All you need to know about Insurance in Nigeria – Series 1

On Wednesday, March 22, 2017, a new book volume was added to the world of Insurance Texts. Authored by Funmi Babington-Ashaye, Deputy President of CIIN and MD/CEO, Risk Analyst Insurance Brokers Nigeria Ltd, the book is titled, Insurance in Practice-All you need to know about Insurance in Nigeria. Beginning from today, we would serialise the 17-Chapter book which presents Insurance in simple, everyday language for the benefit of its stakeholders. Happy reading.

Introduction to Insurance

People and corporate entities undertake economic activities to meet their immediate needs as well as create wealth to take care of the future. Such productive activities take place in environments that are not perfect. Hazards or accidentsmay occasionally occur even when the environment is certified safe or secured by the relevant regulatory and law enforcement agencies. During production in a factory, for instance, employees may be injured, machinery or inputs may be damaged, fire disaster may occur destroying the entire factory and nearby properties of others. In all these cases, some resources will certainly be lost and the affected individual or corporate entity will suffer financial loss if prior arrangements are not in place to protect assets.

It is not only in business or economic activities that there are risks; there are hazards in our daily lives. One may be involved in an accident on the road and even in the house. Natural disasters like flood and storm can destroy houses and other properties. A breadwinner in a family may die leaving behind the challenges of economic survival for his dependants. While alive, he can plan for the protection of his dependants. Simply put, accidents of undefined magnitude may occur unexpectedly at any time but its impact can be alleviated by Insurance.

Risk and Insurance

Organisations or individuals set out to achieve specific goals. To achieve these goals, they would commit resources- money, time, physical assets, etc. These goals may be achieved effortlessly or with great difficulty. In some cases, they may not be achieved at all. The extent to which these goals may be achieved is uncertain. Here lies the concept of risk which, simply, is the probability that an unpleasant thing could happen that will make it difficult or impossible for the set goal to be achieved. A lot of things may prevent the achievement of set goals. This may include accident at work, damage to equipment, downtime of machinery, late or non-delivery of raw materials, fire outbreak, theft, burglary, natural disaster (like flood, earthquake), etc. The uncertainties associated with these negative occurrences make up what is called risk.

This unpleasant occurrence may be in the form of damage to property, injury, liability, loss or any other negative incident. Although these disasters may or may not occur, risk cannot be wished away. Since the occurrence of any of these unpleasant incidences can lead to a loss, the associated risk can be avoided through pre-emptive action. In other words, the existence of risk, notwithstanding, business activities can still be carried out in the midst of the challenges in the environment. Early European merchants therefore evolved the concept of insurance which encourages risk taking for profit motive. Often, the bigger the risk associated with a project, the higher the expected returns. High risk projects often generate the highest returns. Low risk or zero risk projects often produce very little returns. The point must also be made that some people like to take risk while some are risk averse. Since the risk appetite of people and organisations vary, it will therefore be necessary to secure assets in line with the magnitude of the risk appetite.

Thus, Insurance is the remedy for risk. It provides a solution to the spirit of fear and uncertainty. Insurance encourages human beings and businesses to carry out economic activities irrespective of the associated risk. This is because, when any disaster occurs, insurance will provide a cushion to the affected person such that he is restored to his position before the occurrence of the unexpected disaster. With insurance, legal and natural persons are confidently able to do business because, if any hazard occurs, there exists an entity that will shoulder the burden of loss. Insurance therefore involves the transfer of risk in various undertakings to the insurer, for a nominal fee called premium. Insurance is about protection of self, of property and the public from injury or loss arising from unforeseen disaster.

The common legal definition of Insurance is that, “it is a contract whereby a person called the insurer, agrees in consideration of money paid to him, called the premium, by another person, called the insured or assured, to indemnify the latter against loss resulting to him on the happening of certain events”. In other words, insurance is acontract between an insurer and the insured. The insured pays some money, calledpremium, to the insurer to protect him against the effect of any disaster. If the disasteroccurs, the insurer will pay compensation to the insured as stated in the contract which issimply the “agreement between two parties which is intended by them to have legalconsequences”. Insurance contracts have legal consequences. For example, if a car ispurchased and is comprehensively insured, if it is involved in an accident during the period of insurance, the insurer willcompensate the policyholder as stated in the contract. The insurer is bound by law to comply with the terms of the contract.

Core Insurance Principles

Insurable Interest

Organisations acquire assets as indicated above to carry out their productive activitiesjust as individuals also acquire physical assets like houses, cars, furniture, aircrafts, etc,for their comfort. Organisations and human beings are desirous that these assets shouldbe preserved and not destroyed. Theinterest they have in the continuous existence of theasset is the insurable interest. The law must be able to trace a legal relationship (e.g.,ownership rights or beneficial interest) between the asset and the insured.

If they are not interested in the continuous existence of the asset, they can throw it awayor even dispose of it in any manner they consider appropriate. Thus, insurable interest iswhat insurance sets out to protect. It is on the value of the insurable interest that premiumis calculated and paid. When the property insured is sold, insurable interest ceases toexist.

Utmost Good Faith

As indicated above, insurance is a contract between the insurer and the insured. Toconsummate the contract, the parties must disclose all relevant and materialinformation. Theprospective policyholder must disclose all relevant information toenable the insurer to assess and decide whether to underwrite the risk and for how much. This is the concept of utmost good faith or uberrimae fidei or doctrine of non-concealment. The potential policy holder who has all the information concerning therisk to be covered by the insurer must ensure the presentational faithfulness of theinformation he provides. Nothing should be hidden. It is expected that he would provide the information he knowsand therefore must not deliberately provide misleading information to the insurer. Non-disclosureof material information is a valid ground for the insurer to repudiate liability.

Indemnity

Most Insurance contracts are basically contracts of indemnity. The insurer promises tocompensate the insured in the event of the occurrence of the unexpected misfortune. Inothers, the insurer will restore the insured to his position prior to the occurrence of thedisaster. Insurance contracts do not permit theinsuredto make profit from the disaster. Thus, in the event of the occurrence of the insured peril, the insurer will ensurethat the insured is restored to the position he was before the unexpected peril. If theinsured can make profit out of the disaster, many may be tempted to destroy the insuredasset and this will not be in the public interest. However, where there is a contributorynegligence, the policyholder may not be fully restored to his prior position. He wouldbear part of the loss.

Subrogation

The concept of insurance does not permit the insured to make profit from the occurrenceof the disaster insured against. The intention of insurance is not to enrich thepolicyholder but to put him back in the position he was before the unforeseen disasteroccurred. Accordingly, if an insurer promises to compensate the insured in the event ofthe occurrence of a disaster, the insured must relinquish his ownership rights over thescrap or whatever is the value left of the damaged asset. He cannot be compensated by theinsurer and still be allowed to retain ownership of the damaged asset’s residual value. Forinstance, if a car that is insured comprehensively is involved in a ghastly accident and it isdamaged beyond repairs or it becomes more economical to replace than repair it, theownership rights of the scrap will be transferred to the insurer. The insured willautomatically surrender his proprietary or ownership right over the asset, in this case, thecar, to the insurer. This is the doctrine of subrogation. The insured will only becompensated to the extent of his loss and no more.

Contribution

Generally, policyholders procure various insurance products in order to protect theirassets against unexpected disaster. In fact, some may insure a particular asset or insurableinterest with two or more insurers. This is legally allowed if all the insurers are informed.However, if the disaster insured against occurs, the insured cannot be compensated bythe various insurers on the loss of the same asset. If this is allowed, the insured wouldmake a profit from the disaster, a practice that is disapproved by insurance. Each of theinsurers will contribute proportionately, as may be agreed, in order to compensate theinsured. Thisis the concept of contribution. Its purpose is clearly to preclude the insuredfrom profiting from the disaster that occurred to him. Since the insured will paypremium to each of the insurers, the practice of insuring one asset with a series ofinsurers is not often encouraged. If an insured does this without disclosure, it can be abasis for an insurer to repudiate liability in the event of the unforeseen disaster occurring. These apply to all indemnity policies.

The Practice of Insurance

Insurance as a Contract

Insurance business is carried out in the context of legislation for it to be enforceable.Hence it is often a contract involving two parties: the insurer and the insured. Theinsurer,also called the underwriter, undertakes to shoulder the responsibility of any disaster orloss that may happen to the insured in line with the terms and conditions of the contract.In other words, the insurer promises to compensate the insured in the event of theoccurrence of the disaster. Simply put, a contract is a legally enforceable agreementbetween two parties for a legitimate purpose.

The purpose of every contract must be legitimatefor the contract to be enforceable by the State in the event of breach. For a contract to existor be consummated, there must be an offer by one party and an acceptance by the otherparty to do what is right. Any agreement to do what is illegal cannot be an enforceablecontract.

In insurance, it is important to mention that the insured must give something of value tothe insurer to encourage the underwriter to shoulder the risk associated with theeconomic activity. That something of value is called consideration or premium. Thus, acontract is basically a form of exchange; the party receives in return for his act or promise,something from the other party, and this something is called consideration. Thisconsideration must be valuable consideration and not just good consideration likegratitude, love or appreciation. While good consideration cannot be enforced, valuableconsideration makes contracts enforceable. Since insurance is a contract between theinsured and the insurer, it is not transferable. Mr. John cannot transfer an insurancepolicy to Mr. Peter. For instance, if a car is sold by its owner to another person, theinsurance on it immediately lapses. The beauty of an insurance contract is that it may alsoprotect or compensate third parties who are not expressly mentioned in the originalcontract. This would further be clarified later under the discussion oninsurance liability.

The Premium

For the contract of insurance to subsist, the insured must pay some consideration in theform of money to the insurer. This is called premium. The receipt of an insurancepremium shall be a condition precedent to a valid contract of insurance and there shall beno cover in respect of an insurable risk, unless the premium is paid in advance. Thuspremium is the periodic fee paid by the insured to the insurer as consideration for theinsurance cover. Unless and until the relevant premium is paid, there cannot be any validinsurance cover. This is in line with the provision of Section 50(1) of the Insurance Act 2003.

The Law of Averages or Law of Large Numbers

The business of insurance works on the presumption that not everybody who subscribes to be protected against loss, which may arise from the happening of an event, will sufferthe loss at the same time. Some may suffer loss and some may never experience any. Thisis called the Law of Averages. Hence, the few who suffer loss are compensated from alarge pool of resources contributed by all those who are insured against such loss. In a sense, the insurance contract is a mechanism for the transfer and redistribution of risks. The point must be made that the contribution of an insured to the pool, in the form of premium, is hardly ever enough to compensate him when the disaster occurs. It is from the premium paid by the others who did not suffer loss that the insured is compensated.Insurance draws from a pool of funds contributed by all policyholders through thepayment of agreed premium.

Funmi Babington-Ashaye