest at the time ofloss. However, it appears that the Marine Insurance Act 1906 rule probably applies to allcases of indemnity policies.THE DISTINCTION BETWEEN INSURANCE AND GAMBLINGTHE GAMING ACT 1845 SECTION 18The Gaming Act 1845 Section 18 declares all policies by way of gaming or wagering tobe void. No action can be brought on such policies, nor can money paid under themnormally be recovered. In theory the prohibition on gaming policies is additional to therequirement of insurable interest under the Life Assurance Act 1774 section 1, but inpractice it appears that, at least in life assurance, there is no case where an interest is heldto exist but the policy will nevertheless be held to be one of gaming or wagering. It also

Page 22 of 83seems unlikely that this section can be used to defeat claims in those cases where aninterest has lapsed, since the question whether the policy is one of gaming or wageringunder the Gaming Act 1845 must presumably be determined at the time when the policyis effected.STATEMENTS OF THE NATURE OF THE INTEREST INSUREDIt should be noted that there is no legal requirement to state in the policy the nature of theinterest insured. As a matter of practice proposal forms very commonly ask for thisinformation, but this is merely a matter of commercial convenience. The omission of anystatement of the nature of the interest from the policy does not invalidate the policyalthough obviously a mis-statement of that interest in the proposal form would render thepolicy voidable for a breach of the duty of pre-contractual disclosure.AMOUNT OF RECOVERYNOTE: The Life Assurance Act 1774 Section 31 provides:‘In all cases where the insured hath interest in such life or lives, event or events, nogreater sum shall be recovered or received from the insurer or insurers than the amount ofvalue of the interest of the insured in such life or lives, other event or events.’.THE DISTINCTION BETWEEN LIFE POLICIES AND INDEMNITY POLICIESIt is commonly said that life policies are contingency policies rather than indemnitypolicies [Gould v Curtis [1913] 3 KB 84, 82 LJKB 802] it is for this reason that theprinciple of indemnity and the doctrine of subrogation do not apply to them. Thisdistinction between indemnity policies and contingency policies was adopted when thecourts were struggling to formulate a definition of insurance for the purposes of stampduty, and was intended to deal with the problem that there is no obvious loss to thepolicyholder in surviving to the maturity date [Gould v Curtis [1913] 3 KB 84, 82 LJKB802] This distinction was considered to provide a better rationale for recognising suchpolicies as life policies than did Channell J’s observation in Prudential Insurance Co vIRC [1904] 2 KB 658, 73 LJKB 734, that there was loss in reaching that date because itwas to be expected that by the maturity date the policyholder would be less able to earnhis own living. Unfortunately, the categorisation adopted in Gould v Curtis has tended toobscure the fact that the Life Assurance Act 1774 Section 3 does not make any senseunless there is some way of valuing interests in lives, and that some life policies, ie thosewhere there is no automatic interest, have to be regarded as indemnity policies. Despitethe observations of the Court of Appeal in Gould v Curtis life policies in which there isno automatic insurable interest have to be treated as indemnity policies in the sense thatthe amount which can be recovered is limited to the amount of the policyholder’s interest.DETERMINATION OF THE VALUE OF THE INTEREST BEING INSUREDIt appears that the rule in Dalby v India and London Life Assurance Co means that notonly the existence, but also the value of the interest must be determined at the time whenthe policy is taken out. This can obviously produce absurd results. A creditor’s policy on

Page 23 of 83a debtor may insure the full amount of the original loan, which may be recovered even ifthe debtor dies after paying off part (or even all) of the loan. This rule is of course subjectto contrary provision in the policy, and in commercial debt protection policies it is quitecommon to provide that only the outstanding debt may be recovered.THE LIFE ASSURANCE ACT 1774 SECTION 3 AND ITS RELEVANCE TO GENERALINSURANCEIn general insurance cases the Life Assurance Act 1774 Section 3 may be regarded as asupplement to the principle of indemnity. This is the principle that the policyholdercannot recover more than his actual loss. However, this principle ought to apply only atthe point when a loss occurs, since it is only at that time that the amount of the loss canbe ascertained. Section 3 appears to add a further requirement that the interest must bevalued at the time when the policy is taken out. The result appears to be that themaximum amount recoverable is the lesser of the value at the time of inception and thevalue at the time of loss.VALUING THE INTEREST IN OWN LIFE POLICIESIn Lynne v Gordon Doctors & Walton (a firm) [(1991) 135 Sol Jo LB 29] the deceasedhad instructed the defendants to procure for him an endowment policy to back amortgage, but they failed to do so. The question was, assuming that the defendants hadbeen negligent, how much could the estate recover? Phillips J held that there was no lossin this case, since the interest in question was not capable of pecuniary valuation. It issubmitted that this is a wholly erroneous application of the notion that interests in an ownlife policy are not capable of valuation. The deceased needed this policy for a verypractical reason, namely to ensure that his mortgage would be paid if he diedprematurely. The loss to him during his lifetime was the absence of the cover which sucha policy would have provided (and the possibility of selling the policy on the openmarket) and on his death the loss was the irretrievable loss of the opportunity to obtainsuch a policy, even on worse terms because of a deterioration in his condition.THE GENERAL RULES AS TO DISCLOSURE IN PRE-CONTRACTUAL NEGOTIATIONSThe general rule of English law is that in pre-contractual negotiations there is no positiveduty on either party to disclose material facts to the other party. The only duty is thenegative one not to engage in misrepresentations. Contracts of insurance form animportant exception to this principle in that there are onerous duties of disclosure.However, the ordinary rules as to misrepresentation also apply.MISREPRESENTATION: GENERAL PRINCIPLES AND THEIR APPLICATION TOINSURANCE LAWThe general principle is that any misrepresentation which induces the other party to enterinto the contract renders the contract voidable at the option of the other party. Thisapplies even where the misrepresentation is entirely innocent, ie the misrepresentor hasneither actual nor constructive knowledge of the falsity of the statement [Urquhart vMacpherson (1878) 3 App Cas 831]. However, there must be a positivemisrepresentation: mere silence is not enough. The telling of a half truth, which conceals

Page 24 of 83the full truth or gives a misleading impression as to the full truth, can amount tomisrepresentation for these purposes [With v O’Flanagan [1936] Ch 575, CA;Nottingham Patent Brick & Tile Co v Butler (1886) 16 QBD 778, 55 LJQB 280, CA]These situations are occasionally of importance in insurance law. In the majority of cases,though, it is open to the insurer to rely on the much stricter rules relating to nondisclosureof material facts.FRAUDULENT AND NEGLIGENT MISREPRESENTATION: THEIR APPLICATION TOINSURANCE LAWWhere a misrepresentation is made fraudulently or negligently the common law andstatutory rule is that the innocent victim may also recover damages.The application of this principle in an insurance law context is unclear. In theoverwhelming majority of cases the misrepresentation will be made by the proposer.Once the insurer has avoided the policy, it is hard to see what further loss he has suffered,so that no damages could be awarded. The same point appears to apply in the relativelyrare case where the misrepresentation is perpetrated by the insurer. Certainly, it will notnormally be possible for the policyholder to enforce the policy as if the representationwere true. The only case where such an approach could have any prospect of success atall would be where the insurer’s misrepresentation had somehow become a term of thecontract, in which event the policyholder would be entitled to damages to put him in aposition as if the representation had been true.In the context of a pure life policy arguments of this kind are rare, but they are verycommon in relation to investment policies, where investors allege that statements as tolikely investment return, or guarantees against loss or likely surrender values, have beenmade and have been incorporated into the contract. In practice such arguments rarelysucceed, not least because it is usual to have a written policy document which isexpressed to contain all the terms of the agreement between the parties, and rectificationwill not be available because it will be impossible to show that the insurance companyintended these representations to be terms of the contract.THE PRINCIPLE OF UTMOST GOOD FAITHIt is the most important single rule of insurance law that insurance is a contract of utmostgood faith. The principle derives from the well-known case of Carter v Boehm [(1766) 3Burr 1905), 1 Wm B1 593] , where Lord Mansfield CJ said:‘Insurance is a contract upon speculation. The special facts, upon which the contingentchance is to be computed, lie most commonly in the knowledge of the insured only; theunderwriter trusts to his representation, and proceeds upon confidence that he does notkeep back any circumstance in his knowledge, to mislead the underwriter into a beliefthat the circumstance does not exist, and to induce him to estimate the risque as if it didnot exist.’ This case establishes that the proposer comes under a duty to disclose materialfacts to the insurer before the policy is entered into.THE DUTY OF DISCLOSURE: AN ONEROUS DUTY FOR PROPOSERSFrom the point of view of the proposer the law is reasonably clear and very onerous. It isthe duty of the proposer to disclose on the proposal form all material facts of which he is

Page 25 of 83or ought to be aware. Constructive knowledge of the relevant facts is sufficient [Joel vLaw Union and Crown Insurance Co [1908] 2 KB 863, 77 LJKB 1108, CA] and materialfacts are defined as those which would be likely to influence the judgment of ahypothetical prudent insurer in deciding whether and on what terms to accept the risk.This test is derived from the decision of the House of Lords in Pan Atlantic v Pine TopInsurance Co Ltd [[1995] 1 AC 501, [1994] 3 All ER 581, HL]. The discussion in thatcase proceeds on the basis that the test of materiality ought to be the same in all cases ofinsurance.THE DEVELOPMENT OF A TEST OF MATERIALITYIn Lambert v Co-operative Insurance Society Ltd [1975] 2 Lloyd’s Rep 485, CA theCourt of Appeal rejected suggestions that the test for materiality should be couched interms which related to the expectations of the proposer or to the views of the particularinsurer. The test is thus objective by reference to the views of a hypothetical reasonableinsurer. For the purpose of determining whether this hypothetical reasonable insurerwould consider a particular fact material the court may take expert evidence from actualinsurers as to their practice, but like all expert evidence this testimony assists the courtbut does not bind it.Note: the following English cases are not binding in Tanzania. However, their persuasiveforce cannot be underestimated. Carefully scrutinize them for they vividly enlighten alawyer in Tanzania as to how the doctrine of good faith operates.PAN ATLANTIC V PINE TOP [1995] 1 AC 501, [1994] 3 ALL ER 581, HL: ITS EFFECTON THE LAW RELATING TO DISCLOSURE IN INSURANCE CONTRACTSINTRODUCTION AND FACTSIn July 1994 the House of Lords gave judgment in Pan Atlantic Insurance Co Ltd v PineTop Insurance Co Ltd, which is widely perceived as having fundamentally altered theEnglish law of non-disclosure. The relevant facts of the case may be briefly stated. Theplaintiffs wished to reinsure long-tail environmental liability business, and the brokeracting on their behalf:(a) presented the risk to the reinsurer in such a way as to distract attention from themore mature years of the loss record (which of course give a better indication ofthe true position in long-tail cases); and, three weeks after the initial meetingbetween the parties,(b) told the reinsurer that the losses for later years had not significantly increasedsince that meeting, when in fact the total of claims had doubled in that timePAN ATLANTIC V PINE TOP: THE DECISIONThe broker telling the reinsurer, three weeks after an initial meeting between the parties,that the losses for later years had not significantly increased since that meeting, when infact the total of claims had doubled in that time was a misrepresentation and was held torender the policy voidable. The earlier misrepresentation where the broker presented therisk to the reinsurer in such a way as to distract attention from the more mature years ofthe loss record (which of course give a better indication of the true position in long-tail

Page 26 of 83cases was held irrelevant on the ground that a competent underwriter should have knownthat the earlier years were more reliable and should not have allowed himself to bedistracted from them. Although their Lordships were unanimous in reaching thisconclusion, the approaches which they adopted to the general questions of law are ofsuch fundamental importance to the law of non-disclosure that the speeches require to beanalysed at some length.PAN ATLANTIC V PINE TOP: THE ISSUESThe House of Lords took this opportunity to review at length the general principlesapplicable to the law of non-disclosure. The case resolved itself into two issues, namely:(a) whether a fact is material only if it would exercise a decisive influence on thehypothetical reasonable underwriter’s decision whether and at what premium toaccept the risk or whether it is sufficient that it would have been one of the factswhich the hypothetical reasonable underwriter would have wanted to know inmaking that decision; and(b) whether the insurer is entitled to avoid the policy for non-disclosure of a materialfact even though the non-disclosure did not induce the actual insurer to enter intothe contractPAN ATLANTIC V PINE TOP: NO DISTINCTION BETWEEN MARINE AND NON-MARINEINSURANCEFollowing Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd it is clear that thelaw on non-disclosure is the same in marine and non-marine cases. It is noticeable thatthe discussion of the issues was centred on the Marine Insurance Act 1906 Sections 18and 20 notwithstanding that the case did not involve marine insurance. Although it isobviously desirable that the law should be the same in all types of insurance, thisconcentration on the words of the statute did, as will appear below, lead to somedifficulties arising from what are arguable omissions from the sections in question.PAN ATLANTIC V PINE TOP: THE DISTINCTION BETWEEN NON-DISCLOSURE ANDMISREPRESENTATION AS APPLIED TO INSURANCE CASESAlthough the question of non-disclosure arises only in relation to contracts uberrimaefidei, that of misrepresentation arises in all contracts, including insurance contracts. It isobviously desirable that the law on misrepresentation should be the same in all types ofcontract. Moreover, it seems undesirable that the status of an insurance contract shoulddiffer according to whether the behaviour of the proposer is classified asmisrepresentation or as non-disclosure, since there is a fine line between the two and it isoften a matter of chance which designation is adopted.PAN ATLANTIC V PINE TOP: THE DEFINITION OF MATERIALITYMany of the criticisms of the pre-existing law were aimed at showing that materialityshould require some impact on the decision made by either the actual insurer or thehypothetical reasonable insurer.This anxiety to narrow the concept of materiality was a natural consequence of the longheldbelief that materiality was the only question in relation to non-disclosure, ie that any

Page 27 of 83non-disclosure of a material fact must always make the contract voidable. This view is ofcourse derived largely from the wording of the Marine Insurance Act 1906 Section 18,which declares contracts voidable for non-disclosure (Section 20 does the same in respectof misrepresentations).However, if it were possible to treat the question whether the non-disclosure induced theactual insurer to enter into the contract separately from the question whether the factwould, if disclosed, have influenced the judgment of the hypothetical reasonable insurer,this pressure to recast the definition of materiality would greatly diminish. The drawingof such a distinction forms the basis of the speech of Lord Mustill, with whom Lord Goffand Lord Slynn agreed. After an extensive review of authorities and academic writingspre-dating the Marine Insurance Act 1906 Lord Mustill held that the Court of Appeal inContainer Transport International v Oceanus Mutual Underwriting Association(Bermuda) Ltd [1984] 1 Lloyd’s Rep 476 had been right to decide that a fact is materialonce it is shown that it is one which the hypothetical reasonable insurer would havewanted to know. It is not necessary to show that knowledge of the fact would haveexerted a decisive influence on his decision. His Lordship suggests the decisive influencetest is unworkable because it offers too great an opportunity for dispute betweenunderwriters about what they would have done if the fact had been disclosed. It isinteresting to contrast the alternative view taken by Lord Templeman and Lord Lloyd,which is that identifying what the hypothetical reasonable underwriter would have doneis much easier than identifying what he would have wanted to know, the latter being amuch more nebulous question. Lord Mustill’s view is, however, the one which must nowbe regarded as being good law.PAN ATLANTIC V PINE TOP: THE CAUSATION QUESTIONPrior to Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd it had appeared thatthe causation question did not really exist in this context since any material nondisclosurewould allow the insurers to avoid the contract. The radical change which thedecision of the House of Lords in this case makes is that it recognises the centralimportance of the causation question. On this point all five members of the AppellateCommittee were in agreement. The insurer is not entitled to avoid the policy unless hedemonstrates that the non-disclosure actually induced him to enter into the policy. Thistest focuses on the actual insurer rather than on a hypothetical prudent insurer. Althoughthere is no mention of the need for inducement in the Marine Insurance Act 1906, theHouse of Lords held that such a requirement must be implied on the basis that the Actwas intended only to codify the common law, which, in their Lordships’ view, hadincluded such a requirement, and that the absence of any specific reference to inducementcould be explained on the basis that the Act was dealing with materiality, not withinducement. The importance of this decision for the law of non-disclosure can scarcely beover-estimated. In future insurers will face a much greater burden in seeking to avoid apolicy for non-disclosure or misrepresentation, and it appears that this will be so evenwhere the policyholder has been guilty of fraud, since the principles upon which theobservations of the House of Lords in Pan Atlantic Insurance Co Ltd v Pine TopInsurance Co Ltd are based do not depend on the absence of fraud.

Page 28 of 83PAN ATLANTIC V PINE TOP: MATERIALITYSo far as materiality is concerned it seems that expert evidence will still be required, andthat it is not relevant to know what the actual insurer would have done. Where there isconflicting expert evidence, the court will have to choose which it prefers. The moredifficult questions seem, however, to arise in relation to inducement. Where only onematerial fact has not been disclosed, it will probably be easy enough to decide whether itsdisclosure would have led the insurer to act differently, but the position is more complexwhere more than one fact has been concealed. Here it may happen that no oneundisclosed fact would by itself have been sufficient to alter the insurer’s behaviour, butthat the facts (or some one or more combinations of them taken together) would havedone so. Presumably the test must be whether the insurer would have acted differentlyhad full disclosure been made.PAN ATLANTIC V PINE TOP: EFFECTS FOR INSURERSAnother oddity arising from Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltdconcerns the ways in which the insurer’s behaviour might have been changed. TheMarine Insurance Act 1906, dealing with materiality, refers only to the decision whetherto accept the risk, but the judgments in this case assume that this must be treated asincluding accepting the risk at a higher premium. The Act does not of course dealexpressly with the ways in which the actual insurer might have behaved differently, butthe judgments again assume that the change will be of one of the two kinds alreadydescribed. In fact, there are other ways in which an insurer might react to the information,including reducing the cover, imposing an excess or a warranty or altering the policywording by excluding loss arising from specified causes. It is not clear from thejudgments whether a potential change of this kind is sufficient to allow avoidance of thepolicy. In principle it is suggested that any alteration which goes beyond the purely trivialought to be sufficient.FACTS WHICH ARE COMMONLY FOUND TO BE MATERIALIn dealing with material facts for the purposes of the duty of disclosure it is customary todistinguish between facts which are relevant to the physical hazard, and facts which arerelevant to the moral hazard.FACTS WHICH ARE RELEVANT TO THE PHYSICAL HAZARDThese may be defined as those facts which make it more likely that the insured peril willmaterialise. In relation to life policies they obviously include such things as the physicalcharacteristics of the proposer: age; height; weight; facts about the proposer’s medicalhistory and condition; and facts about the proposer’s occupation and hobbies. All thesematters will normally be the subject of specific questions on the proposal form, and theanswers are obviously material.FACTS WHICH MAY BE RELEVANT TO THE MORAL HAZARDThe moral hazard in insurance may be defined as the risk that the proposer will in someway act dishonestly in relation to the insurance policy, in particular the risk that he willmake false claims. This definition is admittedly imperfect, for it is customary in general

Page 29 of 83insurance to regard the proposer’s claims history as part of the moral hazard,notwithstanding that all previous claims may have been genuine and that this evidencemay then go only to show that the proposer is particularly prone to incurring genuinelosses. However, this point is not relevant in life policies, since there can be no previousclaims in own life policies and proposal forms for life of another policies do not normallyask anything about claims history. Accordingly, the definition will serve for all practicalpurposes connected with life assurance. In fact, moral hazard is of much less importancein life assurance than in general insurance, for there are relatively few people who willconsent to their own death in order to see someone else reap the rewards. However, it isnot unknown for those in desperate financial straits to effect a life policy and thencommit suicide with a view to benefiting their dependants, though quite apart from anyquestion of non-disclosure it is suggested that a claim on the policy could properly berejected in these circumstances. Alternatively, there have been cases of policyholdersstaging their own disappearance and ‘death’ with the intention of benefiting later from aclaim on the policy. However, cases of this kind tend to be relatively rare, and in practicelife proposal forms do not ask any questions relating to the moral hazard.FACTS WHICH MAY BE RELEVANT TO THE MORAL HAZARD IN CASES WHERE APOLICY IS TAKEN OVER ANOTHER’S LIFEA particular difficulty arises in life of other policies when the non-disclosure ormisrepresentation is perpetrated by the life assured rather than by the proposer. InWheelton v Hardisty [(1858) 8 E & B 232, 26 LJQB 265] it was held that in the absenceof collusion such misconduct is not to be attributed to the assured and therefore does notrender the policy voidable.FACTS WHICH DO NOT NEED TO BE DISCLOSEDIn Carter v Boehm Lord Mansfield also gave guidance as to facts which do not need to bedisclosed:‘The insured need not mention what the underwriter ought to know; what he takes uponhimself the knowledge of; or what he waives being informed of.’At the present day the facts which do not require disclosure are commonly grouped underfour heads based on the Marine Insurance Act 1906 Section 183.FACTS WHICH THE UNDERWRITER OUGHT TO KNOWThis is a difficult area of law. There is much conflicting authority on the question ofwhich facts the underwriter ought to know. Few of the cases concern life policies and it isdifficult to extract from them any general principle which will be helpful in dealing withlife cases. However, the following propositions are suggested as being good law and inaccordance with principle:(a) the underwriter is assumed to have access to actuarial tables of mortality;(b) the underwriter is deemed to have some level of knowledge as to the risksinherent in common activities, even where these are within the class of activitiesgenerally regarded as extra-hazardous; and

Page 30 of 83(c) the underwriter is not normally deemed to have any special knowledge about theparticular life, even where the life is a well-known person, the scope of whoseactivities is in the public eye.It may also happen that the underwriter effectively has knowledge because of somethingcontained in the proposal form. In Keeling v Pearl Assurance Co Ltd [(1923) 129 LT573] the proposal form included questions about the assured’s date of birth and age nextbirthday. The answers given to these two questions were mutually contradictory, but thepolicy was nevertheless issued without further enquiry. It was held that the companyshould have realised that at least one of the answers was wrong, and that they could notrely on the misrepresentation since they had chosen not to question it. It is submitted thatthis principle can apply only in the fairly narrow range of cases where it is obvious evenin the absence of specialised knowledge that the proposal form must be incorrect.FACTS WHICH DIMINISH THE RISKClearly, there is no need for the proposer to disclose facts which diminish the risk, sincethe insurer cannot be prejudiced by their non-disclosure. As a matter of law any fact caneffectively be converted into a material one merely by requiring the proposer to warrantthat it is true.FACTS WHOSE DISCLOSURE IS WAIVEDIt is always open to the insurer to waive the disclosure of any fact. However, it should beunderstood that the courts have been reluctant to hold that there has been a waiver in theabsence of unequivocal evidence. Thus, disclosure of a fact is not waived merely becausethere is no question about it on the proposal form, nor where the insured fails to answer aspecific question on the form and the insurer does not query this omission. In the latterevent it will be assumed that the insured is representing that there is nothing to disclose[[1956] 2 Lloyd’s Rep 240]. Similarly, it is not usually open to the policyholder to claimthat a question asking about certain specific things implicitly waives disclosure of otherthings which might otherwise have been material. In Godfrey v Britannic AssuranceCo[1963] 2 Lloyd’s Rep 515] a question on the proposal form asked:‘Have you suffered from any illness or accident or received medical advice or treatment,with or without an operation?’The proposer had recently suffered a serious loss of weight, but had not been diagnosedas suffering from any illness, nor had he taken medical advice on the subject. He did notdisclose the weight loss. Roskill J held that the question on the form could not beconstrued as cutting down the duty of disclosure, and that the weight loss was obviouslymaterial and therefore ought to have been disclosed.At the same time an underwriter who knows that certain material information is beingmade available to him but who declines to look at it is likely to be held to have waiveddisclosure. The point arose in a commercial context in Pan Atlantic Insurance Co Ltd vPine Top Insurance Co Ltd, where the broker took a detailed loss record to his meetingwith the underwriter, and offered it to him for examination. In the event the insurer wasstill able to avoid the policy because the broker presented the risk to him in such a way asto divert his attention from the detailed record.

Page 31 of 83THE INCOMPETENT UNDERWRITERPan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd may also be regarded asbeing of interest in relation to the problems posed by underwriters who do not ask thequestions which might normally be expected or who do not appear to understand whichfacts are important. It is true that in Pan Atlantic Insurance Co Ltd v Pine Top InsuranceCo Ltd the House of Lords held that the broker’s presentation had been deliberatelymisleading; at the same time it is necessary to ask how it could have happened that theunderwriter allowed his attention to be diverted by the broker. The case concerned longtailenvironmental business, and it is fundamental to this type of business that the matureyears are a more reliable guide to losses than the immature years; yet the underwriterconcentrated on the immature years and thus formed a false impression of the loss record.The logic of Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd appears to bethat the proposer is required to assume more or less total ignorance on the part of theinsurer. On the other hand, this aspect of the case was not considered anywhere in thejudgments, and it may be that in a future case the issue could be examined morethoroughly, possibly leading to a different approach.SUBSEQUENT WAIVERWhere the non-disclosure comes to light after the policy has commenced, it may bewaived by the insurer. In the absence of express waiver the court may be prepared to findthat there is implicit waiver if premiums are accepted after the insurer has knowledge ofthe non-disclosure.CONSEQUENCES OF NON-DISCLOSUREThe law is equally clear about the consequences of failure to disclose a material fact.Such failure makes the policy voidable at the instance of the insurer provided that thenon-disclosure induced the insurer to enter into the contract.CONSEQUENCES OF AVOIDANCE OF AN INSURANCE POLICYThe avoidance of an insurance policy operates in the same way as the avoidance of anyother contract. In other words it is as if the contract had never existed and the insurercannot be liable for any claim, even if the facts which would otherwise have given rise toa claim have already occurred. The rule is that upon avoidance of the contract the insurermust make restitutio in integrum, i.e., the insured must be restored to the position inwhich he was before the contract was entered into. This naturally involves returning allpremiums which have been paid. Where the policy has been in existence only a shorttime this may not give rise to any great difficulty, but if the policy has been in force forsome years two related but contrasting questions may be posed:(a) First, is the insured entitled to interest on the money which the insurer has had forthe duration of the policy?(b) Second, is the insurer entitled to deduct anything for the life cover which has beenprovided during the policy?The second question is more easily answered than the first. The avoidance of the policy isretrospective, and the matter is to be considered as if the policy had never existed at all. Itis therefore clear that nothing can be retained for the cover, since the effect of the

Page 32 of 83avoidance is that the cover never existed, even though at the time the parties thought thatit did.The first question is more difficult because it is not now clear on what basis the insurerwas ever entitled to hold the insured’s money at all, unless perhaps it was paid under amistake of fact, namely the mistaken impression that the policy was fully valid. However,the general principle appears to be that on the avoidance of a contract (whether a contractof insurance or some other type of contract) money received under the contract is repaidbut without interest. This is certainly the practice within the industry, and it is submittedthat it does accord with the legal position.CONTENTS OF INSURANCE POLICYAn insurance policy is a contractual document and must be interpreted accordingly. Atthe same time insurance policies commonly exhibit a number of distinctive featureswhich are worthy of comment.Insurance companies normally have standard form policies, which are issued as contractsof adhesion. These frequently rely on tried and tested wording, the effect of which is wellknown to those in the industry, but may not be obvious to others.It is necessary when reading an insurance policy to distinguish between the clauses whichexplain the cover provided, the clauses which lay down exceptions to that cover and theclauses which impose other obligations on the parties (usually, it must be said, on theinsured).INSURING CLAUSESThe clauses of an insurance policy which set out the cover provided by the policy areusually referred to as the ‘insuring clauses’. In order to make a claim on the policy it isnecessary for the policyholder to show that what has happened falls within the wordsused in these clauses. Thus, the burden of proof at this stage is upon the policyholder.This point is of importance in those cases where it is difficult to establish just how theloss occurred, for in the absence of decisive evidence the incidence of the burden of proofwill be crucial.The insuring clauses must cover both the nature of the loss which is covered, forexample, liability or property damage or loss of business, and the ways in which that lossmust arise in order to be covered, for example damage by fire. A given loss is within thepolicy only when it is an insured type of loss caused by an insured peril.EXCLUSIONSInsurance policies normally include a list of excepted perils being perils to which theinsurance cover does not apply. These are matters which would or arguably would fallwithin the meaning of the words used in the insuring clauses, but which the insurersnevertheless wish to exclude. It is neither necessary nor usual to provide a full list ofperils not covered: anything which is not listed in the insuring clauses is by definition notcovered. The exclusions are only for things which would otherwise appear to fall withinthe insuring clauses.

Page 33 of 83THE BURDEN OF PROOF AS TO EXCEPTIONSThe insurers bear the burden of proving that an exception applies [Rhesa Shipping Co.SA v Edmunds The Popi M [1985] 2 All ER 712, [1985] 1 WLR 948] once thepolicyholder has discharged the burden of proving that the loss falls within the insuringclauses.EXCEPTIONS TO EXCLUSIONSIt sometimes happens that the exclusions themselves contain further exclusions, ie thingswhich fall within the meaning of the words used in the exclusion, but which arenevertheless not to be excluded. This style of drafting is to be regretted for the confusionwhich it inevitably causes. It appears that an insured who wishes to rely upon anexclusion within an exclusion bears the burden of proof on that point [Munro, Brice & Cov War Risks Association [1918] 2 KB 78, [1916-17] All ER Rep 981]PRINCIPLES OF CONSTRUCTION OF INSURANCE POLICYWhether the policy is written in traditional legal language or in the more modern plainEnglish style, it will always be necessary to interpret it in order to decide exactly what itmeans.LEGAL PRINCIPLES OF CONSTRUCTIONThe legal principles surrounding the construction of insurance policies are in generalmerely those applicable to the construction of any contractual document, but theparticular features of insurance policies require some amplification and modification ofthose principles.The starting point for all forms of contractual construction is that the natural and ordinarymeaning of the words should be adopted [Smith v Hughes [1861-1873] All ER 632, QB].However, it is by no means easy to implement this principle in relation to insurancecontracts, which are documents of undoubted complexity and normally in standard form.TECHNICAL LEGAL MEANINGSWhere words are used which have some other technical legal meaning, they are to beinterpreted according to that meaning1. The examples which follow will show how thatprinciple has been applied in a number of important insurance law cases. It may beobserved that strict adherence to this principle has sometimes produced rather surprisingresults.OTHER PRINCIPLES OF CONSTRUCTIONA number of relevant principles surrounding the construction of insurance policies maybe identified, though it must be said that these are no more than general principles, whichmay yield to other principles in appropriate cases, and which should therefore not beelevated to the status of hard and fast rules.

Page 34 of 83CONTRA PROFERENTEMIt is often said that as a general principle contractual documents should be construedcontra proferentem. In the present context that will always mean against the insurancecompany. This is an important principle, but it should not be taken too far. It does notmean that every document must always be construed in the way least favourable to thecompany. It merely allows for genuine ambiguities to be resolved in favour of thepolicyholder when other approaches fail. It must also be stressed that the principle islimited to genuine ambiguities: it is not proper to adopt a strained construction of thelanguage in order to find an ambiguity which can then be resolved in favour of thepolicyholder. In one case a life policy contained an exclusion for death caused by‘alcoholism’. The policyholder went out to celebrate New Year’s Eve and returned homedrunk. After returning home he fell downstairs and died of the resulting injuries. Theinsurers sought to rely on the exclusion, but it was held that they were liable on thepolicy. Although it was fairly clear that the death was caused by drunkenness, andalthough there was evidence that the policyholder was a heavy drinker, it was by nomeans clear that he could properly be called an alcoholic, far less that the alcoholism, asdistinct from the one incident of drunkenness, was the cause of his death. If the insurerhad wanted to exclude liability in any case where the insured was drunk at the time ofdeath, then the policy wording should have been made much more explicit.WRITTEN WORDS TO PREVAIL OVER PRINTED WORDSThis principle applies in those cases where there is a standard form printed policy, whichhas been specifically altered to meet the needs of the particular case. The maxim is ofimportance in those situations where the standard form words and the specially insertedwords appear to be in conflict with each other. In such cases it is obviously sensible toassume that the parties are more likely to have intended to apply the specially insertedwords, though obviously even this presumption will be inapplicable if it would produceabsurd results. The reference to written words dates from the time when such alterationswould normally be inserted in manuscript. Although there is no reason why this shouldnot be done even today, it is more likely that the words will be typed, or even printed. Inview of this it is suggested that the maxim might usefully be re-formulated as ‘specialprovisions take precedence over general provisions’. It is relatively unusual to find suchspecial provisions in personal lines policies.HAZARDOUS ACTIVITIESAlthough proposal forms commonly ask whether the proposed life assured engages or hasany intention of engaging in hazardous activities, it is rare to find an express provision inthe policy excluding liability in the event that death is caused by such an activity. Ofcourse, death while undertaking a hazardous activity may well be evidence that a falseanswer was given to the relevant question on the form, so that the policy becomesvoidable. It is therefore appropriate to consider what is meant by the phrase ‘hazardousactivity’ or ‘extra hazardous activity’. Unfortunately, this has not as yet been the subjectof judicial interpretation. The phrase is by its nature imprecise, but it is suggested that itshould be interpreted as relating primarily to leisure activities, since there will almostalways be a separate question asking about the proposer’s occupation. All activities are tosome extent hazardous, and it is therefore necessary to find some sensible way of limiting

Page 35 of 83the interpretation given to the phrase. The ambiguity of the phrase leads to the suggestionthat it will be restrictively interpreted, but there is as yet no more definite authority on thesubject.PRE-CONTRACTUAL REPRESENTATIONSIn appropriate cases it may be possible to resolve ambiguities in the interpretation of thepolicy by asking what the policyholder was led to expect in the pre-contractualdiscussions. This is of particular importance when dealing with investment policies. Itshould be noted, though, that only in rare cases will the policy contain any provision as toinvestment return. Consequently, complaints that the return has been less than waspromised by the company representative in pre-contractual discussions will very rarely besupported by anything in the policy. Where the complaint is about misrepresentations asto the terms on which investment could be discontinued or the policy could be encashed,it is likely that the policy will contain express provisions, and the difficulty will be thatthese are inconsistent with what the policyholder claims to have been told before enteringinto the contract. Consequently, these cases too will involve no question of policyconstruction.INDISPUTABLE POLICIESThe policy may provide that it is ‘indisputable’. This is normally understood to meanonly that it cannot be challenged for non-fraudulent non-disclosure. It does not prevent achallenge in the case of fraud [Re General Provincial Life Assurance Co Ltd ex pDaintree (1870) 18 WR 396] nor does it mean that the court will enforce a policy whichis void for want of insurable interest. Sometimes the relevance of fraud will be madeclear by stating that the policy is ‘indisputable in the absence of fraud’.RECTIFICATIONThe rules relating to rectification of insurance contracts are similar to those in other partsof the law of contract. A contract may be rectified where it appears that the document inwhich the contract is embodied does not give effect to the intentions of the parties. Thedoctrine of rectification is from this point of view merely part of the general principle thatin interpreting a contract the court seeks to give effect to the intentions of the parties.However, it is essential to establish that the missing term is one which was in the mind ofboth parties at the time when the contract was entered into: it is not enough that only oneparty had it in mind. Proof of this is obviously difficult in the absence of contemporarydocumentation, since in the nature of things one party is likely to deny ever intending toinclude the term.PAROLE EVIDENCEInsurance contracts do not have to be in writing, though for obvious practical reasonsthey almost invariably are, or at least refer to written evidence. Even in the legendarycase of the Lloyd’s underwriter who orally agreed to insure the Titanic after hearing thatthe ship had struck an iceberg1, both broker and underwriter understood that the oralagreement was for a policy of the relevant Lloyd’s standard form. Although it wouldnormally be assumed that the policy document, supplemented by other documents suchas the proposal form and possibly the advertising literature, would amount to the entire

Page 36 of 83contract, parol evidence may nevertheless be admitted to show the intentions of theparties or to establish that there is some mistake in the documentation.WARANTIES AND CONDITIONSReversal of the usual distinction between conditions and warrantiesIn insurance law the traditional distinction between conditions and warranties is reversed.Thus, a breach of warranty gives rise to an immediate right to terminate the contract[Duckett v Williams (1834) 2 Cr & M 348; 4 Tyr 240] whereas a breach of conditionsounds only in damages [Provincial Insurance Co Ltd v Morgan [1933] AC 240, [1932]All ER Rep 899]THE NATURE OF WARRANTIESSo far as warranties are concerned, a number of points should be noted.(a) First, warranties are commonly construed as statements of absolute fact ratherthan as merely declarations of opinion [Anderson v Fitzgerald (1853) 4 HL Cas484, 21 LTOS 245, Duckett v Williams (1834) 2 Cr & M 348, 4 Tyr 240, HL]though this practice is now restricted in the case of personal lines policies2 by theStatements of Insurance Practice.(b) Secondly, it has long been common to include on proposal forms a clause,commonly referred to as a ‘basis of the contract’ clause under which the proposerwarrants the truth of all statements made on the proposal form. The effect of thisis to turn all such statements into warranties, so that a false answer to any questioncan be a ground for avoiding the policy, even if the answer is not material.BREACH OF WARRANTY [DAWSONS LTD V BONNIN [1922] 2 AC 413, HL]The potentially extreme effect of the rule concerning warranties is illustrated by DawsonsLtd v Bonnin where the proposers were seeking to insure a lorry which they used in theirbusiness. In answer to a question they stated that the vehicle would be garaged at anaddress in central Glasgow. In fact it was to be garaged on the outskirts of the town, at anaddress which carried less risk of theft or vandalism. The policy contained a ‘basis of thecontract’ clause. The House of Lords held, by a bare majority, that the insurers wereentitled to avoid the policy for breach of warranty, even though the false statement hadoverstated the risk, so that the proposers had derived no advantage from it.THE DISTINCTION BETWEEN PRESENT AND FUTURE WARRANTIESThere is a line of quite difficult case law about the difference between a warranty ofpresent fact and a warranty as to the future. In [Hales v Reliance Fire and AccidentInsurance Corpn Ltd [1960] 2 Lloyd’s Reports 391], a shopkeeper insured his shop,declaring on the proposal form that he stored no inflammable materials. Although thestatement was true when made, he was in the habit of keeping fireworks for sale eachyear. It was held that this was a breach of warranty, the statement being construed asreferring to the future as well as the present. The cases are not easy to reconcile, but it issuggested that the answer lies in an examination of the wording of the question in eachcase together with a consideration of the purpose for which the warranty is sought. As tothe question of the wording it is suggested that insurers who want to ask for futurewarranties ought to do so in clear language, since it is they who draft the form and they

Page 37 of 83have ample opportunity to ask for as much information as they need. The presumptionought to be that a warranty expressed in the present tense relates only to the present. Onthe other hand, it is likely that consideration of the purpose of a warranty will lead quiteoften to the conclusion that it ought to apply to the future as well. It is suggested thatwarranties ought to be regarded as applying to the future as well as to the present onlywhen three conditions are satisfied:(a) the wording of the clause clearly refers to the future;(b) the purpose of the warranty clearly requires an element of futurity;IMPLIED WARRANTIES UNDER THE MARINE INSURANCE ACT 1906It should be noted that the Marine Insurance Act 1906 implies certain warranties intocontracts of marine insurance, and that in some cases breach of these warranties canrender a policy automatically void without any election on the part of the insurer.CONDITIONS PRECEDENT AND CONDITIONS PRECEDENT TO LIABILITYA clause which is not a warranty will normally be a condition. Conditions in insurancepolicies are of two types, simple conditions and conditions precedent to liability.SIMPLE CONDITIONSA simple condition is a clause, the breach of which gives rise only to a right to damages.Where the breach is committed by the insured, the likely practical effect will be areduction (possibly to nil) in the amount which can be claimed for a given loss. However,the amount of the reduction will depend on the loss actually suffered by the insurer as aresult of the breach. Where the breach is by the insurer (generally a less likely event,since polices generally impose fewer obligations on insurers) the measure of damageswill again be the actual loss suffered.CONDITIONS PRECEDENT TO LIABILITYA condition precedent to liability gives rise to more difficulty, because its effect isintended to be that there must be compliance with it before any claim can succeed. Insome cases this is entirely unobjectionable, as for example where the clause relates toproviding proof of the fact and/or quantum of the loss suffered. In other cases it is lessobvious why compliance needs to be a condition precedent to liability; the courts haveoccasionally shown reluctance to treat clauses in this way, even in the face of reasonablyclear wording.ONGOING DUTIESOnce the policy has come into force the insurer is of course bound to provide cover asagreed. A more difficult question is what other duties, if any, do the parties owe to eachother during the term of the policy. These matters may be regulated by express policyterms, but it is also important to understand what the position is in the absence of suchterms.ONGOING DUTY OF UTMOST GOOD FAITHDistinction between pre-contractual and ongoing duties of utmost good faith

Page 38 of 83There is a pre-contractual duty of utmost good faith. To what extent is there an ongoingduty of utmost good faith? The topic is one which has attracted a certain amount ofattention from the courts in recent years. Two cases, the Banque Financière [BanqueFinancière de la Cité SA v Westgate Insurance Co Ltd [1991] 2 AC 249, [1990] 2 All ER947, HL] case and the Good Luck case [Bank of Nova Scotia v Hellenic Mutual WarRisks Association (Bermuda) Ltd, The Good Luck [1992] 1 AC 233, [1991] 3 All ER 1,HL] sheds more light on this area. As usual note that these cases are of persuasive natureonly in Tanzania.THE BANQUE FINANCIÈRE CASEFACTS AND DECISIONIn Banque Financière de la Cité SA v Westgate Insurance Co Ltd the appellants were abank who had advanced substantial sums of money to companies controlled by B. Theloans were secured on certain gemstones and on credit insurance policies. The policieswere arranged by L, a branch manager of an insurance broker, who negotiated some ofthe primary cover (which was in three layers) with the insurers through D, who was asenior underwriter with those insurers. The policies contained an exclusion for lossescaused by fraud or attempted fraud. L was unable to place the full amount of risk, but inorder to lead the appellant bank to believe that cover was in place (without which theywould not have been prepared to make the loan) he persuaded D to underwrite the loanfor 14 days, and issued false cover notes for the excess layers when no cover for thoselayers was in fact in place. D discovered L’s deception in 1980, but did not inform hisown employers or the brokers or the bank; instead he continued to underwrite furtherloans to the same companies. In due course those companies defaulted on the loans, thegemstones proved to be worth much less than the value of the loans and B abscondedwith the money advanced by the banks. The banks had to accept that they could not claimon the credit insurance policies in view of the very obvious fraud, but they sued theinsurers contending that the insurers owed them a duty of care to disclose the existence ofL’s fraud once they knew of it, and that their losses stemmed from the insurers’ breach ofthis duty.The House of Lords dismissed the bank’s claim. First, there is no duty to warn theinsured that the insured’s own agent (here L) had committed a breach of duty towards theinsured. Secondly, the loss was not caused by any omission on the part of the insurers.There was fraud by both L and B, and either of these would have been sufficient toprevent a claim under the insurance policy, even if the insurers had made full disclosureto the bank.IMPLICATIONSIt is of course possible to dismiss this case as being effectively decided on the latter point,which has no relevance to the general question of an ongoing duty of utmost good faith.However, this would be an unwise approach, given the lengthy consideration which theHouse of Lords gave to the question of this duty. Lord Bridge, with whom Lord Brandonand Lord Jauncey agreed, expressly approved a passage from the judgment of Slade LJwhen the case was before the Court of Appeal. The passage in question reads:‘In adapting the well-established principles relating to the duty of disclosure falling onthe insured to the obverse case of the insurer himself, due account must be taken of the

Page 39 of 83rather different reasons for which the insured and the insurer require the protection of fulldisclosure. In our judgment, the duty falling on the insurer must at least extend todisclosing all facts known to him which are material either to the nature of the risk soughtto be covered or the recoverability of a claim under the policy which a prudent insuredwould take into account in deciding whether or not to place the risk for which he seekscover with that insurer.Although Slade LJ refers to matters affecting the recoverability of a claim under thepolicy, it should be observed that this passage relates only to the decision whether or notto place the risk with the particular insurer, and is therefore appropriate only to deal withthe insurer’s pre-contractual duty of utmost good faith. It is unfortunate that, according tothe view of the facts ultimately taken by the House of Lords, it was unnecessary to reachany decision on the existence of an ongoing duty of utmost good faith.THE GOOD LUCK CASEFACTS AND DECISIONIn the second case, Bank of Nova Scotia v Hellenic Mutual War Risks Association(Bermuda) Ltd, The Good Luck, the plaintiffs were a bank to whom a ship had beenmortgaged. The defendant P & I Club were the insurers of the vessel. Notification of themortgage had been given to the defendants, the benefit of the insurance policies had beenassigned to the plaintiffs, and the defendants had agreed to hold the insurance moneys tothe order of the plaintiffs and to inform the plaintiffs promptly if they ‘ceased to insure’the vessel. The insurer designated certain areas of the Persian Gulf as additional premiumareas or prohibited areas for the ship to enter because of the Iran-Iraq war which was thentaking place. The ship was struck by a missile while in one of the prohibited areas, butthe owners submitted a claim on the policy under the pretence that they had given noticeof the entry of the ship into an additional premium zone (as they were required to dounder the policy) and that they were ignorant of the prohibited zone. At this time the bankwas in the process of re-scheduling the loans it had made to the owners of the vessel; onenquiring about the casualty and the resulting claim it was told by the insurer’s agent thatthe claim was being processed, an answer which it took to imply that there was noapparent problem with the claim, which would be paid in due course. In fact the agentknew that this claim would be rejected because of the entry into the prohibited zone. Thebank went ahead and re-scheduled the loans. The insurers duly rejected the claim on theinsurance policy, and the bank brought this action, alleging that it had lost the right to theinsurance proceeds because of the deception by the insurer’s agent.The House of Lords decided in favour of the bank on the ground that the insurer was inbreach of its duty to inform the bank promptly on ceasing to insure the vessel. This inturn followed from a finding that the statements as to the areas in which the ship wouldbe used amounted to promissory warranties under the Marine Insurance Act 1906 Section333, and that the effect of the breach of such a warranty is to discharge the insurer’sliability automatically, i.e. without the exercise of any choice on the part of the insurer,and even though the insurer is not at that time aware of the breach.

Page 40 of 83IMPLICATIONSThis case, too, requires careful analysis. The following points may be noted. First, theplaintiffs were not the policyholders, although the benefit of the policy had been assignedto them. Second, the decision is not based upon the breach of any general duty on the partof the insurers to disclose a breach of utmost good faith, whether pre-contractual or postcontractual.Instead, it relies upon the narrow ground that the insurers had undertaken togive prompt notice of ceasing to insure the vessel, and that they were in breach of thatundertaking. The breach had caused the bank’s loss, since the bank had entered into there-financing arrangement on the basis of its belief that the vessel was still insured. It isone of the oddities of the case that the wording of the undertaking was almost certain tolead to its being breached, since it would have been almost impossible for the insurers toknow of the insured’s breach of warranty promptly when it happened.DOES THE ONGOING DUTY OF UTMOST GOOD FAITH EXIST?The essential questions which arise from a review of Banque Financière de la Cité SA vWestgate Insurance Co Ltd and Bank of Nova Scotia v Hellenic Mutual War RisksAssociation (Bermuda) Ltd, The Good Luck are whether there really is an ongoing dutyof utmost good faith, and, if so, what it consists of. The two cases cannot properly beregarded as establishing the existence of such a duty, since in both cases the court wascareful to decide the issue on some other point. At the same time, the cases equally do notestablish the non-existence of the duty; they can simply be regarded as cases in which,upon a proper analysis, the point did not arise for decision. Various observations may,however, be made. In the Banque Financière case, Steyn J, at first instance, held that theduty did exist and had been breached3 and none of the subsequent courts in that case wasprepared to hold that no such duty could in principle exist. It is noticeable that the Houseof Lords approached the matter on the basis that no duty existed in this particularsituation, and the particular situation which they defined as existing was that the breachof duty rendering the policy voidable had been committed by the insured’s own agent.This falls well short of a blanket rejection of the existence of a duty. On the other hand, inThe Good Luck case the House of Lords decided the case in favour of the bank on thebasis of a very technical construction of the Marine Insurance Act 1906 (a constructionwhich is perhaps open to criticism); certainly it would have been just as easy to base thedecision on a more general principle.Similar points may be made about two other marine cases in which the possible existenceof an ongoing duty was considered. In The Litsion Pride Hirst J suggested that there wasa duty of utmost good faith attached to post-contractual communications from assured toinsurer, and these observations were supported and developed by Evans J in The CaptainPanagos. However, both cases deal only with the assured’s post-contractual duty, and inboth cases the decision was based on other grounds.REASONS FOR RECOGNISING THE EXISTENCE OF THE ONGOING DUTY OF GOODFAITHAlthough the courts have not yet definitively pronounced on the existence of an ongoingduty of utmost good faith, it is suggested that there are good reasons for recognising theexistence of such a duty. First, there is already partial recognition of such a duty in therules about making fraudulent claims. It would be anomalous if such ongoing duties were

Page 41 of 83placed only on the insured. Second, the very nature of the insurance contract, which iswell recognised as the most important category of contracts uberrimae fidei, is that theparties are in a relationship of mutual trust. If this is to mean anything, it ought to involvean ongoing obligation on both sides to behave in a proper way.However, this argument is in some danger of proving too much, for it would then be hardto understand why in Banque Financière there was not an obligation to inform theplaintiffs of the fraud which had been discovered. Indeed, perhaps the most importantapplication of the ongoing duty of utmost good faith (if it is to be recognised at all) willarise where the insurer becomes aware of something which affects the validity of thepolicy. It seems that from the point of view of the case itself the only way to avoid thisresult is to say that it depends on the fact that the fraud was perpetrated by the agent ofthe insured and that there is a general principle that the insurer has no responsibility forbringing these to the attention of the insured. Unfortunately, this argument too is likely tolead to unacceptable consequences:(a) In the first place, a great many cases of non-disclosure, whether fraudulent or not,arise because of an error by the insured’s agent, and in all these cases the ongoingduty would presumably not apply. This is of especial importance in life policies,given the very large number of life policies, especially investment policies, whichare sold through independent intermediaries who act for the proposer.(b) Second, if there is no duty to draw attention to a non-disclosure (or othermisconduct) by the insured’s agent, then there is presumably a fortiori no duty todraw attention to non-disclosures (or other misconduct) by the insured himself.This will remove most of the remaining cases of conduct affecting the validity ofthe policy or the prospects of succeeding in a claim under the policy, and willtherefore largely negate the point of recognising the duty at all.Despite this it is submitted, for the reasons given above, that the existence of the dutyought to be recognised, and that it ought to be given a wide ambit.CONTENT OF THE ONGOING DUTY OF UTMOST GOOD FAITHIt should be understood that the duty of utmost good faith would exist independently ofany provision contained in the policy, though of course it could be extended or restrictedby policy provisions. The duty should be carefully distinguished from the other dutiesconsidered in this section, though it is obviously related to them. Thus, for example,policy provisions which suspend cover in the event of the policyholder doing some act,such as vacating insured property or in the case of a life policy leaving the country ortaking up smoking, should be dealt with as a matter of express provision and not underthis principle, since it is only the presence of the express provision which makes themrelevant.BREACH OF THE ONGOING DUTY OF UTMOST GOOD FAITH BY THE POLICYHOLDERIn relation to general insurance there appear to be a number of ways in which the dutymight be breached. Doing an act which materially alters the risk to which the insurer isexposed may perhaps be seen as falling within this category, but it is suggested that thismatter is more appropriately dealt with under the special rules relating to alteration of

Page 42 of 83risk. The same point applies in relation to failure to take reasonable care to avoid losses.Conduct in relation to claims appears to offer a more plausible area for breaches of theduty. The making of a fraudulent claim is generally treated as allowing the insurer toavoid the policy (in addition to refusing indemnity for the particular claim) and this maybe seen as an example of the ongoing duty of utmost good faith.So far as life assurance is concerned, there are relatively few ways in which thepolicyholder can commit a breach of this ongoing duty. It appears that the most likelycases of breach of duty by the insured in life assurance contracts arise in connection withinvestment policies, since in the case of a pure life policy there is relatively little thateither party can do after contract which would amount to a breach of duty.BREACHES OF THE ONGOING DUTY OF UTMOST GOOD FAITH BY THE INSURERThe first issue here is to decide what the ongoing duty requires of the insurer. For themost part the insurer’s duty after contract is limited to dealing promptly and properlywith claims submitted. It can readily be accepted that an insurer who exercises a right ofcancellation must notify that fact to the insured promptly, but that is not a matter ofutmost good faith; rather it is the simple point that the cancellation cannot be effectiveuntil notified. It thus seems that claims handling is likely to be the major issue in mostallegation of breaches of the ongoing duty by the insurer.The position may be slightly different in life policies, and especially in investmentpolicies, where, for example, the insurer may be administering the investments andresponding to requests to switch between funds. However, these are really still aspects ofadministration, just as is claims handling, and the same issue of the duty to carry this outefficiently and honestly would seem to arise.DUTY OF DISCLOSURE-BONUS RATESA particular problem of recent years has concerned possible changes in the terminalbonus rates on with-profits policies. Insurers routinely issue to policyholders, with theirannual statements, projections of terminal bonuses for policies which are due to matureshortly. It is only to be expected that policyholders will to some extent rely on these inplanning what to do with the policy proceeds. It is of course normal practice to include adisclaimer to the effect that the continuance of the rates cannot be guaranteed, and it issuggested that a change to bonus rates made after the issue of the annual statement iscovered by this disclaimer. Greater difficulties have arisen where a decision to cut bonusrates has been taken before the annual statement was issued, but that statement still refersto bonuses at the old rate. This may be evidence of nothing more than administrativeconfusion within the insurance company, but policyholders are, not surprisingly,aggrieved by it, and there have been complaints to the Insurance Ombudsman1. He hasruled that bonus projections issued with annual statements should be up to date, ie thatthey should incorporate any changes already decided upon. It is less clear, however, whatconsequences would follow from a breach of this principle. The policyholder is mostunlikely to want to avoid the contract, unless the rates of return now expected areextremely poor, and it is clear that damages cannot be awarded at law. In any case, thepolicyholder will have some difficulty establishing any loss, since the actual return iswhat it would have been anyway, whatever the annual statement had said. The InsuranceOmbudsman could award damages for maladministration or inconvenience.

Page 43 of 83CONSEQUENCE OF BREACH OF THE ONGOING DUTY OF UTMOST GOOD FAITH BY THEINSURERWhere there is a breach of the ongoing duty by the insurer, the question of the insured’sremedy will arise. It has already been seen that the courts have refused to accept anyremedy other than avoidance of the policy, on the basis that the duty is bilateral, and thatbreach by either side must logically give rise to the same consequences. At law thereappears to be no way to circumvent this rule.AVOIDANCE OF POLICY BY THE POLICYHOLDERWhere a breach of the ongoing duty of utmost good faith entitles a policyholder to avoidthe policy, the question will arise as to what exactly the policyholder is entitled to claim.It is submitted that the position is no different from that where the policyholder avoids forbreach of the pre-contractual duty of disclosure. Thus, the policyholder is entitled to thereturn of his premiums, without interest, and the company is not entitled to make anydeduction for the life cover provided. This last point has proved particularly controversialwithin the insurance industry, and many companies adopt the practice of making adeduction for the life cover already provided. Although there is apparently no modernauthority directly on the point in an insurance context, it is submitted that the correctanswer may be deduced from an application of ordinary legal principles. What ishappening is the rescission of the contract, and it is well settled that rescission of acontract requires restitutio in integrum, ie the parties must be restored to their originalpositions. Thus, any property transferred under the contract must be returned. Once thecontract is rescinded it is treated as void ab initio; thus it is deemed never to have existed.If it never existed, then it must follow that no life cover was ever provided, and if no lifecover was ever provided there can be no possible justification for attempting to make acharge for it. Support for this general principle of contract law may be found in the caseof Rowland v Divall [1923] 2 KB 500] where the purchaser of a car was able to rescindthe contract of sale on the ground of a defect in the formation of the contract. Althoughhe had used the car for some time, thereby deriving a benefit, and although the value ofthe car had diminished as a result of normal wear and tear during that time, he was able torecover the purchase price in full. Although this is not an insurance case, there is noreason to think that the principles which it lays down are not applicable to insurance law.CONCLUSIONS AS TO THE ONGOING DUTY OF UTMOST GOOD FAITHEnglish law has not yet come to a definite decision about the general question of theexistence of an ongoing duty of utmost good faith. It is noticeable that all the cases inwhich the question has been considered have been marine insurance cases where, becausethe policy is not a long term policy, the consequences of allowing avoidance for a breachof post-contractual duty are not as severe as they might be in a life policy. It is alsonoticeable that in none of the cases did the decision turn on a finding that such a dutyexisted, far less that it had been breached. In principle it seems desirable that some notionof fair dealing be imported into the ongoing management of insurance relationships,though it may be doubted whether the very strict rules of utmost good faith are theappropriate mechanism for doing this.

Page 44 of 83A point of especial importance and difficulty is to identify what sanction should followfrom a breach of the duty, for it is clear, particularly in the case of life policies, thatautomatic voidability of the policy is too harsh a consequence in most cases. On the otherhand, the same point might validly be made about breach of the pre-contractual duty ofutmost good faith. It may be that the re-interpretation of pre-contractual utmost good faithperformed by the House of Lords in Pan Atlantic v Pine Top will help lead in due courseto the development of a sensible concept of the post-contractual duty.DUTY TO TAKE REASONABLE CAREImplied and express duties to take reasonable careThere is no authority for the proposition that there is an implied term in insurancecontracts requiring the policyholder to take reasonable care to avoid losses. In all thereported cases on this subject the point has arisen because there has been an expressclause.POLICY WORDING AND ITS EFFECT ON THE DUTY TO TAKE REASONABLE CAREIn response to case decisions, insurers have taken to adopting forms of wording which aremore objective, relying less on the intentions and state of mind of the policyholder. Forexample, in travel policies it has become commonplace to exclude cover for loss ofbaggage if the baggage is ‘unattended’ at the time of the loss.PRINCIPLES AS TO THE DUTY TO TAKE REASONABLE CAREThe law in this area is still in a state of development, but it appears that reasonable careclauses will be interpreted in a way which is fairly generous to the policyholder. Thisappears a proper result, since it is often part of the purpose of insurance to protectpolicyholders against the consequences of their own inadvertence (though not their owndishonesty or recklessness).ALTERATION OF RISK: AN OVERVIEWInsurers are understandably anxious to ensure that the risk which they run throughout theterm of the policy is as nearly as possible the same as the risk which they originallyagreed to accept. They may therefore seek to escape liability where circumstances havechanged between inception and loss. However, there is no general rule forbidding thepolicyholder to do things which increase the risk, or even requiring him to give notice ofsuch event to the insurer. Despite this, there is a modest body of case law from which itappears possible to conclude that in some cases an alteration in the risk undertaken by theinsurers occurring after the inception of the policy may have some effect on the status ofthe policy, although in other cases it appears to be treated as irrelevant.A distinction must be drawn between those cases where the alteration of risk has someeffect on the policy as a matter of general principle, and those cases where there is anexpress policy provision dealing with the matter. In this area of the law there appears tobe no difference between life and non-life policies.It is commonly said that alterations of the risk are of three types:(a) alteration in the subject matter of insurance;(b) changes of locality; and(c) changes of circumstances.

Page 45 of 83ALTERATION OF SUBJECT MATTERAlteration of subject matter obviously has no relevance to life policies, since it is the lifeitself which is always the subject matter of the insurance. It is often important in generalinsurance. It is first necessary to distinguish fundamental change in subject matter fromalteration of subject matter. An example of the former occurs where the insured under amotor policy sells his car and buys a new one. The policy will not normally cover thenew car, not because there has been an increase of risk, but because as a matter ofconstruction it was only ever intended to cover the old car. A more difficult example inrelation to motor insurance would occur where a car insured under a motor policy wasfitted with new accessories which might make it more attractive to thieves. Thisapparently increases the risk, but in the absence of any express provision it does notappear that there is any duty to disclose it to the insurers. The position is probablydifferent if the car is fitted with a new and larger engine, since details of the enginecapacity normally appear on the certificate of insurance.Another way in which alterations in the subject matter might be relevant is where there isa warranty about the condition of the subject matter. If there is a warranty that the subjectmatter will be kept in a certain condition, then an alteration which produces a breach ofthis warranty will also invalidate the cover. This is the explanation of Hales v RelianceFire and Accident Insurance Corpn Ltd, where a shopkeeper insured premises against,inter alia, fire, and answered in the negative a question asking whether any inflammatorymaterials were stored on the premises. Although the statement was true when made, itwas his practice each year to stock fireworks. When the premises were damaged by fire itwas held that the failure to mention the fireworks allowed the insurers to repudiate thepolicy. In order to reach this conclusion the court had in effect to construe the statementabout inflammatory materials as a continuing warranty.CHANGE OF LOCALITYChange of locality is relevant primarily in general insurance where, for example, theproperty insured is moved from one place to another. In general, the position in such acase is the same as in relation to changes in the subject matter; namely, that there is noduty to inform the insurers in the absence of any express policy provision.Change of locality may also be relevant in life cases, since some policies imposerestrictions (or even absolute prohibitions) on the places to which the life insured may gowithout affecting the validity of the policy. It is clear, however, that this category can berelevant only where there is an express policy provision.CHANGE OF CIRCUMSTANCESIn Shaw v Robberds [(1837) 6 Ad & El 75, 112 ER 29, See also Mitchell Conveyor andTransporter Co Ltd v Pulbrook (1933) 45 Ll L Rep 239] the plaintiff had insured hispremises against fire, and had stated on the proposal form that they would be used for‘drying corn’. There was a ‘basis of the contract’ clause, as well as a clause prohibitingincrease of risk unless notified to the insurers and permitted by means of an endorsementon the policy. On one occasion only, the plaintiff used the premises for drying bark, adifferent activity from drying corn, and much more hazardous. On that occasion thepremises burned down. The insurers resisted the plaintiff’s claim on the policy, relying

Page 46 of 83on the increase of risk clause, but the court held them liable. The decision is at first sightsurprising, but can be explained in this way. The use to dry bark was a one-off event, anddid not change the fact that the normal use was for drying corn. If the question on theproposal form is understood to refer only to the normal use of the premises, then therewas no breach of the requirements of the policy, and no material increase of risk, sincethe normal use had not changed. It may be observed, however, that this involves adoptinga somewhat strained construction of the policy. It might reasonably be supposed that theevents which happened were of exactly the type against which the insurers were seekingto protect themselves.A more recent case is Exchange Theatre Ltd v Iron Trades Mutual Insurance Co Ltd[1984] 1 Lloyd’s Rep 149, CA. This was another case of buildings insurance, in whichthere was a clause avoiding the policy ‘with respect to any item thereof in regard towhich there is any alteration ... whereby the risk of destructional damage is increased’. Itwas held that there was no breach of this clause where the insured brought onto thepremises a quantity of petrol. Although this was an added hazard, it was not an alterationwith regard to the premises. This is another example of the adoption of a surprisinglynarrow construction of the relevant clause, though it must be admitted that the drafting ofthe clause in this case left much to be desired. An interesting contrast is to be found in thecase of Farnham v Royal Insurance Co Ltd [1976] 2 Lloyd’s Rep 437 where a clause invery similar terms was held to have been breached by allowing welding to take place onthe premises. It can perhaps be said that the borderline between what is and is not anincrease of risk for these purposes is very much a matter of impression, with the resultthat the outcome depends largely on the way in which the matter strikes the judge of firstinstance.SUSPENSION OF COVER AS AGAINST VOIDABILITYWhere the change in risk can be regarded as affecting one of the warranties descriptive ofthe risk, the result of the alteration will be that cover will be suspended so long as thewarranty is not being complied with, but the policy will not become voidable. The bestknownexample is [Farr v Motor Traders’ Mutual Insurance Society [1920] 3 KB 669,CA] where the policyholder insured two taxis used in the course of his business. On theproposal form he stated that each was used for eight hours daily. In general this was true,but on one occasion when one of the vehicles was being repaired the other was used forboth daily shifts. Later, when the normal pattern of use had been resumed, an accidentoccurred. The insurers refused to pay, relying on the breach of warranty, but the Court ofAppeal decided the case in favour of the policyholder, holding that the warranty givensimply defined the risk; while one taxi was being used for two shifts there was no cover,but once both taxis were back on the road the cover resumed. Where cover is suspendedin this way, it is suggested that the duty to pay premiums is not suspended. It is not truein such a case that the policyholder receives nothing in return for these premiums. Whathe receives is the prospect of the revival of the policy once the warranty is againcomplied with.PROMISSORY WARRANTIES AND THEIR EFFECTIt is possible to make a clause a promissory warranty merely by declaring it to be so, orby declaring that any breach of the requirement will render the policy void at the

Page 47 of 83insurer’s option. A clause may be interpreted as a promissory warranty even though notexpressly declared to be so.VOIDABILITY OF POLICYIn cases where there is a duty to disclose the alteration of risk, it becomes necessary toask what consequences follow from a failure to make that disclosure. One possibility isthat the policy becomes voidable at the option of the insurers. A distinction must bedrawn between two types of case: first where the policy provides that the insured mustobtain the insurer’s consent before allowing the increase of risk to occur and secondlywhere the policy provides only for subsequent notification.REQUIREMENT FOR THE INSURER’S PRIOR CONSENTWhere the policy provides that the insured must obtain the insurer’s consent beforeallowing the increase of risk to occur, it might be thought that the policy is clearly at leastvoidable at the instance of the insurer, but this may be a dangerous conclusion to draw. Itis unsupported by authority (although at the same time not rebutted by any authority) andas a general principle the court should be slow to allow the avoidance of a policy withouta properly drafted policy provision. On the other hand, it is then necessary to considerwhat other sanction can properly be imposed. One possibility would appear to be anappropriate increase in the premium (or proportionate decrease in the sum assured), butthis is subject to the objections that it gives the policyholder no incentive to disclose theincrease of risk in advance, since he may get away with a non-disclosure and is no worseoff if he is detected and, in the case of the proportionate decrease in the sum assured, thatthe doctrine of proportionality is unknown to English insurance law. If the duty to seekapproval were construed as part of the duty of utmost good faith, then voidability wouldseem to be the only possible sanction. In the absence of an express policy provision thereis no possible ground for suggesting that the policy is automatically void if the risk isincreased without obtaining the necessary consent.REQUIREMENT FOR THE INSURER TO BE NOTIFIEDWhere the policy merely provides for subsequent notification the position is less clear. Itmay be that upon receiving the notification the insurers are entitled to avoid (or perhapsmerely to terminate) the policy, but it is suggested that a court is unlikely to accept thisconclusion in the absence of a clearly drafted provision to that effect. On the other hand,it is hard to see what is the point of the provision unless it confers some power upon theinsurers.A possible compromise would be to say that additional premium terms can be imposed,but there are obvious difficulties about allowing a court to come to this conclusion, sinceit seems to amount to a re-writing of the bargain which the parties have made. Nor is itclear upon what principle the court could determine what extra premium is to be allowed;presumably it would be necessary to adopt the rule from the Marine Insurance Act 1906Section 31 that where additional premium becomes payable and there is no agreement asto the amount, the assured must pay a reasonable sum.Another solution would be to say that the policyholder has committed a breach ofcontract (surely undeniable), but that in the absence of clear words this is simply to be

Page 48 of 83treated as a breach of condition. The consequence of this analysis would be that theinsurers could rely on the breach to the extent that it caused them any loss, but no further.Thus, where the increase of risk can be shown to have caused or contributed to the loss,insurers would be able to reduce or entirely escape their liability for that loss, but wouldnot be able to avoid the policy. This analysis probably provides the most satisfactoryresult, though there appears to be no case in which it has been adopted.INCREASE OF RISK AND MISREPRESENTATIONWhere there is a change in risk very shortly after the inception of the policy, the insurersmay be inclined to suspect misrepresentation or at least non-disclosure, ie that theproposer knew that the risk would change very soon and failed to disclose this, fearingthat the premium would be adversely affected. Even in the absence of a relevantwarranty, such a non-disclosure would be a breach of utmost good faith and would renderthe policy voidable. On the other hand, not every change in risk was contemplated by theinsured at the time when the policy was taken out, and it is of course for insurers to proveany non-disclosure on which they seek to rely [Baxendale v Harvey (1859) 4 H & N 445]NOTIFYING A LOSSWhen an insured loss happens it is not always possible to give full details ofcircumstances and total losses immediately, for example, where loss is continuing orwhere valuations or estimates of repair costs are required. To deal with this situation,policies commonly provide for the giving of notice of an insured loss as a separate matterfrom the submission of a claim. The giving of notice may also be subject to stricter timelimits than are applicable to the making of a claim.There are also cases where the insured chooses not to make a claim on the policy for theloss, in order to prevent a loading of the premium for future years. The policy maynevertheless require that notice of the incident be given.MAKING CLAIMS: GENERAL PRINCIPLESThe insured must provide the insurer with sufficient details of the loss and thesurrounding circumstances to satisfy the insurer that the claim is valid, ie that it resultsfrom an insured peril and that any relevant policy conditions have been complied with.The insured is under a duty to take care to complete the claim form correctly. Thedeliberate giving of false particulars on a claim form entitles the insurer to avoid thepolicy as well as refusing to pay the particular claim [Cox v Orion Insurance Co Ltd[1982] RTR 1, CA]BASIS OF SETTLEMENTIn an indemnity policy, the principle is of course that the policyholder is entitled to beindemnified for the loss which he has suffered, but not to receive anything beyond anindemnity. This makes it necessary to calculate accurately the loss suffered, and this mayoften require estimation of the value of property before the loss and, in cases of partialloss, estimation of residual value after the loss. The general principle is that thepolicyholder is entitled to the loss in value. In the case of a total loss, this means the value

Page 49 of 83of the property immediately before the loss. Naturally, this will often be less than thereplacement cost of the item in question. For this reason, some property policies offer, foran extra premium, new-for-old cover, under which the policyholder is entitled to the costof replacing the item as new.VALUED POLICIESIt is possible to have policies in which the value of the insured property is agreed at theoutset. In a sense, all contingency policies might be said to be valued policies, but it ismore usual to confine the term to policies of a type which are normally indemnitypolicies, but where the value is agreed in advance. Valued policies have the obviouspractical advantage of avoiding subsequent valuation disputes, but they are also open tothe possibility of abuse in the form of deliberate over-valuation. Valued policies are theuniversal practice in marine insurance, being expressly sanctioned by the MarineInsurance Act 1906 Section 27. That section also provides that the valuation agreed bythe parties is conclusive in the absence of fraud. Although the section is not directlyapplicable to non-marine policies, it is usually understood that the same rule applies tonon-marine policies.Clear words are required in order to create a valued policy, and the mere inclusion in thepolicy of a value insured or an estimate of value will not of themselves create a valuedpolicy. Such sums may be the limit of cover, so that they represent the maximum sumwhich may be recovered, or they may be no more than an honest estimate of value withno contractual force.UNDER-INSURANCEWhere property is insured for less than its full value, the doctrine of average may becomerelevant. Where average applies, the proportion of any loss which is considered to beinsured will be the proportion which the sum insured bears to the true value of theproperty.Where there is a loss recoverable under the policy, the insurer, or each insurer if there bemore than one, is liable for such proportion of the measure of indemnity as the amount ofhis subscription bears to the value fixed by the policy in the case of a valued policy, or tothe insurable value in the case of an unvalued policy.This rule can work reasonably well in the case of double insurance but is not satisfactoryin the case of under-insurance, for the reasons given in this Paragraph, and should not beregarded as applying outside marine insurance.DOUBLE INSURANCEWhere the same property or the same risk is insured by more than one policy, it isnecessary to decide how any loss should be apportioned between the various policies.Where one of the policies, but not the other, contains an exclusion for any risk covered byother policies, this exclusion will be effective. Where all policies contain such anexclusion, the clauses will be ignored. The common law principle is that the losses areshared rateably between the policies.The rules on double insurance apply only where it is the same risk which is insured by oron behalf of the same insured. To put this another way, there must be two insurers whoare in principle liable in respect of the risk which has materialised. Thus, where goods

Page 50 of 83were lost in such circumstances that the bailees were liable for the loss, but the baileeshad insured under a floating policy and the owners under a proprietary policy, it was heldthat there was no double insurance, for the latter policy was not intended to cover thesituation where the goods were lost through the fault of another party.SUBROGATION: GENERAL PRINCIPLESIt may happen that an insured loss is caused by a breach of duty (contractual, tortious orstatutory) by a third party. In such a case the insured appears to have two rights of action;one against the insurer for the insured loss under the policy, the other against thewrongdoer who caused the loss. The existence of the action against the wrongdoer doesnot prevent the policyholder from claiming on the insurance policy [Nor Mason vSainsbury (1782) 3 Doug KB 61] does the making of the claim under the policy preventthe bringing of a subsequent action against the wrongdoer. However, it would clearly beunjust to allow the policyholder to make a profit by recovering his loss twice over.Equally, it is considered unjust to allow the policyholder simply to claim on the policyand then refuse to bring an action against the wrongdoer. In order to prevent this outcomethe doctrine of subrogation lays down two related rules:(a) the first is that the insurer is entitled to the benefit of any action brought by thepolicyholder which goes to indemnify him for the loss he has suffered, up to theamount paid out by the insurer; and(b) the second is that the insurer is entitled to insist that such an action is brought andis entitled to take over the conduct of the action (although it continues to bebrought in the name of the policyholder, since it is the policyholder’s rights whichare being enforced).The detailed working out of these two general principles gives rise to a number ofdifficulties, which are discussed below. At the level of principle it may however be saidthat the purpose of the doctrine of subrogation is to prevent the insured from recoveringmore than the loss which he has suffered. In this sense it might even be said thatsubrogation is merely part of the detailed working out of the principle of indemnity,although in practice the rules on the subject have now become so complex and detailedthat subrogation deserves to be regarded as a subject in its own right.THE INSURER’S RIGHTS OF SUBROGATIONIn Castellain v Preston [(1883) 11 QBD 380, CA] it was said that the right of the insureris to enforce any right of the insured person which will diminish the overall loss and thatthe right of recovery could not be limited to those payments which were made in respectof the loss. Although the point received considerable attention in that case, it does notappear to have major practical significance. Indeed, it may be that it is a distinctionwithout a difference, for almost any payment which goes to diminish the loss will bemade in respect of the loss, since it cannot be supposed that the Court of Appeal meant toinclude within the doctrine of subrogation every payment received by the insuredirrespective of its source.

Page 51 of 83INSURING REAL PROPERTYProperty insurance may conveniently be divided between the insurance of real propertyand the insurance of personal property. Insurance of real property involves cover againsta number of different risks, some of which can be separately insured, though compositepolicies are also found. The risks commonly insured include the following:STORM, TEMPEST AND FLOODStorm, tempest and flood are what might be described as the meteorological perils, asthey normally (though not always) result from adverse weather conditions. Stormrequires the combination of rain with high winds and insurers routinely reject claimsarising out of weather conditions involving only one of these elements. Tempest is oftenregarded as no more than a particularly violent type of storm. Flood is more difficult toconstrue. In its context with storm and tempest, where it usually appears in an insurancepolicy, it might be thought that it should apply only to flooding caused by adverseweather; on the other hand it is clear that in ordinary language flooding can be caused bythings other than bad weather, for example, burst pipes.FIREA standard fire policy covers the perils of fire (excluding loss, destruction or damagecaused by explosion resulting from fire or caused by earthquake, subterranean fire orspontaneous heating) lightning, explosion of boilers used for domestic purposes andexplosion of gas used for domestic purposes (excluding loss, destruction or damagecaused by earthquake or subterranean fire).THEFTThe term theft in this case obviously means the risk of theft from the premises, as realproperty cannot itself be stolen. Often cover is limited to cases where there has been entryto (or exit from) the insured premises by forcible and violent means, a phrase which hasbeen held to exclude the opening of an unlocked door or the unlocking of a door with thekey, but to include the breaking down of a door. Both personal lines policies andcommercial policies often have warranties as to security requirements. Non-complianceleads to the cover being voided.BAILEESIt is common for bailees of goods for reward (for example, carriers) to insure those goodsfor their full value, notwithstanding that the bailees themselves have only a limitedinterest in the goods. It might be thought that the principle of indemnity would preventthem from recovering more than the value of their limited interest, but in Hepburn v ATomlinson (Hauliers) Ltd [1966] AC 451, [1966] 1 All ER 418, the House of Lords heldthat the bailee can recover the full value of the goods. It should be stressed that the policyin that case was clearly a goods policy rather than a liability policy, and the House ofLords justified its conclusion on the basis that the bailee would hold the insurancemoneys on trust for the owner of the goods. This conclusion is undeniably convenient,but it is not clear that it is right in the absence of express agreement between owner andbailee. The trust point was not directly before the House of Lords in Hepburn v

Page 52 of 83Tomlinson, as the owners of the goods in question were not parties to the case. Inpractice, many contracts of carriage include express provisions requiring bailees to insureand making the bailees trustees of any insurance proceeds.MOTOR INSURANCE: COMPULSORY COVERMotor insurance exhibits special characteristics because the holding of such insurance iscompulsory for anyone who drives a car on a public road. Subsection 1 of section 4 of theMotor Vehicle Insurance Act [CAP 169 R.E.2002] is pertinent in this respect. The Actenacts as follows:(1) Subject to the provisions of this Act it shall not be lawful for any person to use, or tocause or permit any other person to use, a motor vehicle on a road unless there is inforce in relation to the use of the vehicle by that person or that other person, as the casemay be, such a policy of insurance or such a security in respect of third party risks ascomplies with the requirements of this Act.The risks which must be covered are those of death or bodily injury to third parties anddamage to the property of third parties. It is also possible to obtain policies whichadditionally cover the risks of fire and theft and policies which cover damage to thevehicle however caused (‘comprehensive policies’).It is an offence to drive a motor vehicle on a public road without having in force a policywhich covers at least the compulsory risks. An insurer who has issued a policy coveringthe compulsory risks cannot after the happening of an insured risk avoid the policy so asto escape liability to a third party, though he may have a right of indemnity from theinsured for any damages paid if the policy was voidable by reason of any non-disclosureor misrepresentation by the insured.MARINE INSURANCEMarine insurance may be treated as a special category of insurance because it is regulatedby statute, namely the Marine Insurance Act 1906.Moreover, the nature of the risks covered makes it appropriate for the Act to containspecific provisions dealing with matters, such as general and particular average, whichare not encountered in other areas of insurance. The subject of marine insurance is a largeone, but the following paragraphs list some of the more important areas where marineinsurance appears to differ from the more general law of insurance.INSURABLE INTERESTIn marine insurance an insurable interest is required at the time of loss, but at the timewhen the policy is taken out it is only necessary to have a reasonable expectation ofacquiring an interest.THE BUSINESS INTERRUPTION INSURANCEApart from the insurance of the risk of material damage to property, businesses also needto consider the consequential loss which might flow from the material damage, ie the lossof turnover and thus profit resulting from the partial or total closure of the business for aperiod following the material damage. Insurance against this risk is commonly referred toas business interruption insurance, though the term consequential loss insurance is alsosometimes encountered.

Page 53 of 83The loss must be caused by one of the insured perils. The list of insured perils in thestandard form of policy is the same as that in a normal fire policy, and these perils are notfurther defined in the business interruption policy.The cover is all risks arising from the insured perils, subject only to named exclusions,such as maintenance and wear and tear, which are never insurable risks, and otherspecified exclusions, cover for some or all of which may be available at an additionalpremium.Effecting and carrying out contracts of insurance against damage arising out of or inconnection with the use of motor vehicles on land including third-party risks and carrier’sliability.PART TWO: TRUSTS AND SETTLEMENT LAWMEANING OF TRUSTA trust may be defined as an obligation under which a person to whom property istransferred is bound in equity to deal with the beneficial interest in such property in aparticular manner in favour of a specified person or persons (including a corporation), orclass of persons. In general, a trust cannot be set up for a ‘purpose’ or ‘object’ unless thepurpose or object is charitable [ see: Morice v Bishop of Durham (1804) 9 Ves 399]Three characters are concerned in a trust, namely, the creator of the trust, the trustee, andthe beneficiary or cestui que trust; but the creator of the trust, or settlor, may be thetrustee or one of several trustees, and he may also be the trustee and one of thebeneficiaries. Under no circumstances, however, can a sole trustee be the solebeneficiary, for, directly he becomes so, the beneficial interest is merged andextinguished in the legal ownership [see: Re Cook, Beck v Grant [1948] Ch 212, [1948] 1All ER 23].DISTINCTION BETWEEN CHARITABLE TRUSTS AND PRIVATE TRUSTSTrusts may be divided into charitable (or public) trusts and private trusts.Charitable trusts comprise trusts created for:(a) the relief of poverty;(b) the advancement of education;(c) the advancement of religion; and(d) other purposes beneficial to the community not falling under any of the precedingheads.All non-charitable trusts are called private trusts. They may arise either:(a) by express declaration, in which case they are called express or declared trusts;(b) by statute (for example, where land is held in undivided shares3, or on intestacyunder the Administration of Estates Act 1925); or(c) by implication of equity, in which case they are called implied or constructivetrusts.Resulting trusts, which form a sub-division of implied trusts, arise where the beneficialinterest results or springs back to the creator of the trust who has failed to dispose of hisentire beneficial interest. Express private trusts are created by settlements, wills, or bydeclaration of trust.

Page 55 of 83protecting assets both against spendthrift beneficiaries and against outside claimants.Such settlements normally contain provisions designed to enable the principal beneficiaryto enjoy the beneficial interest intended for him without allowing him any power ofalienation. Such a settlement, if made by a third party, will be valid against abeneficiary’s creditors or trustee in bankruptcy [see Re Ashby, ex p Wreford [1892] 1 QB872; Re Throckmorton, ex p Eyston (1877) 7 Ch D 145, CA], but not if made by thesettlor for his own benefit [see Re Burroughs-Fowler, Burroughs-Fowler’s Trustee vBurroughs-Fowler [1916] 2 Ch 251]WHY ARE TRUSTS CREATED?Trusts are widely employed in what may loosely be termed ‘family situations’; incommercial and business transactions; and as a vehicle for charitable or for noncharitablepurposes. For example:1. to provide for property to be held for successive generations of a family (in thecase of land it was traditionally via the strict settlement);2. to hold property on behalf of minors;3. to protect property against spendthrift beneficiaries;4. to provide secretly for dependants;5. to make provision for a couple on their marriage whilst ensuring that the propertyso provided is ‘tied up’ in the event of that marriage failing;6. to obtain fiscal advantages;7. to establish a fund which is available to benefit family members according tofuture need as and when that need arises;8. as an investment vehicle (typically via unit trusts);9. to provide pensions for employees and dependants;10. to provide an incentive to the workforce: e.g. via employee trusts of variouskinds;11. to make provision for abstract purposes which are of benefit to individuals but arenot charitable (‘the purpose trust’);12. to enable charitable objects to be carried out; and13. as part of commercial arrangements: e.g. to protect commercial lenders andcustomers.CREATION OF TRUST AND SETTLEMENTAs a general rule every person who is able to acquire and dispose of property is able tocreate a trust. Exceptions to this rule exist in the case of minors, of persons mentallydisordered and bankrupts. [Note: A person having a bankruptcy order made against him,all property which belongs to or is vested in him at the commencement of the bankruptcywith certain exceptions only, vests in his trustee immediately on his appointment takingeffect or, in the case of the official receiver, on his becoming trustee. It follows that abankrupt cannot make any settlement of the property so vesting. He is, however, entitledto any surplus remaining after payment in full of his creditors, with interest, and theexpenses of the bankruptcy proceedings; and this he can settle.Under the Trustees Incorporation Act, [CAP 318 R.E.2002], application to incorporate atrust is made to the Administrator General. Section 2 provides as follows:

Page 56 of 832. Application for incorporation(1) A trustee or trustees appointed by a body or association of persons boundtogether by custom, religion, kinship or nationality, or established for any religious,educational, literary, scientific, social or charitable purpose, and any person or personsholding any property on trust for any religious, educational, literary, scientific, social orcharitable purpose, may apply to the Administrator-General for incorporation as a bodycorporate.(2) Every such application shall be in writing signed by the person or personsmaking the application, and shall contain such particulars as may be prescribed andshall have annexed thereto copies, verified in the prescribed manner, of the constitutionand rules of the body or association, if any, and of any trust instrument or declaration oftrust defining the trusts on which such property is so held.(3) The Administrator-General may require such declaration upon oath orotherwise or other evidence in verification of the statements and particulars in theapplication, and such other particulars, information or evidence as he may thinknecessary or proper.The required prescribed form for registration is Form No.T.I.1 found in the TrusteesIncorporation RulesFORM T.I. 1APPLICATION FOR INCORPORATIONTHE TRUSTEES' INCORPORATION ACT (CAP. 318)(Rule 2)I/WE ................................................................................................................................(Insert full names, residences and postaladdresses of trustees)HEREBY APPLY for incorporation as a body corporate, and I/WE solemnly andsincerely DECLARE as follows–1. The proposed title of the body corporate is:................................................................2. The postal address of the proposed body corporate will be:..............................................................................................................................................................................................................................................................3. We are ordinarily resident in Tanzania:.............................................................................................................................................................................................................................................................................................................................................................................................(Substitute "The following of us are ordinarily resident in Tanzania": where appropriate.)4. The trusts to which we are subject are those contained in:..............................................................................................................................................................................................................................................................(Refer to constitution and rules or trust instrument or declaration of trust)5. The number of trustees may not be less than nor more than:.......................................6. Persons cease to be trustees in the following circumstances:

Page 57 of 83.............................................................................................................................................................................................................................................................................................................................................................................................7. New trustees may be appointed by:.............................................................................................................................................................................................................................................................................................................................................................................................8. The proposed device of the common seal is:..............................................................................................................................................................................................................................................................9. The common seal will only be affixed to documents in the presence of:..............................................................................................................................................................................................................................................................10. The following lands will vest in the proposed body corporate if and whenincorporated:..............................................................................................................................................................................................................................................................11. Annexed to this application are verified copies of the following documents..............................................................................................................................................................................................................................................................................................................................................................................................(Copies of any constitution and rules and of any trust instrument and declaration of trustmust be annexed.)and I/we make this solemn declaration conscientiously believing the same to betrue and by virtue of the Oaths and Statutory Declarations Act *.DECLARED at ......................................................................................this ......................... day of ......................... 20........before me......................................................Signature of Administrator-General.............................................Qualification..............................................Signature(s) of Applicant(s)Form No. F.I.1 should be accompanied by the following documents:(a) Two original copies of the Trust Deed or Settlement Deed;(b) Minutes of the meeting approving the Trust Deed or Settlement Deed;(c) List of the founding members and their signatures;(d) Curriculum vitae of the trustees and their photographs;(e) Addresses and physical location of the offices of the trustees;SETTLEMENT BY TRUSTEES OF A SETTLEMENT (‘SETTLED ADVANCES’)Trustees of a settlement may properly settle funds they advance, whether under anexpress power of advancement contained in the settlement or under the statutory powerof advancement where that applies. If the trustees are satisfied that the proposed

Page 58 of 83settlement is for the benefit of the object of the power, it is no objection to the exercise ofthe statutory power of advancement that other persons may incidentally benefit as theresult of its exercise; nor is it bad merely because money is to be tied up in a proposedsettlement.Although no settlement made by way of advancement upon an object of the power bytrustees must conflict with the maxim delegatus non potest delegare, the law is not thattrustees cannot delegate, but that they cannot delegate unless they have power to do so;and, if the power is so read as to allow the trustees to raise money for the purpose ofhaving it settled on the trusts of a new settlement, then they have authority to let themoney pass out of the old settlement into the new trusts.The exercise of a power of advancement, however, which takes the form of a settlement,is a special power akin to a special power of appointment, and as such, must be exercisedwithin the period permitted by the rule against perpetuities, and its exercise must, for thepurposes of that rule, be written into the instrument creating the power.MODE OF CREATION OF TRUSTSThere are two methods of settling land: by what is known as a ‘strict settlement’ or bymeans of a trust for sale. If the former method is employed the land is vested in the tenantfor life, or statutory owner, by a vesting instrument, the trusts being declared by aseparate instrument. All powers over the land, such as sale and leasing, are thenexercisable by the tenant for life. If a trust for sale is employed the land is vested intrustees who hold it on trust for sale, and the trusts of the net proceeds of sale and of thenet rents and profits until sale is again normally declared by a separate instrument. All thepowers are then exercisable by the trustees. Money might also be settled upon trust topurchase land to be held upon trusts appropriate to a settlement of realty.In the case of registered land, the relevant vesting deed or assurance are required in theprescribed form of transfer and the transfer would need to be lodged for registration inorder to achieve the vesting of the legal estate in the appropriate person.SETTLEMENTS OF PURE PERSONALTYA trust of pure personalty is properly constituted by the transfer of the trust property totrustees who are directed to hold it on trust for the persons or purposes intended tobenefit; or by the settlor declaring that from that time onwards he holds the property onthe specified trusts.CONSTITUTION OF TRUSTSA voluntary settlement is fully constituted when the instrument declaring the trusts hasbeen executed [ if the settlor intends to retain the property himself, but to declare himselfto be a trustee of it for a donee, no instrument in writing is necessary, unless the trustproperty consists of land or the declaration constitutes a disposition of an equitableinterest] and everything has been done by the settlor which is necessary, according to thenature of the property comprised in the settlement, to transfer the property to the trustees[ see: Milroy v Lord (1862) 4 De GF & J 264. The test is whether any act remains to bedone by the settlor, and not by the beneficiaries or trustees: see Re Rose, Midland BankExecutor and Trustee Co Ltd v Rose [1949] Ch 78, [1948] 2 All ER 971; Re Rose, Rosev IRC [1952] Ch 499, [1952] 1 All ER 1217, CA; see also Jaffa v Taylor Gallery Ltd

Page 59 of 83(1990) Times 21 March. Once a settlement is completely constituted, it is immaterialwhether it is voluntary or not; it will be enforced against the settlor, whether heafterwards obtains possession of the settled property or not: see Vandervell v IRC [1967]2 AC 291, [1967] 1 All ER 1, HL]. Alternatively he may declare himself to be a trusteeof the gifted property for the donee. In principle there is no distinction between the casewhere the donor declares himself to be the sole trustee for a donee and the case where hedeclares himself to be one of the trustees for that donee. If a voluntary settlement is notcompletely constituted, the settlement and the covenants contained in it will beunenforceable.In the case of a settlement made for valuable consideration, such as marriage, the courtwill treat an incompletely constituted settlement as a contract to transfer the propertywhich the settlor covenanted to transfer and will enforce it. Where a proposed marriagedoes not take place, or is later annulled, there is a total failure of the consideration for anante-nuptial settlement, which generally causes a resulting trust of the settled property tothe settlor.EVIDENCE OF AN EXPRESS TRUSTEvidence of trust in land or disposition of equitable interestApart from statute, a trust inter vivos can be created by word of mouth. [Note, however,that both the Land Act and the Land Registration Act, provides that no interest in landcan be created or disposed of except by writing signed by the person creating orconveying it, or by his agent who is lawfully authorised.]A declaration of trust, therefore, needs merely to be evidenced by writing; it does nothave to be created by writing. The written evidence should contain all the terms of thetrust (namely, parties, property and the way in which the property should be dealt with).On the other hand, the disposition of an equitable interest or trust must be in writing,although signature by an agent lawfully authorised in writing is sufficient. The word‘disposition’ has been widely construed and accordingly oral directions given by thesettlor may be treated as dispositions. All interests in land created by parol and not putinto writing and signed by the persons creating them, or by their agents lawfullyauthorised in writing, have the force and effect of interests at will only. However, thisdoes not invalidate dispositions by will, or the right to acquire an interest in land byvirtue of taking possession, or affect the operation of the law relating to part performance.TESTAMENTARY TRUSTS (INCLUDING SECRET AND HALF-SECRET TRUSTS)A trust of either real or personal property, which is not intended to take effect until afterthe death of the creator, must be created by a document properly attested as a will orcodicil. For instance, if a testator appoints by duly executed will a trustee to whom hegives property expressed to be upon trust, but does not by the will declare the trusts, adeclaration of trust subsequently made by a document not executed as a will is invalid,and the trustee becomes trustee for the persons interested as residuary legatees or on anintestacy [ see Johnson v Ball (1851) 5 De G & Sm 85] . Similarly, if a testator givesproperty by will to a person absolutely, and makes no reference to any trust on the face ofthe will, but privately communicates to that person that he is to hold the property

Page 60 of 83bequeathed to him on certain trusts, prima facie those trusts are invalid unless declared bya duly executed testamentary instrument [Re Boyes, Boyes v Carritt (1884) 26 Ch D 531]To this rule, however, there is an exception arising where the testator has been induced tomake a will in a particular form by a promise on the part of the devisee or legatee to dealwith the property or some part of it in a specified manner. In such a case equity compelsperformance of the promise, treating it as a trust binding the conscience of the devisee orlegatee, the trust operating outside the will. Because it is presumed that, had it not beenfor such promise, the testator would not have made the gift, where there are two trustees,communication to and acceptance of the trust by one of them is, in certain circumstances,enough. If the gift by will is made to persons as tenants in common, then thecommunication of the trust must be made to all such persons in the testator’s lifetime;otherwise only the persons to whom it is communicated are bound: Re Stead, Witham vAndrew [1900] 1 Ch 237. If, however, the gift is made to persons as joint tenants adistinction is drawn between two cases: (a) if one of the joint tenants accepts the trustbefore execution of the will, all joint tenants are bound; (b) if acceptance is after theexecution of the will, only the joint tenants who accept are bound: Moss v Cooper (1861)1 John & H 352.This exception does not operate, however, where the communication to the allegedtrustee is accompanied by a statement on the part of the testator that it is not to create atrust. Nor does it apply in a case where the gift is made to trustees on the face of the will,but the trusts are not disclosed and communication of the trusts is only made to thetrustees after the execution of the will, for a testator cannot reserve to himself a power ofmaking further unwitnessed dispositions by merely naming a trustee and leaving thepurposes of the trust to be supplied afterwards. Likewise, where the amount of the gift isincreased, but the increase is not communicated to the trustee, the additional gift will fail.Although the principle has generally only been applied in gifts by will, it may operatealso where the gift is by settlement inter vivos.VOLUNTARY TRUSTSValuable consideration is not necessary to render a trust inter vivos enforceable. If thetrust is in the first instance completely constituted, it will be enforced in favour ofvolunteers [ see:Ellison v Ellison (1802) 6 Ves 656; Kekewich v Manning (1851) 1 DeGM & G 176]. The law is that anybody of full age and sound mind who has executed avoluntary deed by which he has knowingly denuded himself of his own property is boundby his own act, [see Henry v Armstrong (1881) 18 Ch D 668] unless that act was inducedby undue influence, fraud or mistake. The case where the disposition of the property isnot complete must be distinguished, and trusts of this nature have not hitherto been ableto be enforced by mere volunteers. Therefore, a covenant in a marriage settlement for thesettlement of after-acquired property could not be enforced by persons, such as the wife’snext of kin, who are outside the marriage consideration [see Re D’Angibau, Andrews vAndrews (1880) 15 Ch D 228, CA; Re Pryce, Nevill v Pryce [1917] 1 Ch 234].NECESSITY FOR CERTAINTYMatters in respect of which certainty is required

Page 61 of 83It has been laid down1 that ‘three certainties’ are required for the creation of a trust:(a) the words used must be so couched that taken as a whole they are deemed to beimperative;(b) the subject matter of the trust must be certain; and(c) the persons or objects intended to be benefited must also be certain.CERTAINTY OF WORDSEquity looks to the intent rather than the form. No particular form of words is requiredfor the creation of a trust. The use of the word ‘trust’ is not essential, although, of course,highly desirable. It is therefore possible that words expressing desire, belief,recommendation or hope (known as precatory words) may create a trust. It is entirely aquestion of construction of the instrument whether the settlor intended to create a trust[see: Comiskey v Bowring-Hanbury [1905] AC 84, HL] A similar question ofconstruction will arise when it has to be determined whether a trust or a mere power ofappointment was intended by the settlor, for what appears to be a power may be treated,as a matter of construction, as a trust, in which case it is often referred to as a trust poweror a power in the nature of a trust [see Burrough v Philcox (1840) 5 My & Cr 72]. Thesame principles apply where it is alleged that a person has declared himself a trustee ofproperty which he owns for the intended beneficiary [see Paul v Constance [1977] 1 AllER 195, [1997] 1 WLR 527, CA, applied in Rowe v Prance [1999] 2 FLR 787].CERTAINTY OF SUBJECT MATTERThe expression ‘certainty of subject matter’ can mean either that the trust property shouldbe certain or that the beneficial interest of the cestui que trust must be certain.If the trust property cannot be identified, the purported trust is void ab initio [see,Simmonds (1854) 2 Drew 221; Sprange v Barnard (1789) 2 Bro CC 585]; If, however,there is both certainty of words and certainty of the trust property but the beneficialinterests are uncertain, then the property should be held on a resulting trust for the settlor[ see Boyce v Boyce (1849) 16 Sim 476; cf Re Golay, Morris v Bridgewater [1965] 2 AllER 660, [1965] 1 WLR 969]. In such a case, a trust will clearly have been intended andits failure on grounds of uncertainty of the beneficial interests will not enable the trusteesto take beneficially [see, Briggs v Penny (1851) 3 Mac & G 546 at 557 per Lord TruroLC].CERTAINTY OF OBJECTSExcept in the case of charitable trusts it is necessary for the objects of the trust to becertain. For the purpose of deciding whether the range of beneficiaries is ascertainable adistinction must be drawn between a power of appointment in their favour, on the onehand, and a trust, on the other. If a mere power of appointment is given it is establishedthat the test of certainty is whether or not it can be postulated of any given personwhether or not he is an object of the power. If, however, a trust, rather than a power ofappointment, is created, the test was formerly thought to be that the whole range ofobjects eligible for selection should be ascertained or capable of ascertainment. This testhas now, however, been overruled, with regard to trust powers and discretionary trusts.The test for a power is the appropriate one to apply, subject to the qualification, it would

Page 62 of 83appear, that a ‘wider and more comprehensive range of inquiry is called for in the case oftrust powers than in the case of powers’. Furthermore, even where the meaning of thewords is clear, the definition of beneficiaries may be so hopelessly wide as not to form‘anything like a class’, so that the trust is administratively unworkable. It is not yetestablished, however, whether this test applies merely to trust powers and discretionarytrusts, which, it is submitted, is the better view, or whether it applies to all trusts.TERMINATION OF TRUSTSApart from the restrictions imposed on the duration of trusts by the rules directed againstremoteness of vesting and against the creation of trusts of perpetual or indefinite durationotherwise than for charitable purposes, and by the statutory restrictions uponaccumulations of income, an express trust after it has become operative may beterminated by the subsequent failure or satisfaction of the purposes of the trust, or by thecessation of particular circumstances for which the trust was created to provide. It may beterminated by the action of the beneficiaries if they are all ascertained and sui juris, andby the trustees in the exercise of dispositive powers.REVOCATION AND SETTING ASIDEWhere an express trust is completely constituted, it is generally binding and irrevocablewhether it was or was not constituted or declared for valuable consideration, unless apower of revocation is expressly reserved [see, Ellison v Ellison (1802) 6 Ves 656]. Inorder to effect a valid revocation, such a power must be exercised in the mannerspecifically directed [see, Lane v Debenham (1853) 11 Hare 188 at 192]. A power torevoke the trusts of a settlement with the consent of a judge of the Chancery Division isinvalid, since a private individual cannot impose upon a judge the jurisdiction or duty toadjudicate on a matter: Re Hooker’s Settlement, Heron v Public Trustee [1955] Ch 55,[1954] 3 All ER 321; and see Re H’s Settlement, H v S [1939] WN 318. A disposition ofproperty in trust may in certain circumstances be set aside under the provisions relating tothe avoidance of transactions at an undervalue or under the statutory provisions relatingto dispositions in fraud of creditors, or on the ground that the disposition was induced byfraud, duress or undue influence. In the case of matrimonial proceedings, the court haspower to adjust interests in settlements; to set aside a disposition intended to defeat aclaim for financial relief in such proceedings; and even to set aside a settlement made incompliance with a property adjustment order in matrimonial proceedings where thiswould amount to a transaction at an undervalue in an insolvency.INTERESTS UNDER APPOINTMENTS AND IN DEFAULT OF APPOINTMENTAn interest in default of appointment is a vested interest subject to defeasance and iscapable of being bound by a covenant to settle present or future acquired property [ see,Re Jackson’s Will (1879) 13 Ch D 189], but property acquired under an exercise of apower is derived under a new title, even when there is a gift over to the covenantor indefault of appointment, and such property is not caught by a covenant which does notextend to future property [see., Sweetapple v Horlock (1879) 11 Ch D 745]. Propertyover which the covenantor possesses a general power of appointment will not be caught

Page 63 of 83unless the power is so exercised as to bring the property within the covenant [see, Ewartv Ewart (1853) 1 Eq Rep 536; Townshend v Harrowby (1858) 27 LJ Ch 553; Bower vSmith (1871) LR 11 Eq 279].WHO CAN BENEFIT UNDER THE TRUSTAny person capable of holding property may be a beneficiary under a trust, but personsincapable of holding property at law cannot be entitled to it under a trust. Minors,however, can be beneficiaries under a trust even though they cannot hold the legal estatein trust land. It is not essential in all cases to the validity of a trust, that there should besome living person by whom it can be enforced. For example, a trust may be created forcharitable purposes. Furthermore, in certain limited instances trusts have been held valideven though they are not charitable and there is no person by whom they can be enforced.These trusts are commonly called trusts of imperfect obligation. Thus trusts for thebuilding or maintenance of monuments and tombs have been held valid, as have trusts forthe maintenance of particular animals, so long as such trusts are limited in duration to theperiod allowed by the rule against perpetuities. If the trustee elects not to carry out such atrust, he cannot keep the property for himself beneficially but must deal with it as aresulting trust. It seems, however, that in general equity will refuse to recognise a trust,other than a charitable trust, unless it is for the benefit of ascertained or ascertainablebeneficiaries. Accordingly, it would appear that the decisions by which trusts for thebuilding or maintenance of monuments or tombs, or trusts relating to specific animals,have been held valid are to be regarded as anomalous and exceptional and their scope isnot to be extended.The principle that a trust cannot be created for a ‘purpose’ or ‘object’ unless the purposeor object is charitable does not apply to a trust which, although apparently expressed as apurpose, is directly or indirectly for the benefit of an individual or individuals. The needfor enforceability of the trust is met by the existence of factual beneficiaries; ie personswho, though not actually cestuis que trust, are interested in the disposal of the property[see, Re Denley’s Trust Deed, Holman v HH Martyn & Co Ltd [1969] 1 Ch 373, [1968] 3All ER 65. See also Re Grant’s Will Trusts [1979] 3 All ER 359, [1980] 1 WLR 360; andsee Barclays Bank Ltd v Quistclose Investments Ltd [1970] AC 567, [1968] 3 All ER651, HL. Problems in this area may be overcome by the formation of a company].TRUSTS FOR THE BENEFIT OF UNINCORPORATED ASSOCIATIONSAn unincorporated association does not have a legal personality and cannot therefore be abeneficiary under a trust. If a trust is purported to be created for a non-charitableunincorporated association it must be determined first how the trust is to be construed,and then decided what results flow from that construction. It appears that fourinterpretations of such a trust are possible[see, Re Recher’s Will Trusts, National Westminster Bank Ltd v National Anti-Vivisection Society Ltd [1972] Ch 526, [1971] 3 All ER 401; following Leahy v A-G ofNew South Wales [1959] AC 457, [1959] 2 All ER 300, PC and Neville Estates Ltd vMadden [1962] Ch 832, [1961] 3 All ER 769]It may be construed as a trust for the individual members of the association at the date ittakes effect for their own benefit as joint tenants or tenants in common, so that they could

Page 64 of 83at once, if they pleased, agree to divide it amongst themselves, each putting his share intohis own pocket. The association on this construction is used in effect as a convenientlabel or definition of the class which is intended to take. This construction may even beadapted to a trust for the general purposes of the association, although it may clearly notbe contemplated that the individual members will divide it among themselves [see,Bowman v Secular Society Ltd [1917] AC 406, HL; Re Ogden, Brydon v Samuel [1933]Ch 678] provided that there is nothing in the constitution of the association to prohibit it[see, Re Clarke, Clarke v Clarke [1901] 2 Ch 110].It may be construed as a trust not only for present members, but also for future membersforever or for an indefinite period. It may be construed as a trust for the trustees or otherproper officers of the association, who are to hold the beneficial interest on trust to carryinto effect the purposes of the association. On this construction the trust will fail as aninvalid purpose trust. It may be construed as a trust for the existing members of theassociation beneficially, but on the basis that the subject matter of the trust is to be heldas an accretion to the funds of association and falls to be dealt with in accordance withthe rules of the association by which the members are contractually bound inter se. Onthis construction the trust will be valid. Though beneficially entitled, an individualmember cannot claim to be paid out his share. His share will accrue to the other memberson his death or resignation, even though members include persons who became membersafter the trust took effect. This construction may apply where there is a trust for anassociation for a specific purpose, that purpose being within the powers of the associationand being one of which the members were beneficiaries.PROPERTY WHICH MAY BE MADE SUBJECT OF TRUSTProperty of all kinds, real or personal, legal or equitable, may be made the subject of atrust. [see, Earl Nelson v Lord Bridport (1846) 8 Beav 547; Allen v Bewsey (1877) 7 ChD 453, CA. Where leasehold property is settled, the trustee is under a duty to obtain forthe benefit of the trust a renewal of the lease if he can and the court will not permit him toretain for himself the benefit of any such renewal: Keech v Sandford (1726) 2 Eq CasAbr 741; Re Knowles’ Will Trusts, Nelson v Knowles [1948] 1 All ER 866, CA. Legalrights may be settled: see for a consideration in the context of capital gains tax Kirby vThorn EMI [1986] 1 WLR 851; revsd [1988] 2 All ER 947, [1988] 1 WLR 445, CA].There can, accordingly, be a trust of a chattel or of a chose in action, or of a right orobligation under an ordinary legal contract, just as much as a trust of land or money. [seeLord Strathcona Steamship Co Ltd v Dominion Coal Co Ltd [1926] AC 108, 124, [1925]All ER Rep 87, 95, per Lord Shaw, cited by Lightman J in Don King Productions Inc vWarren [1998] 2 All ER 608, affd [1999] 2 All ER 218, CA. In Abrahams v Trustee inBankruptcy of Abrahams [1999] 31 LS Gaz R 38, it was held that where a person paidmoney to a lottery syndicate she gained the right to have any winnings received dulyadministered in accordance with whatever rules of the syndicate then applied. That rightwas property which was capable of being held on a resulting trust. In Swift v DairywiseFarms Ltd [2000] 1 All ER 320, [2000] 1 WLR 1177 it was held that a milk quota whichmust be attached to a holding of appropriate land, known as a euroholding, could be the

Page 65 of 83subject of a trust. If T held a quota on trust for B, then where B had no euroholding hecould not, therefore, require T to transfer the quota to him. He could, however, require Tto realise the quota and transfer the proceeds to him]. It even seems that there is noobjection to a party to a contract involving skill and confidence or containing nonassignmentprovisions becoming trustee of the benefit of being the contracting party aswell as of the benefit of the rights conferred.PERSONS WHO CAN BE A TRUSTEEAny person who can hold property is capable of being a trustee of it, although he may bedisplaced by the court if unfit: for example, if he is a person mentally disordered, aperson permanently resident abroad, a bankrupt, or a person who has been detected indishonest practices, or even if he be a very quarrelsome person who cannot carry on thetrust in harmony with his co-trustees. There is no bar to a beneficiary being a trustee norindeed to the settlor being a trustee, although there may be tax disadvantages in the lattercase.TRUSTEE NEED NOT BE NAMEDIt is not necessary in a trust created by will, or based on valuable consideration, to name atrustee at all, for a court of equity never allows a trust to fail for want of a trustee, but willeither appoint trustees, or, alternatively, will itself administer the trust in an action for itsadministration [Moggridge v Thackwell (1803) 7 Ves 36, HL]. However, in the case of avoluntary trust purported to be created inter vivos, there can be no valid trust if thedocument relied on as constituting the trust is a purported conveyance or transfer totrustees who are not named or otherwise identified, or who are already dead, or haveotherwise ceased to exist or are not capable grantees. Such a document would be a nullityand completely ineffective to constitute a trust.ADVISING THE SETTLORBefore commencing his work it is essential for the draftsman to be clear in his mind whathe is seeking to achieve. One difficulty is that the settlor may have motives andobjectives that are conflicting; for example, retention of the beneficial interest may beincompatible with the tax savings he seeks to make. The motives and objectives of thesettlor may, apart from a wish to confer benefits on members of his family, or others, andto avoid tax, include the following:(a) He may wish to shield himself and his assets from future changes in legislationand to keep the trust property secure from creditors.(b) He may wish to transfer the management of and responsibility for assets totrustees who may in his view have the necessary expertise and be better qualifiedto conserve and develop them than he is himself.(c) His aim may be to achieve confidentiality. Although it may be known where thelegal title is to be found, the equitable interest can be dealt with confidentiallywithout any means being available to disclose what has been done.

Page 66 of 83IN GENERALThe matters for consideration in constituting settlements vary with the occasions onwhich, and the circumstances in which, the settlements are to be made. Marriage hastraditionally been an occasion for the making of a settlement. Other occasions for themaking of settlements are many and various: settlements may be made on the attainmentof the age of majority of the child or children, grandchild or grandchildren or otherrelatives of the settlor; on the birth of a child or grandchild of the settlor; on theretirement from business of the settlor whether that business be the property of acompany or not; for the protection of particular persons whom it may be consideredshould be protected from their own financial misfortunes or incompetence, or who needprotection because they are incapable of managing their own affairs by reason of youth,old age, or mental incapacity; or for the benefit of a domestic employee or other persons.A principal object in the case of many settlements, whatever the occasion, is themitigation of the burden of taxation in so far as it falls, or will fall, on the settlor or hisestate, and the form of a settlement may be governed as much by the incidence of theburdens of income tax, capital gains tax and inheritance tax in so far as they affect boththe settlor and the beneficiaries, as by other factors. In most cases in which settlors arepossessed of substantial properties, the occasions on which it was once common to effectsettlements (for example on the coming of age of a child or on marriage) are merelyselected as being the most opportune moments at which to effect a disposition ofproperty, the primary object of which is to pass on the benefit of the properties to thepersons whom they wish to benefit, freed from the burdens of tax which the propertiesmight have to bear if they remained in the possession of the settlors.Upon the receipt of instructions to make a settlement on any occasion other thanmarriage, the adviser has to satisfy himself that the settlor understands the facts andcircumstances upon and in which the settlement will operate, and the operation it willhave in the events which will or may happen, and that he wishes to do what he asks theadviser to help him in doing, and is not acting under the undue influence of anotherperson. In so satisfying himself, an adviser should consider whether the settlement is onewhich it is right and proper for the settlor to make in all the circumstances, and if not, heshould so advise the settlor, although the settlor is not bound to act on this advice [see,Powell v Powell [1900] 1 Ch 243 at 247; Wright v Carter [1903] 1 Ch 27 at 57]. Thisduty does not extend so far as to require a solicitor to refuse to act for a settlor who, beingfully aware of all the implications, continues to wish to make a settlement which thesolicitor thinks he ought not to make [see Wingrove v Wingrove (1885) 11 PD 81;Baudains v Richardson [1906] AC 169 at 184, 185, PC; Craig v Lamoureux [1920] AC349 at 357, PC]. Where the solicitor is to follow a client’s instructions when these arecontrary to his advice, it is generally prudent to ensure that the position as to the giving ofadvice and the receipt of contrary instructions is adequately recorded in writing.

Page 67 of 83THE PROPERTY TO BE SETTLEDIn advising the settlor on the property to be settled the adviser will have regard not onlyto the nature and value of that property, but also the nature and value of the property leftremaining to the settlor and the income likely to be produced from it, so as to enable theadviser to determine whether or not the settlor is left with sufficient means to provide forhimself. An important consideration in advising on the nature of the property settled,where there is any choice in the matter, may be the likely incidence of capital gains taxpayable in respect of the transfers or disposals necessary as the result of the constitutionof the settlement. It may be that the settlor is able to dispose of some property attractingexemption for capital gains tax purposes.When, as is frequently the case, the settlor desires to settle shares in a companycontrolled by him so as to relinquish that control, the adviser should consider whether theinterests of the settlor are adequately protected. Consideration might be given, prior to theexecution of the settlement, to the settlor’s entering into a service contract with thecompany. Any special rights attached to the shares settled should also be reviewed andany desired amendments made, prior to settlement.In connection with the property to be settled the adviser should ascertain whether theproperty transferred to the trustees is to be kept in its existing form or is to be convertedand, if converted, whether the trustees are to have power to postpone the conversion.PERSONS WHOM IT IS DESIRED TO BENEFITThe settlor will usually decide which persons he wishes to benefit before he considersany further questions. He should be reminded of the tax consequences if he fails todispose of his whole interest in the property. In exceptional cases, he may desire that theproperty should ultimately return to him. In other cases, however, a resulting trust couldhave serious disadvantages, particularly if the purpose of the settlement is to mitigate tax.The settlor should therefore be asked to consider what further objects he wishes to benefitif the objects of his immediate benefit fail to attain vested interests. It may be,particularly in the case of discretionary trusts extending over a substantial number ofyears, that, unless the settlement is carefully drawn, persons to whom the settlor has nointention of giving benefit will ultimately come to acquire a substantial part of the trustproperty. Discretionary settlements should, therefore, provide for trusts in default ofappointment in favour of those persons (for example, the issue of the settlor living on aparticular date) whom the settlor desires immediately to benefit and should always besupplemented by a letter of wishes.Where a beneficiary or potential beneficiary is referred to by reference to his or herrelationship to the settlor or any other person, it should be ascertained whetherillegitimate, legitimated and adopted persons are intended to benefit.BENEFICIAL TRUSTSThe beneficial trusts will be governed by the settlor’s intentions with regard to thepersons whom he wishes to benefit. Particular regard should be had to the possibilities ofsaving tax on the death of the individual beneficiaries and to any savings of tax that maybe effected during their lives, although the opportunities may be circumscribed by thechoice of beneficiaries. The settlor should be asked what primary interests he wishes tocreate in the income and capital of the trust fund, and whether these are to be protective

Page 68 of 83trusts, life interests (whether revocable or not), contingent interests or discretionary trusts.The settlor should be asked about and advised on the precise form of trusts if the primarytrusts created by the settlement fail. The settlor should also be asked whether or not hewishes to include a power or direction to accumulate income, what powers ofappointment he wishes to include and by whom he wishes such powers to be exercisable,and whether he wishes to include a power to vary the settlement by allowing the trusteesto add to the number of beneficiaries.EXCLUSION OF BENEFITIt is common in settlements in which substantial assets are involved (with potentiallyheavy liabilities for tax) to provide specifically that the settlor and any spouse shall in noway benefit from the exercise of any power, discretion or duty under the settlement. Thereason for the insertion of this provision is to avoid so far as possible liability to taxfalling on the settlor in respect of the income or capital of the trust. This applies withregard to income tax, capital gains tax. It is desirable both as a reminder to the trustees,and as a means by which any argument that the settlor might in fact derive some benefitunder the settlement can be forestalled. In this connection trustees should be remindedthat when they are given extensive powers of borrowing and lending, no money shouldbe lent to or borrowed from the settlor. Particular care is needed where private familycompanies are involved. It is sometimes expedient to insert a specific reminder in thesettlement to this effect since the test for liability in such cases is not the benefit derivedby the settlor but the making of the loan (or its repayment) itself. Apart from this it maybe to the advantage of those beneficially interested under the settlement if wide powers ofborrowing and lending are inserted.CHOICE OF TRUSTEESAlthough it is increasingly common to appoint a corporate trustee and many settlementscontain provision for the appointment of such a body, the settlor may, in particular if thetrustees will become obliged to exercise powers requiring an intimate knowledge offamily affairs, prefer to appoint as trustees individuals who are likely to be in a positionto know more about those affairs. If the settlor fears dispute between members of hisfamily, or if none or few of those members are capable of acting as a trustee, he mayprefer to appoint a solicitor or other independent person. It should be remembered that acorporate trustee imposes charges for its services and, if it is proposed to appoint such abody, confirmation as to its rates of charges and of the terms and conditions upon whichit will act should be obtained. There are now statutory provisions under which a trustcorporation or a professional trustee may be entitled to reasonable remuneration out ofthe trust funds.The adviser must, therefore, ascertain from the settlor:(a) whether he has any particular wishes concerning the identity of the trustees;(b) whether any particular person is to be debarred from appointment as trustee;(c) whether a corporate trustee is to be appointed;(d) whether professional trustees, who are also directors of companies by virtue oftheir office as trustees, are to be allowed to retain their remuneration as directors;and

Page 69 of 83(e) whether other trustees may charge for their servicesThe adviser should ascertain who is to have power to appoint new trustees.TRUSTEES’ POWERSTrustees may be, and commonly are, given wide powers either as powers of appointmentor under a discretionary trust, and may even be given wide powers to vary the trust. Thepowers, having been given to the trustees, cannot be controlled by the settlor, but there isnothing improper in the settlor providing the trustees, when he creates the trust, with amemorandum of his wishes. The provision of a letter of wishes is strongly recommended:it will not in any way be binding on the trustees, but they may find it useful guidance inthe administration of the trust both during the lifetime of the settlor and after his death.OTHER MATTERS TO BE CONSIDEREDThe settlor should be advised of the statutory powers and provisions relating to trusteesand any additional powers and provisions which may be desirable. The choice of anyadditional powers and provisions will depend on the nature of the property settled, thenumbers of the beneficiaries, their circumstances, the situation of the property and likematters. Consideration should be given whether to insert a provision for the remunerationof professional trustees or to rely on the statutory provisions; likewise in relation to apower of investment; and whether to insert provisions excluding the settlor from benefit.Where houses are held on a trust of land in the case of family settlements, a statement ofthe intentions of the settlor or settlors, and of the purposes for which the land is held, maybe included in the settlement so as to confirm or qualify the right of beneficiaries tooccupy trust land.Other questions which may be put to the settlor include:(a) whether the settlor wishes to vary the statutory powers of maintenance andadvancement or to include any other special powers of advancement;(b) whether any particular item of expenditure is to be treated as between thebeneficiaries as capital or income;(c) whether the trustees are to be given any wider protection against their breaches oftrust than that provided by law, or can act if they are personally interested in atransaction;(d) whether the trustees are to be given power to appropriate any particular item ofproperty to any one beneficiary;(e) whether the settlor wishes to include power to insure his own life or that of anyone of the beneficiaries;(f) whether extended powers of borrowing or lending are to be included;(g) whether any more extensive powers than those provided by law are to be includedto employ agents and servants, to appoint nominees, to audit the trust accountsand value trust property, to raise money on mortgage, or to manage land;(h) whether any consents are required to the exercise of any of the powers containedin the settlements; and(i) whether any of the powers or directions can be surrendered by the person entitledto exercise them and if so by what means.

Page 70 of 83Special provisions may be needed when it is intended to settle large holdings of land;where a business or shares in a family company are being settled; or where it iscontemplated that the trust property or part of it may be situated or transferred abroad orthe administration of the trust transferred abroad.EXONERATION OF TRUSTEES FOR LOSS TO THE TRUST FUNDClauses commonly inserted in settlements relieve trustees from liability except in the caseof wilful default and individual fraud or dishonesty on the part of the trustee who issought to be made liable. Arguably this gives the trustees, and especially professionaltrustees, an undue amount of protection as they should be liable for their own negligence.Express instructions should be given by the settlor, to whom the consequences should beclearly spelt out before such clauses are included.POWER TO CARRY ON BUSINESSA power to enable trustees to carry on a business (including a farming business) alone orin partnership, or to incorporate a company for this purpose, and to make sucharrangements as they think fit upon the reconstruction of a company in which the trustholds stocks, shares or securities should be included in a settlement in appropriate cases.Trustees will be personally liable for business debts although they should be given a rightof indemnity against the trust fund. It may be appropriate in such cases to incorporate thebusiness, or to form a limited liability partnership, so that advantage can be taken oflimited liability.APPROPRIATION POWERSA settlement may provide for the appropriation of trust property by the trustees insatisfaction of the share of particular beneficiaries. Such a power may be particularlyuseful when the assets consist of property that is not readily reducible to cash; forexample, chattels or shares in a family company. The statutory powers of appropriationapplicable to the estates of deceased persons may be applied for the purpose, and it isusual to exclude the necessity of obtaining consents. However, those powers do not applyautomatically to trustees holding funds under a settlement.Trustees of land have power to partition the land where beneficiaries of full age areabsolutely entitled in undivided shares and to provide for the payment of equality money.The trustees, after obtaining the consent of the beneficiaries, give effect to any suchpartition by conveying the partitioned land in severalty, either absolutely or in trust, inaccordance with the rights of the beneficiaries. The power of partition may be excludedby the disposition creating the trust, or the disposition may require a consent which, inthat case, must be obtained.UNLAWFUL TRUSTSA trust created for an unlawful purpose is invalid and void. Unlawful trusts include thefollowing:

Page 71 of 83(a) trusts infringing the rule against remoteness of vesting or the rule against thecreation of a trust of perpetual or indefinite duration otherwise than for charitablepurposes;(b) trusts for accumulation beyond the period allowed by the statutes in that respect;(c) trusts restricting the power of alienation;(d) trusts in fraud of creditors;(e) trusts tending to restraint of marriage;(f) trusts designed or tending to induce a future separation of husband and wife; and(g) trusts tending to prevent the carrying out of parental duties.THE RULE AGAINST PERPETUITIESIn drafting a settlement care must be taken not to violate the rule against perpetuities.That rule, shortly stated, was, and in some cases still is, that a future interest must vest, ifit vests at all, within a period consisting of a life or lives. It is not sufficient that it mayvest within that period; it must necessarily so vest, otherwise it is void.ASSET PROTECTION TRUSTSAsset protection trusts (commonly set up in tax haven jurisdictions such as the Turks andCaicos or Cook Islands) are designed to hold assets beyond the reach of the settlor’screditors, his divorced spouse or other family members (typically in the situation wherehe resides in a forced heirship jurisdiction).THE TRUST AS A VEHICLE FOR ASSET PROTECTIONThe flexibility of the trust (it can, for example, be wholly discretionary in nature and maycontain powers to add to the class of beneficiaries) and the limited formalities requiredfor creation are major attractions for would-be asset protectors. Care does, however, needto be exercised to ensure that the trust is not a ‘sham’ and that it creates the irreducibleminimum of fiduciary obligations and corresponding rights.PROTECTED LIFE INTERESTSA provision in a settlement which reserves to the settlor a life interest in property settledby him determinable on his bankruptcy is void as against his trustee in bankruptcy; but aprovision reserving to the settlor a life interest in such property determinable if heassigns, charges or incumbers it is valid [see, Re Walsh’s Estate [1905] 1 IR 261; RePerkins’ Settlement Trusts, Leicester-Warren v Perkins [1912] WN 99]. A personbringing property into settlement may settle it so as to give to any other person taking aninterest under the settlement a life interest determinable on bankruptcy [see, Mackintoshv Pogose [1895] 1 Ch 505, Re Detmold, Detmold v Detmold (1889) 40 Ch D 585] or onany attempted alienation or other disposition [see, Re Throckmorton, ex p Eyston (1877)7 Ch D 145, CA] and it is by no means unusual in a marriage settlement to give thehusband such a protected life interest in the property brought into a marriage settlementby his wife.

Page 72 of 83STATUTORY PROTECTIVE TRUSTSA determinable life interest is now generally given by directing that the trustees are tohold the income on ‘protective trusts’ for the benefit of the principal beneficiary duringhis life or for some lesser period. In such a case the income must, without prejudice toany prior interest, be held on the statutory protective trusts; namely, upon trust for theprincipal beneficiary during the period specified or until he, whether before or after thetermination of any prior interest, does or attempts to do or suffers any act or thing, oruntil any event happens other than an advance under any statutory or express power, bywhich, if the said income were payable to him absolutely during his life, he would bedeprived of the right to receive the income or any part of it. If such trust should fail ordetermine during the specified period, then, during the residue of that period, the incomeis applicable, at the discretion of the trustees, for the maintenance or support, orotherwise for the benefit of any one or more of the following persons; namely, theprincipal beneficiary and his or her wife or husband, if any, and his or her children ormore remote issue, if any, or, if there is no wife or husband or issue of the principalbeneficiary in existence, the principal beneficiary and the persons who would, if thatbeneficiary were dead, be entitled to the trust property or the income from it.EVENTS CAUSING FORFEITURE UNDER THE PROTECTIVE TRUSTSWhether or not an act or event has caused a forfeiture depends in every case upon the trueconstruction of the particular clause, which will not be construed so as to extend its limitsbeyond the fair meaning of the words used. Where the clause adopts or follows thelanguage of the statutory protective trusts, no forfeiture will be caused by a settlement bythe principal beneficiary of his protected life interest, if, under the terms of thesettlement, the income remains payable to him, or where the interest of the life tenant isdetermined after divorce by an order of the court. A covenant to pay the income,however, if and when received, to a third party is an equitable assignment of the incomeand will cause a forfeiture. A forfeiture will also occur where the income is impoundedby the trustees to make good a breach of trust, or where a creditor obtains a chargingorder against the trust fund or where a writ of sequestration is issued against the propertyof the principal beneficiary.The statutory protective trusts may be varied by the instrument creating the trust both asregards the events which will cause a forfeiture and the objects of the discretionary trust.A clause conferring a protected life interest, even if in future terms, applies to abankruptcy existing at the date of the settlement or at the time when the interest would,but for the bankruptcy, have fallen into possession. If the forfeiture is expressed to takeeffect on alienation only, an involuntary act, such as the filing by a creditor of abankruptcy petition, does not operate as a forfeiture. The filing by a debtor of a petition,which is not followed by adjudication, will not cause a forfeiture of his life interest undera limitation ‘until he should do or suffer something by which the income, if payableabsolutely to him, would become vested in any other person’. The word ‘forfeited’ in agift over in case the settled property should be ‘forfeited to or become vested in any otherperson’ means liable to be taken away, rather than actually taken away. An interest givenuntil insolvency will subsist until the beneficiary is unable to pay his debts.

Page 73 of 83AVOIDANCE BY REASON OF UNDUE INFLUENCESettlements, whether made for the benefit of the settlor himself, or of third parties, areliable to be set aside in equity if their execution was obtained as the result of undueinfluence. In Barclays Bank plc v O’Brien [1994] 1 AC 180 at 189, [1993] 4 All ER 417at 423 the House of Lords classified situations of undue influence as follows:(a) ‘Class 1’ (actual undue influence). In these cases, it is necessary for the claimantto prove affirmatively that the wrongdoer exerted undue influence on thecomplainant to enter into the particular transaction which is impugned.(b) ‘Class 2’ (presumed undue influence). In these cases, the complainant only has toshow, in the first instance, that there was a relationship of trust and confidencebetween the complainant and the wrongdoer of such a nature that it is fair topresume that the wrongdoer abused that relationship in procuring the complainantto enter into the impugned transaction. In Class 2 cases, therefore, there is no needto produce evidence that actual undue influence was exerted in relation to theparticular transaction impugned: once a confidential relationship has been proved,the burden then shifts to the wrongdoer to prove that the complainant entered intothe impugned transaction freely; for example, by showing that the complainanthad independent advice. Such a confidential relationship can be established in twoways:(c) ‘Class 2A’. Certain relationships (for example solicitor and client, medical adviserand patient) as a matter of law raise the presumption that undue influence hasbeen exercised.(d) ‘Class 2B’. Even if there is no relationship falling within Class 2A, if thecomplainant proves the de facto existence of a relationship under which thecomplainant generally reposed trust and confidence in the wrongdoer, theexistence of such a relationship raises the presumption of undue influence. In aClass 2B case therefore, in the absence of evidence disproving undue influence,the complainant will succeed in setting aside the impugned transaction merely byproof that the complainant reposed trust and confidence in the wrongdoer withouthaving to prove that the wrongdoer exerted actual undue influence or otherwiseabused such trust and confidence in relation to the particular transactionimpugned.In the case of transactions falling within Class 2 (but not Class 1), there is a furtherrequirement to be satisfied before the transaction is set aside; namely that it constituted ‘adisadvantage sufficiently serious to require evidence to rebut the presumption that in thecircumstances of the relationship between the parties it was procured by the exercise ofundue influence’.SHAM TRUSTSAlthough a trust may appear to be created with trustees owning property and owingfiduciary duties to the beneficiaries, it may transpire that the reality is that the settlor hasretained a full beneficial entitlement to the property with the trustees being no more thancyphers in carrying out his wishes [see; Midland Bank plc v Wyatt [1995] 3 FCR 11;Rahman v Chase Bank (CI) Trust Co Ltd [1991] JLR 103, Royal Ct (Jer)]. The classic

Page 74 of 83definition of a sham is found in the judgment of Diplock LJ in Snook v London and WestRiding Investments Ltd [1967] 2 QB 786 at 802, [1967] 1 All ER 518 at 528, CA wherehe commented: ‘... if it has any meaning in law, it means acts done or documentsexecuted by the parties to the “sham” which are intended by them to give to third partiesor to the court the appearance of creating between the parties legal rights and obligationsdifferent from the actual legal rights and obligations (if any) which the parties intend tocreate.’In Rahman v Chase Bank, Mrs Rahman persuaded the Jersey court that the trustapparently set up by her husband (‘KAR’) was a sham. The headnote of the case recordsthat:‘the trustee was empowered to pay or apply the capital or income to or for the benefit ofKAR and was directed to have regard exclusively to his interests in determining whetheror not to exercise such power. Many of the administrative powers contained in thesettlement required his prior consent for their exercise in his lifetime. KAR referred to thefund as “my assets” and to the trustee as his “trust manager”. The trustee made noindependent investment decisions and invariably complied with KAR’s instructions.Moreover, KAR obtained moneys and made distributions from the fund of which thetrustee was only later informed and often gave direct instructions to banks holding trustproperty concerning its investment’.WHEN WILL A TRUST BE SET ASIDE ON THESE GROUNDS? CONSIDER THEFOLLOWING:1. Midland Bank plc v Wyatt. A man made a declaration of trust in favour of hiswife and children and put the relevant instrument away in his safe. Subsequently,he incurred various liabilities to the bank which obtained a charging order overthe property. The bank had throughout been in ignorance of the declaration oftrust which only came to light after the charging order had been obtained. Thecourt held that he had no intention of benefiting his wife and children and that thedeclaration was a pretence or sham.2. Red Cross ‘trusts’. A trust in wide discretionary form is set up with a singlenamed beneficiary (eg the Red Cross), but with the trustees having wide powersto add the settlor and his family. There is evidence that the Red Cross is notintended to benefit. Often such trusts are purchased ‘off the peg’ in a similar wayto ready made companies.3. Terms in the trust deed denying the ‘irreducible trust core’. If it is clear from aclause in the trust deed that the beneficiaries are to have no rights as against thetrustees, it may result either in the clause being struck out or in the courtconcluding that no trust can have been intended so that the settlor never disposedof any equitable interest in the property. The question of the ‘irreducible trustcore’ has recently been considered by the Court of Appeal in the context ofwhether a clause purporting to relieve the trustees against liability for acts ofnegligence (or indeed of gross negligence) was valid and enforceable. Millett LJcommented as follows:‘I accept ... that there is an irreducible core of obligations owed by the trustees tothe beneficiaries and enforceable by them which is fundamental to the concept of

Page 75 of 83a trust. If the beneficiaries have no rights enforceable against the trustees there areno trusts. But I do not accept the further submission that these core obligationsinclude the duties of skill and care, prudence and diligence. The duty of thetrustees to perform the trusts honestly and in good faith for the benefit of thebeneficiaries is the minimum necessary to give substance to the trusts, but in myopinion it is sufficient. ... a trustee who relied on the presence of a trusteeexemption clause to justify what he proposed to do would thereby lose itsprotection: he would be acting recklessly in the proper sense of the term’4. The settlor leaves a detailed letter of wishes which the trustees slavishly follow. Inthis case an argument can be mounted that the trust deed by itself does not recordthe full terms of the trust which can only be ascertained by incorporating the letterof wishes. Similar arguments can be raised if the settlor’s consent is required tothe exercise of powers (e.g. of distribution and investment) and in reality it is thesettlor who initiates whilst the trustees provide the consent.POSSESSION OF TRUST ESTATEAs against strangers, a trustee and his beneficiaries are regarded in equity as one person,so that possession of the trust property, whether real or personal, by the beneficiaries is,in general, possession by the trustee. Similarly, while the relation between trustee andbeneficiary subsists, the possession of the trust property by the trustee is the possession ofthe beneficiaries. If property is given to the trustee to sell, it remains in him for thatpurpose until something is done to put an end to the character in which he stands. Thetrustee is bound to protect the interest of the beneficiaries and the length of time duringwhich he has omitted to discharge his trust is no bar to his power or duty to perform it.Where a trustee has as such taken possession of trust property, he cannot hold it adverselyto the beneficiaries after his estate as trustee has determined; his continuance inpossession is deemed that of the beneficiaries.TRUSTEES’ LIABILITY FOR OUTGOINGSThe possession by a trustee of the legal estate or legal ownership of trust property investshim with the legal burdens and privileges incident to that estate or ownership. If the estateis leasehold, he is liable to pay rent and perform the covenants under which it is held.TRUSTEES’ LIABILITY FOR TAXESTrustees are liable to make returns and are assessable and chargeable to income tax andcapital gains tax. The statutory income of trustees is calculated in the same way as for anindividual by applying the rules of the Income Tax Act. The trust is taxed independentlyof its beneficiaries. However, the distributions out of the trust in the hands of thebeneficiaries are not taxable.RELEASES OF TRUSTEES ON DETERMINATION OF TRUSTWhere a trustee pays income or transfers capital in strict accordance with the terms of aclearly defined trust, he may on the termination of the trust require an acknowledgementthat the accounts are settled [Chadwick v Heatley (1845) 2 Coll 137]. It is usual on the

Page 76 of 83distribution of the trust fund for the beneficiaries to execute a release. Although a trusteemay strictly not be entitled to such [King v Mullins (1852) 1 Drew 308 at 311] in practiceit is not objected to and affords protection to the trustee. In cases where the trustee isrequested to deal with property in a manner differing from the strict tenor of the trust, hecan demand a formal release by deed.FORM OF PERSONALTY SETTLEMENTSThe form of settlements of personalty made otherwise than on marriage will vary with theobjects whom the settlor desires to benefit and to a certain extent the property availablefor settlement. The primary purpose of many settlements is the mitigation of the burdenof tax which would otherwise fall on the settlor or his estate1, and attention is usuallypaid also to the potential liability of individual beneficiaries or their estates in deciding onthe form of settlement.STOCKS AND SHARESStocks and shares are possibly the most frequent subject of personalty settlements. Avoluntary settlement of the stocks and shares of public and private companies requires thetransfer of them to the trustees in accordance with the regulations of the companyconcerned, or, if the company is registered abroad, in accordance with the law of thecountry where that company is registered. Bearer securities are transferred by delivery. Ineach case the settlement normally recites that the transfer has been, or is intended to be,made, as the case may be.DEBTSA debt is normally settled by assignment to the trustees of the settlement. Such anassignment, coupled with notice in writing of it to the debtor, vests in the trustees thelegal right to the debt and the remedies for it, with power to give a good discharge.Money secured by a mortgage is settled by transferring the mortgage to the trustees byone deed, without disclosing that the mortgage debt is trust money, and declaring thetrusts by another. This avoids the inconvenience that would otherwise arise on the sale orredemption of the mortgaged property, of having to produce and acknowledge the right toproduction of the deed containing the trusts, and for similar reasons, a portion charged onland is settled by assigning it to the trustees of the settlement by a separate deed.REVERSIONARY INTERESTSA reversionary interest is settled by assignment to the trustees of the settlement, whoshould perfect their title, as in the case of other choses in action, by giving notice inwriting of the assignment to the trustees of the instrument under which the reversionaryinterest is derived. The principle on which the court acts in discouraging dealings byexpectant heirs with their reversionary interests has no application to the case of asettlement by an expectant heir.

Page 77 of 83SHARE OF PERSONALTY UNDER OR IN DEFAULT OF APPOINTMENTA fund or share of a fund of personalty to which the settlor is entitled, either under or indefault of appointment, in the estate of a testator or intestate, is settled by assigning to thetrustees the settlor’s interest. This should be described with precision, since settlements ofan interest in a fund derived, under a will, by survivorship, or otherwise, do not include ashare in the fund coming to the settlor as next of kin of another beneficiary under the will,and shares taken under appointments do not pass under settlements which deal withshares in the same property taken in default of appointment.POLICIES OF INSURANCEPolicies of insurance, generally on the life of the settlor, are frequently made the subjectof settlements. The settlement may either declare the trusts of money to arise from apolicy, which is taken out by the trustees in their own names, or more usually the settlorwill take out the policy in his own name and assign it to the trustees to be held upon thetrusts declared by the settlement. The trustees should give notice in writing of suchassignment to the insurance company. An assignment of a policy generally carries with itany bonuses or profits which may accrue, although the settlor may be entitled to exerciseany option that is given him by the rules of the insurance company to apply the bonusesor profits in reduction of premiums or receive them in cash. Where bonuses or profits areexcluded from the settlement, the trustees who receive them are not allowed to retainthem, as against the personal representatives of the settlor, to make good amisappropriation of trust funds by him.A marriage settlement usually, and a voluntary settlement occasionally, containscovenants with the trustees by the person whose life is insured to pay the premiums, toeffect a substituted policy if necessary, to observe and perform the other stipulationscontained in the policy, not to avoid the policy, and not to prejudice the trustees’ rights tothe policy money. If the covenant is merely to keep up the policy, there is no right ofaction against the covenantor’s estate on the forfeiture of the policy by reason of a breachof the stipulations contained in it. In the case of those settlements where there is no suchcovenant, it is desirable on the payment of each premium for the settlor to address a shortmemorandum to the trustees indicating that the payment of the premium does not createany lien in his favour.Failure to effect a substituted policy in pursuance of a covenant requiring it will renderthe covenantor liable in damages to the trustees, even though the reason for the failure isthat his life has in fact become uninsurable. If a settlor in breach of covenant allows apolicy to become void, neither he nor his assigns can claim any interest in other propertycomprised in the settlement until the loss has been made good. Failure to pay premiumsgives the trustees a right to substantial damages, and, should the covenantor becomebankrupt, his contingent future liability to pay premiums is a debt which may be provedin his bankruptcy. It is always desirable for the trustees to be given the power tosurrender the policy for a fully paid up one of a smaller amount.Payment of the premiums may be further secured by trusts or powers directing orauthorising the trustees to apply the income and even the capital of settled property in

Page 78 of 83making such payment or to borrow money and use it for the purpose. Insurancecompanies often give undertakings to let some premium or premiums remain outstandingat interest on the security of the policies. In framing the trusts, the expectant character ofthe interest settled must be borne in mind, and the trusts of such policies as do, or may,give a right to any payment to the insured in the lifetime of the settlor should provide forthe application of the income which may in his lifetime accrue from that money and itsinvestments, as well as its yearly produce after his death. If the trustees may becomeentitled to options concerning the form in which they may receive benefit of bonuses,directions or powers should be given to them with reference to that choice.Where a policy is subject to a charge or debt and is afterwards settled or assigned, careshould be taken to make provision for how the charge is to be borne. Where the charge isnot created by the settlor the grantee may be liable to discharge or contribute to thecharge, but if the charge is a debt due by the settlor his estate may be required to bear it.A trustee of the policy who pays the premium to prevent lapse is ordinarily entitled to alien for repayment by reason of the right of trustees to indemnity out of their trustproperty; but where the trustee of a term of years who is not trustee of the policy pays thepremiums to prevent lapse, he has no lien. A wife, however, who pays the premiums onher husband’s life policies to prevent them lapsing has no lien on them for repayment.Power to restore a policy does not authorise a new policy to replace one that has lapsed.Covenants to substitute a new policy for one which had become void formerly requiredthe new policy to be for the sum which would have been payable under that which hadbecome void if the life had then determined. The modern variety in policies suggests thatit is more practical for covenants to describe in more general terms the benefits to besecured, and also that it may be expedient to authorise the trustees to accept a new policydiffering from the old one if, in the opinion of the trustees, it will not be lessadvantageous to the beneficiaries under the settlement generally.CHATTELSChattels are sometimes made the subject of a settlement, which may provide that thebeneficiaries should have the enjoyment of the settled chattels, and that the trusteesshould not interfere with the custody or management of them, or that the trustees shouldnot be responsible for the custody, preservation, or insurance of the chattels against fire,or other damage or loss. It is expedient to provide for the substitution of new articles ofequal value for those originally settled. A settlement of chattels on marriage does notrequire registration as a bill of sale. The transfer of chattels is usually effected bydelivery.

Page 79 of 83BENEFICIAL INTERESTSCREATION OF LIFE INTERESTSIn a marriage settlement of personalty the first life interest in the settled property isusually taken by whichever party to the marriage brings property into the settlement. Ifboth parties bring property into the settlement, each, as a rule, takes the first life interestin the property settled by him or her; and, after the death of either spouse, the survivor1 isgenerally given a life interest in the entire fund. Careful thought should be given to theincidence of inheritance tax and capital gains tax before creating life interests involuntary settlements: often trustees are given power to determine the life interest in sofar as it affects the whole or any part of the settled property prior to death2. Settlementson children, grandchildren and other objects of the settlor’s bounty may take the form ofa discretionary trust or a trust of income and capital accompanied by an overriding powerof appointment, but for tax reasons an accumulation and maintenance settlement isusually preferred if it is appropriate in the circumstances3.PROTECTED LIFE INTERESTSProtective trusts are primarily designed to guard against the possibility that the life tenantmay be a spendthrift. They operate by a combination of a life interest determinable onspecified events, including bankruptcy, followed by discretionary trusts. The statutoryprotective trusts provide that where any income is held on protective trusts for the benefitof any person (‘the principal beneficiary’) for his life or any lesser period, then duringthat period the income is to be held on trust for him unless and until he does anything orany event happens as a result of which if the income were payable to him he would bedeprived of the right to receive it. This covers both voluntary alienation and involuntaryinalienation on bankruptcy. If a determining event occurs discretionary trusts arise underwhich the trustees hold the income for such of the following persons as they in theirabsolute discretion select, namely:(a) the principal beneficiary, his or her wife or husband, and children or more remoteissue; or(b) if there is no wife or husband or issue, the principal beneficiary and the personswho would be entitled to the trust property or the income if he were dead.BENEFICIARIES UNDER A DISCRETIONARY TRUSTNATURE OF DISCRETIONARY TRUSTSUnder a discretionary trust trustees are given a discretion to pay or apply income orcapital, or both, to or for the benefit of all, or any one or more exclusively of the others,of a specified class or group of persons, no beneficiary being able to claim as of right thatall or any part of the income or capital is to be paid to him or applied for his benefit. Thetrustees may therefore have power to decide both who shall benefit and what the benefitsshall be. A potential beneficiary cannot be said to be the owner of an equitable interest inthe trust property unless and until the trustees exercise their discretion in his favour.A discretionary trust may be exhaustive, that is where the trustees are bound to distributethe whole income, but have a discretion as to how the distribution is to be made betweenthe objects. Alternatively, a discretionary trust may be non-exhaustive, in which case thetrustees have a discretion not only as to how the distribution is to be made, but also as towhether and to what extent it is to be made at all. It is thought that the term ‘non-

Page 80 of 83exhaustive discretionary trust’ in fact conceals the two alternatives of a power ofdistribution coupled with a trust to dispose of the undistributed surplus, by accumulationor otherwise, and a trust for distribution coupled with a power to withhold a portion andaccumulate or otherwise dispose of it [McPhail v Doulton [1971] AC 424 at 448, [1970]2 All ER 228 at 240]The objects of a discretionary non-exhaustive trust do not have concurrent interests in theincome, nor do they have a group interest [Re Smith, Public Trustee v Aspinall [1928] Ch915]. They all have individual rights: they are in competition with each other and whatthe trustees give to one is his alone. The reference to a class or group of objects under adiscretionary trust is merely a convenient form of reference to indicate individuals whosatisfy requirements to qualify as objects who may separately receive benefits under theexercise of the discretion. The separate ‘interest’ of each separate object isunquantifiable, and of a limited kind. What he has is a right to be considered as apotential beneficiary, a right to have his interest protected by a court of equity and a rightto take and enjoy whatever part of the income the trustees choose to give him. He couldaccordingly go to court if the trustees refused to exercise their discretion at all, orexercised it improperly [Tempest v Lord Camoys (1882) 21 Ch D 571]. He has also; ithas been said [Spellson v George (1987) 11 NSWLR 300 at 316 per Powell J], a right tohave the trust property properly managed and to have the trustee account for hismanagement.If trustees fail to execute a discretionary trust the court will do so in the manner bestcalculated to give effect to the settlor’s or testator’s intentions. It may do so by appointingnew trustees, or by authorising or directing representative persons of the classes ofbeneficiaries to prepare a scheme of distribution, or even, should the proper basis fordistribution appear, by itself directing the trustees so to distribute [McPhail v Doulton[1971] AC 424].RIGHTS AND POSITION OF BENEFICIARIESRIGHTS OF TENANT FOR LIFE AND REMAINDERMANA tenant for life of settled property is entitled ordinarily to the income of the property[Verner v General and Commercial Investment Trust [1894] 2 Ch 239 at 258]. He will beentitled also to the casual profits which accrue during the subsistence of the life interest,but not to capital receipts [Re Wilson’s Estate (1863) 3 De GJ & Sm 410] unless, ineither instance, the settlement provides otherwise [Simpson v Bathhurst, Shepherd vBathhurst (1869) 5 Ch App 193]. Money received under a policy of insurance againstloss or damage to trust property is to be treated as capital whether or not the trustees havepower to pay premiums out of income. Receipts that accrue to settled property may beeither casual profits, which belong to the tenant for life, or capital accretions orsubstitutions [Re Scholfield’s Will Trusts, Scholfield v Scholfield [1949] Ch 341, [1949]1 All ER 490] and the answer to the question whether a particular receipt is capital orincome may depend not merely on its nature but on the intention of the person fromwhom it comes .Therefore, where a company makes a distribution, its intention maycontrol whether the payment is capital or income: see eg Re Whitehead’s Will Trusts,Public Trustee v Whitehead [1959] Ch 579 at 588, [1959] 2 All ER 497 at 501. For the

Page 81 of 83recent debate concerning the nature of shares received by trustees on a corporatedemerger see Sinclair v Lee [1993] Ch 497, [1993] 3 All ER 926 or on statutoryprovisions.The rule that a tenant for life is entitled to the income of settled property applies ingeneral to wasting assets settled by deed or specifically by will; therefore, apart fromstatute, a tenant for life is entitled to the income of wasting property such as leaseholds[Milford v Peile (1854) 17 Beav 602; Hope v Hope (1855) 1 Jur NS 770] or to theincome of mines lawfully worked [Daly v Beckett (1857) 24 Beav 114]. Whether a tenantfor life may cut timber or open new mines depends, apart from statutory powers12, onwhether he is impeachable for waste. If he is unimpeachable for waste, he will be entitledto the rents and profits; if he is impeachable for waste, but exercises the statutory power,he will be entitled beneficially to the proportion allowed him by statute. A provision thata tenant for life is unimpeachable for waste expresses an intention excluding the generalrule that the price of land carried away and sold in the shape of minerals, stones or bricks,is treated as capital: see Re Ridge, Hellard v Moody (1885) 31 Ch D 504 at 508, CA; ReChaytor [1900] 2 Ch 804 at 809.LIABILITY OF TRUSTEESGENERAL DUTY TO OBSERVE TERMS OF TRUSTIn administering the trust, the trustee has to perform a number of duties and exercise anumber of powers or discretions. He will commit a breach of trust if he fails to do whathis duty requires, or if he does something he is not entitled to do. The directions of theinstrument creating the trust and the duties imposed by statute and the rules of equitymust be strictly observed. Any such departure which results in loss may involve thetrustee in liability to make good such loss [Target Holdings Ltd v Redferns (a firm)[1996] AC 421, [1995] 3 All ER 785, HL]. In exercising his powers or discretions, atrustee must act honestly [Re Smith, Smith v Thompson [1896] 1 Ch 71] and must use asmuch diligence as a prudent man of business would in dealing with his own privateaffairs [Speight v Gaunt (1883) 9 App Cas 1]. A higher standard of care will be requiredfrom a paid professional trustee, in that he will be held to the standards of skill andexpertise which he claims to possess [Bartlett v Barclays Bank Trust Co Ltd [1980] Ch515, [1980] 1 All ER 139]LIABILITY IS PERSONALA trustee is essentially liable for his own acts and omissions and not for those of others,including any other trustee1. However, a trustee can still be liable for breaches committedby a co-trustee if he himself is at fault2, although the burden of proof lies not on thetrustee but on the person who alleges that any loss was due to the trustee’s default [Brierv Evison (1884) 26 Ch D 238]TRUSTEES AS FIDUCIARIESGENERAL POSITIONA trustee stands in a fiduciary position towards a beneficiary; ie it is a mark of theirrelationship that the trustee has been entrusted with an authority and a task which he is

Page 82 of 83bound to exercise and perform in the best interests of the beneficiary. Failure to do sowill result in the trustee being accountable for profits made and the return of propertyacquired.In reaching decisions as to the exercise of their fiduciary powers, trustees have to weighup competing factors, ones which are often incommensurable in character. In that sensethey have to be fair1TRUSTEE MUST NOT PROFIT FROM HIS TRUSTThe rule, subject to certain exceptions, is that a trustee must not make a profit for himselfout of his office. As a fiduciary, a trustee must not be allowed to put himself in a positionwhere there is a conflict between his duty to the beneficiaries and his own personalinterests, or where he may be able to take advantage of information gained as a trustee.The rule does not depend on fraud, dishonesty or bad faith on the part of the trustee buton the mere fact that a profit has been mad1. It applies to all types of trustee and to otherpersons in a fiduciary position.TRUSTEE PURCHASING TRUST PROPERTYIf a trustee purchases trust property, the transaction is voidable at the instance of anybeneficiary. [see Campbell v Walker (1800) 5 Ves 678; and contrast Holder v Holder[1968] Ch 353, [1968] 1 All ER 665, CA. See also Kane v Radley-Kane [1998] 3 All ER753 where it was held to be a breach of the self-dealing rule for a sole personalrepresentative of an intestate estate to appropriate to herself unquoted shares insatisfaction of her statutory legacy, unless she had been authorised to do so by the otherbeneficiaries, or the court had sanctioned the appropriation]. The trustee takes a voidabletitle which can be set aside by a beneficiary within a reasonable time of discovering thecircumstances [Beningfield v Baxter (1886) 12 App Cas 167, PC]. This right exists nomatter how honest and fair the sale might be and even if it was for a price higher than thatobtainable on the open market or which is otherwise on terms which are generous to thetrust estate. The rule does not apply to a trustee who has been retired from the trust for along time5, nor to a trustee who acquires a right to buy the property before becoming atrustee6. The trust instrument may expressly authorise the purchase7 and the Settled LandAct 1925 allows a tenant for life to purchase and otherwise deal with settled propertywhich he holds on trust8.TRUSTEE PURCHASING BENEFICIARY’S INTERESTA trustee’s purchase of trust property must be distinguished from his purchase of abeneficiary’s interest. Whilst the former transaction is voidable at the instance of thebeneficiary, the latter will only be set aside by the court if there is a suggestion that thetrustee has abused his position or exercised undue influence over the beneficiary. Thepurchase is unimpeachable as long as the beneficiary entered into the contract of his ownfree will and provided there is no fraud, concealment, or advantage taken by the trustee ofinformation acquired by him as a trustee. Coles v Trecothick (1804) 9 Ves 234; Wright vCarter [1903] 1 Ch 27 [See, however, Dougan v Macpherson [1902] AC 197, HL wherethere was non-disclosure by the trustee of a valuation obtained qua beneficiary].

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