‘No Premium, No Cover’: Supreme Court affirms insurance commission guidelines

The recent decision of the Supreme Court of Nigeria in the case of Jumbo United Co. Ltd vs. Leadway Assurance Co. Ltd (2016) 15 N.W.L.R. Part 1536, pages 363-532 has, affirmed the position of the National Insurance Commission and put a seal of finality to the seeming conflict in the position of the law and the actual practice on the vexed principle of ‘no premium, no cover’ as it relates to Marine Insurance in particular and Insurance in general.

In a bid to stem the rising incidents of huge outstanding premiums being reported in the financial statement of Insurance Companies, minimise the large amount of provisioning for bad debts without significant subsequent recoveries, curtail the wide disparity between what insurers claim are due from Brokers and what the Brokers claim are to insurers, reduce the incidences of unreported collected premium by Brokers to Insurers especially as the Insurance Act deems premium collected by Brokers as having been collected by Insurers, minimise the cases of significant amount of premium that had been paid to Insurers but could not be matched against  relevant debts due to lack of sufficient information, the National Insurance Commission of Nigeria (NAICOM )on 1st January, 2013 decided to put to practice the provision of section 50 of the Insurance Act 1997 by issuing guidelines on the vexed issue of ‘No premium , no cover’ and other sundry issues as they relates to insurance premium and remittance.

Commencing from the date therein stated on the circular, the Commission directed that there shall be no outstanding premium in the Books of any insurers as covers granted on credit is not recognised by law, all insurance covers shall only be provided on strict ‘no premium, no cover’ basis. Consequently, any insurer who grants cover without having received premium in advance or premium receipt notification from the relevant insurance Broker, shall be liable to a penalty in the sum of N500,000.00 in respect of each cover so granted  and in addition, may be ground for suspension of the licence of the insurer.

The guidelines also prescribes prompt remittances of insurance premium against re-insurers and lead insurers while also mandating compulsory quarterly notification of any case of unremitted premium on insurers as well as cases of notification of all cases of receipts of premium on the Brokers.

The above guidelines have been the guiding principles regarding payment of insurance premium until the case of Jumbo United Co. Ltd vs. Leadway Assurance Co. Ltd (supra).  As reported the Appellant in this case imported stock fish into Nigeria from Iceland.

On 7th March 1997, the Appellant entered into an agreement with Respondent for the insurance of 121 bales of Icelandic stockfish valued at USD33, 880.00 and 1907 bags of assorted Iceland fish valued at USD121, 040.00 for the duration of the voyage which commenced in Iceland to Port Harcourt, Nigeria.

The Respondent issued two policies to the Appellant on 10th and 12th March 1997. Prior to the execution of the contract agreement, the Appellant presented relevant shipping documents to the Respondent at the Respondent’s request. Later, the Appellant paid agreed premium to the Respondent, although it was not paid during the period. A ship with the Appellant consignment of fish set sail from port in Iceland but it disappeared on the high seas without any trace.

There was evidence that it left Iceland on the 6th March 1997. The Appellant informed the Respondent about the loss and the insured goods. The Respondent declined liability on the ground that the consignment of fish, the subject matter of the insurance, had already been destroyed as at the date of insurance. The Respondent therefore refused to honour its obligation under the agreement between the parties. Consequently, the Appellant sued the Respondent at the Federal High Court for the value of the consignment of fish and other damages.  At the conclusion of trial, the trial court in its judgment applied the provision of section 23 of the Marine Insurance Act, 1961 to the Appellant’s claim on the ground that the Act is a special legislation on marine insurance; that it is subsisting law having not been repealed by the Insurance Act; and that the Act is not inferior to the Insurance Act, 1997 which it held is a general legislation on insurance.

The trial court found the claim proved and entered judgment for the Appellant. On appeal by the Respondent, the Court of Appeal held that section 50 of the Insurance Act, 1997 had impliedly repealed section 23 of the Marine Insurance Act, 1961; and that it voided the contract of marine insurance between the parties because the Appellant did not pay premium before the Respondent issued the insurance policies to the Appellant.

The Court of Appeal therefore allowed the appeal and set aside the judgment of the trial court.  Aggrieved, the Appellant appealed to Supreme Court where the apex Court considered the provisions of section 23 of the Marine Insurance Act, 1961 and section 50 of the Insurance Act of 1997 which respectively read thus: Section 23 of the Marine Insurance Act, 1961:“23. A contract of marine insurance shall be deemed to be concluded when proposal of the insured is accepted by the insurer whether his policy is the issue or not and for the purpose of showing when the proposal was accepted reference may be made to ship, a covering note or other customary memorandum of the contract” Section 50(1) of the Insurance Act, 1997:   “50(1)  the receipt of an insurance premium shall be a condition precedent to a valid contract of insurance, and there shall be no cover in respect of an insurance risk unless the premium is paid in advance” Interpreting section 50 (1) of the Insurance Act 1997 the Supreme Court held that the premium payment is a condition precedent to a valid contract of insurance and therefore there cannot be cover in respect of insurance risk unless or except the premium is paid in advance thereby maintaining that the provision of section 50(1) of the Insurance Act of 1997 on the payment of premium thereby supersede the position of section 23 of the Marine Insurance Act of 1961 on same. This case is important on the principles of formation of contract of insurance; what plaintiff must prove to succeed in claim based on contract of insurance; the fundamental purpose of contract of insurance; condition precedent to a valid contract of insurance; meaning of premium in contract of insurance, meaning and nature of contract of marine insurance, purpose and scope of Insurance Act 1997 and on whether section 50(1) of Insurance Act, 1997 repealed section 23 of marine Insurance Act, 1961. By this decision, the apex Court has succeeded in speaking to various stakeholders in the insurance, maritime and finance sectors of the economy as it specifically deals with marine insurance policy. 

It speaks to the insurance Companies, the shippers, Insurance Brokers, the insured, the merchants and business men, the investors, the Banks/ finance companies and the general public. On formation of a contract of insurance, the law Lords held that a contract of insurance is created only in a situation where there exist an unqualified acceptance by one party of an offer made by the other party.

Consequently, if the parties are still in the process of negotiation, ( as may be in cases of non-payment of premium before policy cover is issued) then, it can be said that there’s no valid and enforceable contract. Therefore non-payment of premium (even with the accomplishment of every other thing) amounts to mere expression of an intention to enter into an insurance contract.

This principle is very instructive in view of the very well-known practice of insurance companies which issues cover to their customers while still awaiting the payment of premium or receipt of notification of payment of premium from Brokers. The apex Court also held that a contract of insurance should always contain the terms and conditions of such contract, including the rights and liabilities of parties to the contract. Also the Law Lords held that the fundamental purpose of contract of insurance is to give cover for insurance risk. In other words, where a law states that there’s no insurance cover unless premium is pre-paid, then in effect, it means that the contract is void if no premium is actually pre-paid.

On condition precedent to a valid contract of insurance it held that by virtue of section 50 (1) of the Insurance Act, 1997, the receipt of an insurance premium is a condition precedent to a valid contract  of insurance and there shall be no cover in respect of an insurance risk unless or except the premium is paid in advance. On meaning and importance of premium in contract of insurance, the Court held that premium is a payment by the insured to keep an insurance policy alive.

It is usually a periodic payment.   A contract of insurance would be void if premium is not paid and on meaning and nature of marine insurance the apex  Court held that a marine insurance or contract of marine insurance is an agreement to indemnify against damage to a ship, cargo, or profits involved in a journey by sea.

While agreeing with the sound judgment of the apex court on the principles enunciated in the case, we would like to make the following remarks regarding the case and the actual practice of insurance in Nigeria.

Firstly, considering a recent publication to the effect that about 30 per cent of insurance companies have not presented their 2015 financial records, and about 95% of the companies recorded losses and unable to pay dividend to their shareholders due largely to the economic recession, would the sudden insistence on the strict policy of ‘No premium, no cover’ not jeopardise the already Fragile sector. Secondly, if there are still reports in 2016 of unpaid premium even when there exist a cover, does this then indicate a failure or complete disregard for the NAICOM guidelines which disobedience might be extended to the present Supreme Court decision.

Finally, in view of the Nigerian Reinsurance (Nigerian Re) 2016 report that the insurance industry had remained largely underpenetrated with insurance density (insurance premium as a percentage of the gross domestic product at the lowest ebb of 0.225 per cent  and a coverage level for insurance services very low in Nigeria with approximately 1.5million policy holders out of 170 million people patronising insurance product), is it not doubtful that a strict adherence to the principle of ‘no premium, no cover’ will impact the industry positively. While we wait to see how the insurance industry will react to this decision and the interpretation given to the section 50 (1) of the Insurance Act of 1997, we submit that the Supreme Court has spoken and made the final pronouncement on the issue and so it stands.