Insurance is a relationship of indemnity which exists between two parties, the insurer and the insured. The insurance relationship most commonly arises by a contract of insurance (COI).
The COI exists between the insurer who undertakes, in return for some agreed consideration (the premium) to pay the insured a sum of money or provide an equivalent benefit, on the happening of a specified event that causes loss to the insured person; the occurrence or time of which is uncertain.
The formation of COI is governed by ordinary contractual principles. The fundamental aspect of COI is the transfer of risk. A contract can be purely an insurance contract. For example: motor vehicle insurance and property insurance are purely contracts for insurance. Conversely, a rental vehicle contract is a contract that contains insurance and noninsurance type provisions.
In a rental vehicle contract, the agreement as a whole deals with the lease of the vehicle for a certain period and certain provisions of the agreement provide indemnity to the renter against damage.
In Truta v Avis Rent-A-Car Systems Inc [1987], it was stated that when analysing whether a contract constitutes insurance, two inquiries should be made; ‘To what extent, in each case, did the specific transactions or the general line of business at issue involve one or more of the evils? And were the elements of risk transference and risk distribution of central importance to the transaction?’ The risk transfer aspect is fundamental to the insurance contract. in Truta’s case the rental agreement was not an insurance arrangement even though it contained an indemnity clause that transferred specified risks to the rental company. The purpose of the agreement was to provide possession of the vehicle to the renter for a specified period. The transfer of risk pursuant to the indemnity clause was an incident of the lease, not its primary purpose.
General Insurance Law in Australia is governed by the Insurance Contracts Act 1984 (Cth). Trutas case is a good starting point to distinguish between what is and what is not a COI, but it’s not conclusive. When deciding whether a contract is a COI of Insurance, The provisions of the ICA and section 10 should be given close consideration.
By Mohammad Kashefi
LLB (Hons), GDLP
MK Legal Group
mk@mklegalgroup.com.au
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