Legal Matters: Insurance companies are not the devil

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Insurance as a business is largely divided into two broad categories: short-term and long-term. The first is technically called indemnity or property insurance, while the second is non-indemnity or life insurance. Short-term is so-called because the contract hardly ever runs for a period in excess of one year but is subject to renewal, whilst long-term or life policies run for the entire life of the insured or until the policy is paid up, whichever occurs first.

Tichawana Nyahuma

Short-term or indemnity insurance is a contract that hardly ever runs for a period in excess of one year but is subject to renewal and deals with speculative dangers

The other distinctive feature is that indemnity insurance deals with speculative dangers or perils that may happen as for example, the insured item may be stolen or destroyed by fire or any other accident whereas non-indemnity policies are concerned with perils that will eventually occur, that is to say, death or retirement of the insured.

The first is uncertain while the second is certain.

Further, under indemnity insurance, the idea, as the name says it all, is to indemnify the insured after loss or damage to the insured item. In other words, the insured should be put in the position she was prior to the loss.

Upon loss or damage of the thing covered by the policy, the insured is entitled to recover from the insurer, the actual commercial value of the insured item but only up to the agreed limit of the contract.

Put in another way, it is to place the insured into the position she would have been had the loss or damage to the insured property not occurred. However, at no point is the insured to profit out of her loss as otherwise fraud may be inferred.

As for non-indemnity insurance, the objective is to ameliorate the lot of the insured and or her dependants when the insured person dies.

Under this head, upon the demise of the policy-holder, the insurer will pay the agreed sum of money to the beneficiaries.

Clearly, there is no question of indemnity there or “putting back into the position they would have been” had the insured not died since life is priceless and the insurer is, in any event, incapable of restoring life once it is lost.

In light of that, today we discuss the law relating to indemnity insurance as this is where some folks seem to have challenges when it comes to claiming from the insurer after losses or damage to insured items.

The contract

There are some who believe insurers are hell-bent on finding excuses to reject claims when the day of reckoning comes; and that when they do settle, they do so grudgingly.

Nothing can be further from the truth. Insurers are always willing to pay claims.

The starting point is to understand that insurance is a contract between the insurer and the insured.

Each side has to meet its end of the contract.

Insurers only pay out if the terms and conditions have been observed. A senior insurance company official recently remarked to me that: “We are not in the business of insurance, we are in the business of paying claims but only if . . . ”

The contract of insurance is, like any other contract, comprised of at least two parties each with duties and obligations cast upon her by either the terms of the contract itself or by operation of law.

By its very nature, the insurance contract imposes obligations on the insured which obligations others perceive to be burdensome when compared to those of the insurer for the following reasons.

The contract of insurance has been said to be in a class of its own.

It is unlike a contract of sale, a construction contract or an employment contract where in most, if not all cases, the terms and conditions are a culmination of negotiations and agreement between the parties prior to the signing of the contract.

The insurance contract has what I term “rules of engagement”. It is not “a negotiated settlement” in that the terms and conditions are pre-determined by the insurance company, (the insurer) as the risk professional.

Much like a hire purchase agreement, an insurance contract resides in that category of agreements commonly called “standard form contracts”, in that the terms and conditions are already pre-set.

Rules of engagement

It is the would-be insured person who “offers” to insure and the contract is complete upon the insurer accepting the same.

At all times, the insured remains the offer or even if she is approached by the insurer through touting or other methods of selling insurance.

However, payment of the premium by the insured is a precondition, it being the soul, spirit and blood that keeps the contract alive.

So, in a situation where the insured is paying her premium on a monthly basis but falls behind in those payments and a loss occurs, she cannot seek to “pay up” before making a claim for a loss suffered during the period the premium was not paid – even if the period is just one day.

A breach of contract would have already occurred and the insurer would be perfectly entitled to resist such a claim.

If the insurer were to settle a claim of that nature, that would amount to “purchasing the claim” which would be completely untenable in my view.

The other duty that is carried by the insured is the duty based on the fact that the insurance contract is premised on the principle of good faith or the duty of disclosure.

This subsists both before and after the consummation of the contract. By this is meant that the insured has an obligation to be completely candid with the insurer in so far as the subject of the risk is concerned.

Lack of probity is not excusable, however slight.

There is the presumption that the insured knows everything about the property being insured while the insurer knows nothing.

She is accordingly obliged to disclose all the material facts or details affecting the risk.

For instance, if the insured offers to insure her house or some other building which has a thatched roof but does not make the specific disclosure to the insurer that the roof is thatched, then if a loss occurs, the claim is bound to be rejected on the grounds that there was not full disclosure by the insured at the inception of the contract.

Note that the claim would not be settled even if the loss has absolutely nothing to do with the type of loss for which a disclosure was withheld.

What will be of concern to the insurer is that there was no disclosure, not whether there is a connection between the cause of the loss and that which was not disclosed.

To put it in another way, it is pertinent to answer the question: “Was the non-disclosure a breach of the contract”? If the answer is yes, then there was no contract and any claim arising therefrom will be declined.

Sometimes the insurer will pin down the insured to make certain positive undertakings that she shall/shall not conduct herself in a particular manner during the currency of the contract.

These are technically called “warranties” the breach of which will cause a claim to be resisted.

For instance, the insurer may ask a question whose effect is to commit the insured that she shall keep a proper set of books of accounts.

If upon loss, the insured’s books of accounts are found to be in a shambles, the claim will be rejected.

Reporting early

All insurance contracts carry, either expressly or by implication, what is commonly called “a notification clause”.

The notification in question relates to a message by the insured to the insurer that an incident or event which may give rise to a claim has occurred.

What is key here is that the notification ought to be made “as soon as possible” after the event.

Now do not take the quoted phrase for granted.

The phrase means exactly what is says. The insured is required to give the notice at the very first opportunity she is able to do so.

An inexplicable delay of even 24 hours can be held to be inordinate rendering the claim dismissible. There have to be very good reasons for any delay in making the notification.

The reason insurers insist on prompt notification of any event likely to result in a claim is that they wish to also protect their own interests by being afforded the earliest opportunity to investigate the circumstances of the loss or damage to the insured property.

That can only be possible when things are still “fresh”, so to speak.

Readers should also mind that there is a vast difference between notification of an event likely to result in a claim and the actual making of a claim. Normally, a claim is supposed to be intimated within 30 days of the loss or damage of the insured thing but a notification ought to be so soon after the event as is reasonably possible in those circumstances.

The other significant duty that falls into the insured’s luggage is that of insurable interest.

It is the connection or relationship between the insured thing and the person so insuring.

If the person entering into the contract has only a remote connection to the insured thing, then there is no insurable interest and consequently a claim in such a circumstance is bound to be thrown out.

If loss or damage of the insured item does not result in any prejudice to the insured, there is no insurable interest and, therefore, no contract.

However, even if the insured is not the owner of the item insured but derives a benefit from it the loss or damage of which will cause her prejudice, there is insurable interest and such a claim will be happily settled.

A major challenge with insurable interest occurs on the sale of motor vehicles.

Many in our midst are not aware that the insurance contract terminates with the sale of the motor vehicle.

In other words, the insurable interest of the previous owner of that motor vehicle lapses upon the sale of the same.

The purchaser would have to insure the motor vehicle afresh in his own name even if the registration book still bears the name of the seller.

The insurance contract is not transferable.

If a loss occurs after the motor vehicle has been sold, the previous owner cannot make a claim on behalf of the purchaser as she will run foul of the duty of good faith, if not fraud itself. – The Sunday Mail

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