The Supreme Court of Ghana, by a majority decision, ruled on November 21, 2018 that an Insurer (Insurance Company) is not entitled to avoid an insurance contract based on an inflated Sum Insured.
SIC Insurance Company Ltd. had sought to repudiate a claim by a Ken Kwame Asamoah on the grounds that he inflated the replacement value of his vehicle at the inception of the contract. SIC relied on the duty placed on any person seeking insurance cover to disclose all facts truthfully and fully about the risk to be insured, so that an insurer may make an informed decision relying on same.
While agreeing with the determination that SIC could not avoid the contract on the ground stated supra, I diverge from the court in their order for SIC to pay the full Sum Insured of GH¢116,200 without regard to the fundamental principles of Insurance. In fact, I am convinced that their Lordships erred, gravely, in their order and steps must be taken (by the Insurance Industry, perhaps) to correct the flaw, lest lower courts rely on it in future.
In this article, I seek to establish the point, firmly founded in Insurance Law and backed by an abundance of determined cases, that an insurer may, rightly, not pay the full Sum Insured in a Total Loss claim if doing so makes the insured better-off than his financial position immediately prior to the loss.
To help you understand my point, I will explain what insurance is and how it differs from gambling as well as some principles and concepts.
Imagine a World Without Insurance
Contrary to the unfortunate opinion held by many, insurance plays a critical role in ensuring economic stability as well as supporting development the world over, and in Ghana. In the years 2017 and 2018, an estimated GH¢1billion was paid in Non-Life Insurance Claims (motor, fire, and other non-life insurance business lines) to individuals and corporates who suffered various insured losses in Ghana. The direct impact on the individuals and corporates, as well as effects on the Ghanaian economy, of some GH¢1billion lost without insurance cannot be gainsaid.
For small predictable premiums, companies are emboldened to embark on ambitious construction and other developmental projects, shippers are able to put hundreds of millions at risk on the seas for economic benefit, manufacturers are able to run at massive scale – all assured that they can fall on insurance if something goes wrong.
What Insurance is Not
In simple terms, Insurance is the transfer of fortuitous risks from persons (individuals and companies) to insurance companies. Insurance Companies, by accepting risks from large numbers of people, build pools of similar risks and utilize the tools of statistics and probability to predict losses. The costs of these predicted losses are shared for the members of the pools to contribute to (based on the weight of the risk brought into the pool by each member), with a small addition for the insurance company’s expenses and profit. The contribution to the predicted losses plus the fractional addition for insurer expenses and profit is known as Premium.
Insurance operates on the same concept as members of a society (in churches, associations, and communities) contributing funds to help alleviate the suffering of the unfortunate few who are overtaken by misfortune. You can look at Insurance Companies like your Church Welfare Committee which receives small contributions from church members and (promise to) pay some benefits upon the occurrence of some adversity.
A time-tested definition of insurance appears in Prudential Insurance Company v Inland Revenue Commissioners  2 KB 658;
“A contract of insurance is one whereby one party (the “insurer”) promises in return for a money consideration (the “premium”) to pay the other party (the “assured”) a sum of money or provide him with some corresponding benefit, upon the occurrence of one or more specified events.”
Insurance Contracts v Other Contracts
A general contract may be constituted when the elements of Offer and Acceptance, Legal Capacity, Consideration, and Legal Purpose are satisfied. In the case of insurance contracts, however, seven additional inter-connected elements/principles come into play. Any interpretation of insurance contracts and/or judicial decision on insurance must be firmly grounded in a proper understanding and application of the principles underlying insurance.
For the purpose of the issue in contention, I explain three of the governing principles of insurance which work to ensure that insurance does not become a profiteering or gambling scheme for insureds.
- Insurable Interest – a person must stand in a relationship with a property or a subject matter of insurance such that (s)he suffers a financial loss on the happening of the insured event. In simple terms, you cannot insure anything whose loss or destruction does not make you worse-off financially.
Insurable interest is absolutely cardinal to the practice of insurance. It is what differentiates insurance from gambling and other games of chance. If you decide to bet on Chelsea to win the UEFA Europa League 2019, you can select any amount to win in the unlikely event that your prediction comes true. Your financial loss is limited to the amount of your stake but your potential winning could be much higher.
Insurance is, however, never meant to be a lottery where you win on the happening of an unfortunate event. If that were to be allowed, you can be assured that anyone desiring a new Toyota Landcruiser Prado would simply have to insure their Toyota Corolla S for US$80,000 and hope for the destruction of the Corolla to win a Prado. In fact, there is so much history to prove that people have an incentive to destroy their insured property, if:
- a) they have no Insurable Interest in the subject matter of insurance. For example, people insuring the lives of persons in whom they have no Insurable Interest may cause the death of the insured to benefit,
- b) the amount recoverable from Insurance is higher than their true Insurable Interest in the said property.
The Act establishing the principle of Insurable Interest, Life Assurance Act of 1774, enacted by the English Parliament read as follows;
“Whereas it hath been found by experience that the making of insurances on lives . . . wherein the assured shall have no interest [,] hath introduced a mischievous kind of gaming [,] . . . no insurance shall be made . . . on the life . . . of any person . . . wherein the person . . . for whose . . . benefit . . . such policy . . . shall be made, shall have no interest, or by way of gaming or wagering. . .. and in all cases where the insured hath interest in such life . . . no greater sum shall be recovered . . . from the insurer . . . than the amount of value of the interest of the insured in such life.”
- Indemnity – indemnity simply means that insurance should place an insured party as nearly as possible in the same financial position after a loss as that which it occupied immediately before occurrence of the insured event. Insurance should not make an insured person better-off financially than they were before the occurrence of an insured event.
Indemnity operates on the back of the principle of insurable interest. A vehicle owner has insurable interest in her vehicle up to and not more than the replacement value of the vehicle – the market value. The principle of indemnity mandates that the vehicle owner can only be indemnified by insurance up to his insurable interest in the vehicle.
- Contribution – yet another corollary of Indemnity. Contribution means that if you insure a vehicle (whose Market Value can be determined) for more than its value with more than one insurer, the insurers together will contribute to pay up to the Market Value of your vehicle in case of a total loss.
For example, Ama’s 2013 Hyundai i10 is valued GH¢30,000 on the market. She insures it for GH¢30,000 with Insurance Company A and pays the full premium. She then insures the same car for GH¢30,000 with company B and pays the full premium there too. If Ama’s car gets totally damaged in the perennial Accra floods, the 2 companies will each contribute GH¢15,000 so Ama receives GHC30,000 – never mind that she paid premium for GHC60,000.
Understanding the different groups of Insurance Contracts
Insurance policies are generally grouped into Indemnity and Non-Indemnity/Valued Contracts.
You remember from the principles of insurance that Indemnity means to restore to the financial position immediately prior to a loss. So, then, all Insurance policies by default are Indemnity contracts. There are some insurance policies, however, where the value of the subject matter cannot be determined objectively. Such is the case with the value of a human life. Life insurance policies, therefore, are termed as Non-Indemnity/Valued contracts. A proposer for life insurance is allowed to determine how much value will suffice as compensation for the loss of the life assured, subject to some exceptions and underwriting discretion.
Non-Indemnity/Valued insurance contracts, in essence, refer to policies wherein the amount payable in the event of a valid claim is agreed upon between the insurance company and policyholder when the policy is issued, and is not related to the actual value of a loss.
Finally, the Concepts of ‘Sum Assured’ and ‘Sum Insured’
The insurance concepts Sum Assured and Sum Insured, when used interchangeably, will lead to misinterpretation as happened in Asamoah Vs SIC.
‘Sum Assured’ refers to a specified/certain/determinate sum of money that the assured will receive from the Assurer when the event assured occurs. Sum Insured, however, refers to the upper-limit of the compensation that the Insured may receive if the insured event occurs. Sum Assured is properly used in Valued/Non-Indemnity Contracts, while Sum Insured finds proper use in Indemnity Contracts.
The interpretation of insurance policies must pay careful attention to whether they are Indemnity or Non-Indemnity Contracts, as they influence whether the amount of compensation to pay is as relates to a ‘Sum Assured’ or a ‘Sum Insured’.
Where Their Lordships Erred
- Treating Motor Insurance wrongfully as a Valued Contract
The venerable Justices defined insurance as “a contract whereby one person, called the Insurer, undertakes, in return for the agreed consideration, called the Premium, to pay to another person, called the Assured, a sum of money or its equivalent, on the happening of a specified event.” They go on to say “…the SIC (the Insurer) undertook in return for the agreed consideration of GH¢5,759 (the Premium), to pay Ken Kwame Asamoah (the Assured), a sum of money (GH¢116,200) or its equivalent, on the happening of an event”.
A fatal flaw emerges in the definition adopted by their Lordships, leading to their erroneous order compelling SIC to pay the GH¢116,200 – which they (SIC) contend is inflated.
Motor Insurance falls under the group of policies known as Indemnity Contracts because Motor vehicles do have Fair market Values or Replacement Values. The understanding under the Indemnity policies, as explained earlier, is that an Insurer agrees with an Insured to compensate him up to a sum of money (not a sum of money) on the happening of an insured event.
The Halsbury’s Laws of England, 4th Edition reissue, Vol 25 par 3, establishes the point about the sum insured being only an upper limit abundantly clearly as follows:
“Most contracts of insurance belong to the general category of contracts of indemnity in the sense that the insurer’s liability is limited to the actual loss which is, in fact, proved. The happening of the event does not of itself entitle the assured to payment of the sum stipulated in the policy; the event must, in fact, result in a pecuniary loss to the assured, who then becomes entitled to be indemnified subject to the limitations of his contract.”
It is always advisable for proposers of insurance to state a Sum Insured for their properties above the current Market Value (especially taking cognisance of Currency depreciation and Inflation) in Ghana. This gives room for them to be adequately compensated in case of a total loss. I must state again, though, that stating a higher than current value is only a provision.
- The Fact that the Insured Paid Premium
Their Lordships made the point in their ruling and the accompanying order that the Insured is essentially entitled to the Sum Insured for which premium was charged and paid. That, respectfully, is another faulty point.
The fact that you have paid Premium for a stated Sum Insured does not entitle you to the full Sum Insured. In fact, in MacGillivray and Parkington on Insurance Law, 8th Edn (1988), Pg 368, the writers make the point that the amount or adequacy of the premium in relation to the risks run is a matter for the insurer rather than a court. A similar view is expressed in Colinvaux’s Law of Insurance, 7th Edn (1997), at Pg 157: “A premium is in no respect a prerequisite of a contract of insurance: all that is necessary is the undertaking by the insurer for good consideration”.
Remember the Principle of Contribution? If the order of the Supreme Court is allowed to stand, then an insured paying full premium for double the Market Value of his vehicle would be entitled to double compensation…because he paid Premium!
- Allowing for Profit Margin
The flaw in their Lordships reasoning is further buttressed in this quote from the ruling in their justification of the Sum Insured which the Insurer believed to be too high;
“And where it is for sale, profit margins should be taken into consideration.”
As a general principle, Insurance compensates up to the Market Value if the object is to be purchased or up to the Cost Price if the object is stock in trade. Allowing for (speculative) profit vitiates the underlying principle of Indemnity and approaches the realm of gambling. If profit margins become allowed under insurance, then the car dealerships with hundreds of unsold cars would have been provided an avenue to make gains without actually selling the vehicles.
The principle that an insured cannot profit from insurance was established in the English case of Castellain v Preston (1883) 11 QBD 380 (CA) 386, which has been cited around the world in cases involving Insurable Interest.
Again, that mere expectancy or hope doesn’t create insurable interest was established in the English case of Lucena v. Craufurd (1806) CEC ((1802) 3 Bos & P 75, (1802) 127 ER 42 Ex Ch), when it was held that “An insurance taken out on the profits of a ship or other goods… was in its true nature a wager…”
It is apparent from the foregoing that their Lordships erred in deciding that the Sum Insured must be paid even if the Insurer has reason to believe that paying the Sum Insured will lead to allowing the Insured to profit under the contract.
It is against the spirit of insurance and injurious to public policy for anyone to attempt to state that each insured is entitled to determine the replacement value of his vehicle, and for that matter any subject of insurance whose objective/fair market value can be determined. Any such precedent will create an incentive for people to over-state the values of their vehicles/properties, insure same and cause loss to benefit. That, surely, is not insurance.
Let me add, in conclusion, that the Ghana Non-Life Insurance sub-industry has run underwriting losses consistently for the last many years. Underwriting losses indicate that insurers are not realising enough premiums to cover Claims and Operating Expenses. GH¢266million and GH¢317million were recorded as Underwriting losses in the years 2016 and 2017 respectively. Insurers have survived on income from investing activities, returning paltry rates of less than 10% on invested capital for several years. It is alright for judgements to be pro-policyholders, but we run the risk of killing the goose that lays the golden eggs if we over-reach.
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