Contract of Insurance - Effect of Assignment (What is Novation, by the way !)

There will always be some fundamental issues on which clarity is required but there would be multiplicity of opinions. After years of experience, one could get stumped by simple basic things ! Have you heard of the term “Novation” used in contract law and business law ? If not, its time to have a refresher course on some founding principles of insurance.

Insurance is a contract between Insurers and Insured and the principles of law of contract does apply. A contract is an agreement between two or more parties that creates an obligation to do or not to do something. The parties to the contract are under an obligation to perform the terms and conditions as laid down in the contract. Thus a contract can confer rights or impose obligations arising under the contract on the parties to the contract. Third parties cannot be under such an obligation to perform or demand performance under a contract. This is referred to as Privity of contract.

The Indian Contract Act, 1872 codifies the methods of entering into a contract, executing a contract; rules to implement provisions of a contract and effects of breach of a contract. The provisions of the Act prevail over any usage or custom or trade however the same will be valid as long as it is not inconsistent with provisions of the Act. The practise of insurance is subject to certain fundamental principles arising under common law. The object of the Policy is to indemnify the insured against the loss of subject matter insured subject to insuring terms. A loss which is merely consequential on the loss of the subject matter is not within the scope of the policy.

Frequently, we come across assignment of policies – on some occasions, it is not the person named as assured who recovers under a policy and it is also stated that marine policies are freely assignable, which is loosely and wrongly interpreted on some occasions.

Insurance contract is entered into by the Insurer with a specific individual / Company and for transfer to another person would require the consent of the Insurer and could involve renegotiating the terms also.
Not so in case of marine policies, which are expressly assignable without the consent of the Insurers. (Only in Cargo Insurance and not in Hull) Here there is no need for a written notice (though it would serve them better to preserve the assignee’s priority over later assignees). Assignment cannot be done by a person who has no proprietary interest and who has not acquired insurable interest at the time of assignment. However, assignment after the loss is not prohibited provided it was agreed upon earlier.

‘ Assignment’ (Latin cessio) is a term used with similar meanings in the law of contracts and real estate. It encompasses the transfer of rights held by one party—the assignor—to another party—the assignee. The legal nature of the assignment determines some additional rights and liabilities that accompany the act. Significantly, a contract of personal nature of those involving personal skills where they are to be performed by the promisor himself will not be assignable. ( Eg., sculpting a statue where it is entirely dependent on the skill of a particular sculptor personally)

This principle of assignment is recognised under Indian Law. The word would mean transfer of rights or obligations held by one to another. Assignment of rights under a contract is the complete transfer of rights to receive benefits accruing to one party to that contract. Where a contract is not specific as regards the parties’ intention concerning assignment, one will have to rely on the provisions of the Indian Contract Act, 1872, and the principles of assignment enshrined therein.

Just as one would get the rights, the assignor could also remain liable unless there is an agreement to the contrary. An agreement must manifest intent to transfer rights, it may not necessarily be in writing, words will do, and the rights assigned must be certain.
The assignment must occur in the present. No specific language is required to make such an assignment, but the assignor must make some clear statement of intent to assign clearly identified contractual rights to the assignee. A promise to assign in the future has no legal effect.  If the contract specifically contains non-assignment clause, prohibiting the assignment of specific rights or of the entire contract, such contracts are not assignable.

Novation is a term used in contract and business law describing the act of either replacing an obligation to perform with a new obligation, or replacing a party to an agreement with a new party.  Assignment would be valid so long as the Assignee (person receiving the benefit) is given a notice; Novation would be valid only with the consent of all parties to the original agreement. Thus, instead of mere acceptance of assignee, the novation would be valid only when the Insurer consents to replacement of insured –  in simple terms novation requires consignment of all parties concerned. Consideration is still required for the new contract. The criteria of novation comprises of the obligee’s acceptance of the new obligor, the new obligor’s acceptance of the liability and the old obligor’s acceptance of the new contract as full performance of the old contract. Novation is also used in trading markets.

Coming back, assignments made for consideration are irrevocable i.e., the assignor permanently gives up the legal right to take back the assignment so made. Donative assignments are generally revocable either by assignor giving notice to assignee, taking performance directly from the obligor, or making a subsequent assignment of the same right to another.   Even a donative assignment cannot be revoked in the following :-
1. The assignment can not be revoked if the obligor has already performed
2. The assignment can not be revoked if the assignee has received a token chose (chose being derived from the French word for "thing", as in a chose of action) - a physical object that signifies a right to collect, such as a stock certificate or the passbook to a savings account.
3. The assignment can not be revoked if the assignor has set forth in writing the assignment of a simple chose - a contract right embodied in any form of token.
4. Estoppel can prevent the revocation of a donative assignment if the assignee changed their position in reliance on the assignment.

Finally, the death or declaration of bankruptcy by the assignor will automatically revoke the assignment by operation of law.

Now ending up with the common confusion on ‘free assignment’ of marine cargo policies. The policy would trace and pass on to the buyer with the insurable interest and does not require the consent of the Insurers provided it goes by the sale contract of other specific contract and further provided that it not expressly prohibited by the Insurer.

Marine Policies are assignable either before or after the loss, unless prohibited. The assignment is done by endorsement on the Policy / Certificate of Insurance or in any other customary manner. When the Policy is so assigned to transfer the beneficial interest in the Policy, the assignee is entitled to sue on it in their name and defendant is entitled to raise any defence arising out of the contract that they would have been entitled to raise, if the action had been brought by the person on whom the Policy was effected.

It is categorically clear that where an insured transfers or loses an interest in the subject-matter insured and does not, before or at the time of so doing, expressly or impliedly agree to assign the marine policy, no subsequent assignment of the marine policy is operative.

Hope this has generated some interest in the founding principles of insurance. Look forward to your feedback.

With regards – Sampathkumar S