The prohibition of cover notes— An Opinion

Dr. Justice Ofori, Commissioner-NIC

The regulator of the insurance industry, the National Insurance Commission (NIC), has embarked on some significant measures aimed at bringing sanity to the insurance industry. It is without a doubt that the biggest problem that the industry has had to grapple with in recent times is the menace of fake insurance and undercutting. It therefore came as a huge relief when the NIC introduced the Motor Insurance Database (MID) in January 2020. The database is designed to ensure that all vehicles insured in the country are captured in a central database, making it easier to track genuine insurance policies and detect fake ones. By this same system, the regulator is able to monitor the premiums being charged by insurers which allows the Commission to know whether insurers are charging the right premiums. Insurers found to be charging premiums below the recommended minimum rates are sanctioned. This has significantly reduced the incidents of undercutting amongst insurers. The result of this has been impressive for the industry as the motor portfolio of insurers has seen a major boost in premiums.

The implementation of the database has undoubtedly changed the way insurers operate the motor insurance business. Insurers have been forced to invest in technology and have enhanced the capacities of their agents in the process. Manual stickers have been replaced with electronically generated stickers. Since the existence of an insurance policy on a motor vehicle (which is a legal requirement) can be digitally confirmed, it has thrown into question the relevance of even the electronically generated stickers. The stickers serve the purpose of an outward evidence of cover which is not conclusive in any sense concerning the validity of insurance cover on the vehicle. This is because the stickers merely serve the purpose of law enforcement officers being able to readily check whether an insurance policy exists on a vehicle in compliance with the law. The sticker has little legal significance beyond that. Apparently, the electronically generated stickers are still required to be issued, printed out and used on vehicles because, once again, the law requires that stickers be fixed on the vehicles. Other than this particular use of the sticker, it is now practically obsolete.

In a rather surprising move, the NIC, in its most recent directive, has now served notice that it intends to abolish the use of cover notes in the insurance industry as an additional measure to rid the industry of fake insurance and premium undercutting. The ban is expected to come into effect on September 1, 2021.

While the objective is highly commendable, it is not yet convincing if it is absolutely necessary to eliminate the use of cover notes considering the important function that cover notes serve in insurance. A cover note is not just another document issued by insurers; it has enormous significance as it forms a crucial part of what insurers do, at least, within the motor insurance sector.

Insurance companies enter into contracts of insurance with their clients by means of documents issued for that purpose. The primary documents that are used to provide cover for insurance include cover notes, insurance policy documents (the policy wording) and insurance certificates (where applicable). Cover notes are predominantly used in the motor insurance business. The cover note functions as a temporary insurance contract. They are used in situations where the insurer is not in a position to issue a permanent insurance policy and hence, when issued, they are valid for a period of thirty days. They are usually issued by insurance intermediaries who have been authorized by an insurer to issue temporary cover until the insurer is able to assess the proposal for insurance in line with its underwriting guidelines or policy. It needs emphasizing that agents or intermediaries in general are not underwriters. They are therefore in no position to be able to properly assess a proposal for insurance and bind the insurer into a permanent insurance contract with the proposer. Cover notes therefore facilitate the conduct of insurance business by providing a means for the insurer to give temporary cover and at the same time have the opportunity to evaluate the insurance proposal before deciding whether to commit itself to a permanent contract. In the absence of a cover note, an insurer has no such opportunity and would therefore be forced to make a decision on the proposal as and when it is received. Insurance intermediaries who are not trained for the purpose of underwriting insurance contracts, although with the authority to bind the insurer, assume the functions of underwriters. This would present an odd situation for insurers as agents have no training in insurance underwriting and therefore lack the capacity to make underwriting decisions. It therefore remains to be seen how insurance agents can function effectively if this directive comes into effect.

It is also important to emphasize that the new Insurance Act, 2021 (Act 1061) imposes an obligation on insurers to conduct their business with “integrity”, “optimum skill”, “due diligence”, and “care” —— section 84(1)(a). This obligation requires insurers to exercise the highest degree of caution when entering into insurance contracts. At all times, they must give themselves the opportunity to properly evaluate proposals before accepting to go on cover fully for a risk. They would need to be able to determine if the temporary cover granted by their agents are in full compliance with regulations.  In doing so, they would be exercising due diligence and care which allows them to apply their underwriting skills to its optimum in order to achieve the required integrity in the underwriting process and the general conduct of business.

The menace of fake insurance is not only carried out by means of a cover note. There are also fake certificates of insurance and while the MID has helped to reduce the prevalence of fake insurance stickers, it has not completely eliminated fake stickers as insurance fraudsters are still able to issue fake stickers. In fact, fake stickers are now far easier to make than it used to be since they are now only printed on plain sheets of paper. If stickers are not abolished, it sounds rather strange why cover notes should be abolished. It appears from the Commission’s statement that the ban on cover notes is being done in order to preserve and enhance the authenticity of insurance stickers. It is however not yet clear how eliminating cover notes would reduce fake stickers when the stickers themselves are so easily susceptible for use as instruments of insurance fraud.

If cover notes are abolished, will we also get to the point where certificates of insurance too would be abolished since there are also fake versions of the motor insurance certificates on the market? Abolishing certificates may be more difficult to do because it is legally required under the Motor Vehicles (Third Party Insurance) Act, 1958 (No. 42). While the cover note serves as evidence of temporary insurance cover, the motor certificates serve as evidence of a permanent insurance cover. They are both of prime importance in the motor insurance business. If certificates of motor insurance, which is also subject to fraud, cannot or would not be abolished, then cover notes do not have to be abolished merely on the basis that they can be faked.

Further to this, the Motor Vehicles (Third Party Insurance) Act, 1958 (No. 42) provides under section 6(4) that a motor insurance policy, for the purposes of the Act, only comes into effect when the insurer issues a certificate of insurance in the form prescribed by the Act which contains all the required conditions. It means that by issuing a sticker alone without any corresponding document supporting it as evidence of insurance cover such as a cover note, the insurance policy so issued is legally not effective for the purpose of complying with the requirements of the law. A critical look at the cover note issued by insurers would show clearly that it purports to serve as the certificate required to be issued under the Motor Vehicles (Third Party Insurance) Act, 1958 (No. 42). Thus, unless the NIC makes it mandatory for all insurers (including their agents) to issue certificates of insurance along with the motor insurance stickers when a cover is purportedly granted, there is a high chance of non-compliance with the law if insurers are unable to issue cover notes.

Abolishing cover notes will present operational difficulties for insurers. It is not only insurance agents that use the cover notes. Insurance offices also use cover notes where, for example, there’s system down time or there’s no power available. In such a situation, insurers cannot turn away their clients with the excuse that there is no power or that their system is down. They have to find a way to provide them with temporary cover until normalcy is restored. They can only do this by means of a cover note. When we visit the bank to make a deposit and they tell us their system is not working, they don’t tell us to take our money away and come back another time. They will take the money and give us a deposit slip as evidence of receipt of the money. Cover notes serve exactly the same purpose for insurers. If cover notes are abolished, how else would insurers who find themselves in such situations be able to serve their clients? Would they have to sign on some note or form or sheet of paper and give to the client as evidence of temporary cover? And if they should do that, how different would that be from a cover note as we know it? I believe that’s something worth considering.

Cover granted by means of a cover note, although temporary in nature, are fully effective contracts of insurance. It is the main working tool of the insurance agent. It is similar in many ways to a reinsurance slip which also serves as evidence of a reinsurance contract. Cover notes are widely accepted feature of insurance worldwide. Ghana would perhaps be alone as the only country to ban the use of cover notes in insurance. Therefore, to merit a complete ban, there must be compelling evidence that a ban on the use of cover notes is absolutely necessary to completely put a lasting end to the menace of fake insurance and undercutting. It is not known the extent of consultations that have gone into this decision but the statement announcing the ban is not detailed enough. It is therefore not easy to appreciate the urgency behind the decision to abolish the use of cover notes. In view of the significant disruptions this decision will bring to the insurance industry, it is suggested that the NIC should have more extensive engagements with stakeholders on the issue before proceeding with the ban. The ramifications of this decision, if it comes into effect, would be enormous and it leaves me to wonder if the industry is ready for it at this time and especially as it is coming at such short notice.

The writer is a chartered insurer based in Kumasi.

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