Insurance

Insurance is a contract in which one party takes on another’s risk for a price. It is used everywhere, from fire cover on a shop to life cover for a family, and it has rules that differ from the ordinary law of contract. The insured must tell the insurer everything that matters, must have a real stake in the thing insured, and cannot make a profit from a loss.

The exam tests these rules through definitions, lists and problems about a claim that the insurer refuses to pay.

This topic covers the meaning of insurance and its difference from assurance, how an insurance contract is formed, the licensing and records rules in the Nigerian Insurance Industry Reform Act 2025 (NIIRA), the classes of insurance business and capital, utmost good faith and material facts, insurable interest, indemnity, subrogation, double insurance and contribution, and the assignment of policies.

Meaning of insurance and assurance

Insurance is a contractual relationship in which a party known as the insurer undertakes to indemnify the other party, the insured, for a loss, in return for a consideration known as premium given by the insured. The main statute is the Nigerian Insurance Industry Reform Act 2025 (NIIRA). An insurance contract is aleatory: the occasion for indemnity may or may not occur, because it depends on some specified but uncertain event.

The terms are often used as synonyms, but they are not the same. The consideration for a contract of insurance is the premium (a multiple-choice question in a past paper), summed up in the slogan “no premium, no cover”.

Formation of the contract

No strict formalities are required, but the elements of a contract, offer, acceptance, consideration and intention to create legal relations, must be present. Writing is not a legal requirement, except in marine insurance, where a contract is not admissible in evidence unless it is embodied in a marine policy in the form in the First Schedule (section 141(1) NIIRA).

The steps

This sequence was set in May 2019 (XYZ Insurance and Uche), May 2018 (three steps), and May 2017 (offer and acceptance). The contract is evidenced by the insurance policy.

The proposal form and the policy

• Section 64 NIIRA: where the insurer requires a proposal form, it must be drawn up to elicit all the information the insurer considers material, and any information not specifically requested is deemed not material.
• The form must be printed in easily readable letters and must state conspicuously on its front page that if an insurance agent helps the applicant to fill it in, the agent is deemed the agent of the applicant.
• Section 17(1): the insurer must deliver the policy document to the insured before the policy period begins. The penalty is 5% of the premium received, plus other penalties the National Insurance Commission prescribes.

Insurance agents and the records of an insurer

Licensing of an insurance agent (section 37)

No one may carry on business as an insurance agent without a licence. The eligibility criteria are:

1. a certificate of proficiency issued by the Chartered Insurance Institute of Nigeria (CIIN) at least;
2. for a corporate agent, at least one principal officer with a CIIN certificate;
3. at least 10 years’ experience in an underwriting firm;
4. no previous conviction for an offence involving dishonesty or fraud; and
5. not having become bankrupt, or applied for the relief of bankruptcy, within the five years before the application.

Duties of an agent about premiums

• The agent must not collect premium for the insurer. Premium must be paid directly to the insurer.
• An agent who collects a premium and does not pay it over commits an offence, liable to a penalty of not more than 5% of the premium and ₦100,000 for each day of the offence. He is also disqualified for 12 months from further engagement as an insurance agent or employee of an insurance operator, and the Commission may impose other penalties.

Records an insurer must keep (section 19)

At its principal office:

• its memorandum and articles
• a record of its owners
• a register of every policy
• a register of claims
• a register of investments attributable to the insurance funds
• a register of ceded reinsurance
• a register of its assets
• a cash book
• a current account book
• a register of open policies for marine insurance
• its management accounts

An insurer that uses agents must also keep a register of the name and address of each agent, with the date of the contract and any termination (section 38(1)).

Classes of insurance business and capital

Section 3 NIIRA divides insurance business into two:

Miscellaneous insurance business, including financial inclusion insurance, is in addition.

Minimum capital (section 15)

The Commission sets risk-based capital by considering insurance risk, market risk, credit risk and operational risk. Under section 16, a new insurer must deposit with the Central Bank of Nigeria (CBN) 50% of the minimum capital, and the CBN returns 80% of it within 60 days of registration. An existing insurer must deposit 10% of the minimum capital. Failure to deposit is a ground for cancelling the licence.

Utmost good faith and material facts

A contract of insurance is a contract of utmost good faith (uberrimae fidei), which depends heavily on trust and truthfulness. The special facts on which the risk is judged are known mainly to the insured, so he must be honest and must not keep back anything that might influence the insurer.

In Carter v Boehm Lord Mansfield said that insurance is a contract upon speculation, where the special facts lie in the knowledge of the insured, so good faith requires that he should not conceal anything that might influence the insurer.

Material facts

A fact is material if it would affect the insurer’s decision whether to accept the risk and on what terms. Material facts depend on the kind of risk:

• Life assurance: a serious or terminal illness.
• Motor insurance: previous accidents while driving.
• Fire insurance: previous fires on the premises or neighbouring building, and a neighbouring factory handling inflammable substances.

The old common law test was that every fact was material that would guide a prudent insurer, whether or not the insured appreciated it and whether or not the non-disclosure caused the loss. Section 64 NIIRA has modified this: where a proposal form is used, it must elicit all the information the insurer considers material, and anything not requested is deemed not material.

Section 64(4) adds that the Bank Verification Number (BVN) and NIN of an individual, and the Corporate Affairs Commission (CAC) documents of a corporate entity, form part of the material information.

Exceptions to the duty of disclosure

November 2020 asked for three. The insured need not disclose, unless specifically asked:

1. facts known or presumed to be known to the insurer in the ordinary course of dealings;
2. facts that diminish the risk; and
3. facts the insured did not know.

Duration and effect

The duty of disclosure generally continues throughout the life of the policy, and changes in the original circumstances must be disclosed. The consequence of non-disclosure by either party where the duty exists is that the contract is voidable.

Insurable interest

The insured must have a legal relationship with the subject matter that is worth preserving, or the contract is void.

It is a statutory requirement, from the Life Assurance Act 1774, retained by section 66(1) NIIRA: a policy on the life of another person, or on any other event, is null and void where the person for whose benefit it is made has no insurable interest, or where it is made by way of gaming or wagering.

May 2016 asked for the meaning (2 marks), and the examiners defined it as the pecuniary or proprietary interest of the insured in the subject matter, from which he stands to gain if it is preserved and stands to lose if it is not.

• Under section 66(2), a person has insurable interest where he stands in a legal relationship to the person or event so that he may benefit by its safety or be prejudiced by its loss.
• A person has an insurable interest in his own life and his spouse’s, without special proof of pecuniary interest.
• A creditor has an insurable interest in the life of his debtor to the extent of the debt, but generally none in the debtor’s property.
• A surety has an interest in the principal debtor’s life. An employee engaged for a term has an interest in his employer’s life.
• The legal owner of property, a vendor, purchaser, mortgagee, mortgagor, trustee and bailee have insurable interest in the property in their transactions.
• A shareholder has no insurable interest in the assets of the company, since the company is a separate person (Macaura v Northern Assurance, 1925).

The interest must exist at the time of making the contract (and for property insurance at the time of the loss). A person has an interest in property if he has an absolute, partial, defeasible or voidable interest.

Indemnity

An insurance contract is generally one of indemnity: when the insured risk occurs, the insured is compensated to the actual extent of his loss, so that he is restored to his financial position before the loss. It does not apply to contingency insurance, such as life insurance and personal accident insurance, because no sum can compensate for the loss of life or limb.

November 2022 asked for the two, indemnity insurance and contingency insurance (3 marks each).

Subrogation

Subrogation is a fundamental doctrine under which no one is allowed to profit from his loss. If the insured has rights against both his insurer and a negligent third party for the same loss. The insurer pays, the insurer steps into the insured’s rights against the third party, including the right of action.

The insured cannot recover from both, as he would be better off than before the loss (Castellain v Preston).

• Section 215: where the insurer pays for a total loss, he becomes entitled to take over the insured’s interest in whatever remains of the subject matter, and is subrogated to all his rights and remedies.
• The right does not arise until the insurer has admitted the claim and paid (British India General Insurance v Kalla, 1965).
• The insurer cannot recover more than he paid (Yorkshire Insurance v Nisbet Shipping, 1961).
• If the insured receives further compensation from a third party after being indemnified, he holds it in trust for the insurer.

Double insurance and contribution

There is no rule of law against taking out several policies on the same risk. Section 146(1): where two or more policies are effected on the same adventure and interest, and the sums insured exceed the indemnity, the assured is over-insured by double insurance. He may claim from the insurers in any order he likes, but may not recover more than the indemnity.

An insurer that has paid has a right of contribution from the others, founded in equity and in section 190(1): each insurer contributes rateably in proportion to the amount for which he is liable.

For contribution there must be:

1. a common risk, which occurred;
2. a common subject matter;
3. the same interest of the insured under each policy;
4. each policy enforceable at the date of the loss; and
5. no policy excluding contribution.

Assignment of an insurance policy

An insurance policy creates rights that are choses in action, meaning enforceable rights as opposed to tangible property. A chose in action cannot be passed by sale and delivery, so it can be transferred only by assignment, from the assignor to the assignee. November 2021 asked why policy rights cannot be transferred by delivery (3 marks). May 2015 asked for the definition and three types of assignment.

• The rights are personal. A transfer of the subject matter of the insurance does not carry the rights under the policy with it, because of privity of contract.
• Every policy is assignable unless it expressly prohibits assignment. A marine policy is assignable unless it contains terms expressly prohibiting assignment, before or after loss (section 163(1)).
• The assignee of a policy who holds the beneficial interest may sue in his own name. The insurer may raise any defence it could have raised against the original insured (section 163(2)).

Legal and equitable assignment

Notice of assignment

• A policyholder may assign without the insurer’s consent unless the policy says otherwise, but for a legal assignment notice must be given to the insurer. If notice is required and not given, payment to the assignor is a good discharge.
• Section 72: in life insurance, the assignee has no right to sue unless written notice of the date and purport of the assignment is given to the insurer at its principal place of business. The date of the notice governs priority, and a payment made in good faith before notice is valid against the assignee.
• The insurer must acknowledge the notice, and the acknowledgement is conclusive evidence of receipt. If the insurer fails to acknowledge, the assignee must prove delivery (section 73).
• Section 74: sections 64 to 83 (Part IX) do not apply to marine insurance.

The essential elements of an insurance contract

March/July 2020 asked for three. The examiners gave: utmost good faith, disclosure of all material facts, insurable interest and payment of premium, the last being the consideration for the indemnity.

Working through the rules

Does a contract exist?

Is the interest insurable?

Indemnity and contribution in figures

A shop worth ₦10,000,000 is insured with Insurer A for ₦6,000,000 and with Insurer B for ₦4,000,000 against fire. A fire causes a loss of ₦8,000,000. The insured may claim from either in any order but may not recover more than ₦8,000,000. If A pays the whole ₦8,000,000, it may claim contribution from B in proportion to the sums insured, 6 to 4: A bears ₦4,800,000 and B bears ₦3,200,000, so B must reimburse A ₦3,200,000.

Subrogation in figures

A car worth ₦5,000,000 is destroyed by a negligent driver. The insurer pays the insured ₦5,000,000 and then sues the driver, recovering ₦4,000,000. The insurer may keep ₦4,000,000, since it cannot recover more than it paid. If the driver separately pays the insured ₦500,000, the insured holds that sum in trust for the insurer.

Worked problems

Problem 1: Tatafo and the petrol station

1. The issues. Utmost good faith, disclosure of material facts, and the effect of the proposal form.
2. The rule. The insured must disclose all material facts. A fact that a neighbouring premise handles highly inflammable substances is material to a fire policy. Under section 64, a proposal form must elicit the material information, and information not requested is deemed not material.
3. The application. The form specifically asked for peculiar environmental information, and the petrol station was one. Tatafo wrote “None”.
4. Advice. Non-disclosure of a material fact makes the contract voidable, so the insurer was entitled to refuse to pay. Tatafo is likely to lose.

Problem 2: Mallam Bako’s building

1. The issue. Insurable interest.
2. The rule. The insured must have an interest in the subject matter at the time of loss, from which he stands to gain if it is preserved and lose if it is destroyed. A shareholder has no insurable interest in the company’s assets (Macaura).
3. The application. Bako had sold the building, so he no longer owned it. His shareholding does not give him an insurable interest in the building.
4. Advice. The insurer was entitled to deny the claim.

Problem 3: Abokhasomi’s health policy

1. The law. Utmost good faith; the duty to disclose material facts; and section 64 NIIRA on the proposal form.
2. The application. Serious illness is a material fact in a health or life policy. He knew of it, so the exception for facts the insured did not know does not apply, and the form asked about health.
3. Advice. The contract is voidable for non-disclosure, so the insurer may refuse to pay. Abokhasomi may argue that the insurer should have been more specific in the form, but a question about known health issues would be enough.

Questions that have been asked on this topic, and how to answer them

Common mistakes in the exam

• Mixing up insurance (uncertain event) and assurance (certain event).
• Calling the insurer’s proposal form an offer. It is an invitation to treat. The applicant’s completed form is the offer.
• Saying a contract exists before the first premium is paid when the insurer made payment a condition.
• Saying non-disclosure makes the contract void. It makes it voidable.
• Ignoring section 64, which treats information not requested as not material.
• Saying a shareholder can insure the company’s property.
• Applying indemnity to life insurance. It does not apply to contingency insurance.
• Saying subrogation lets the insurer keep more than he paid.
• Forgetting that the agent who fills in the proposal form is the applicant’s agent.
• Forgetting that a transfer of the insured property does not carry the policy rights.

Quick revision

• Insurance: uncertain loss, premium, aleatory. Assurance: certain event. Formation: proposal form (invitation to treat), completed form (offer), assent (acceptance), policy (evidence). Policy before the period (s.17).
• Classes: life (4) and non-life (8). Capital: ₦15bn, ₦10bn, ₦35bn. Deposit with the CBN 50% (80% back in 60 days), existing 10%.
• Utmost good faith, material facts, s.64, three exceptions, continuing duty, voidable. Insurable interest (s.66), Macaura.
• Indemnity (not life or accident). Subrogation (s.215). Double insurance (s.146) and contribution (s.190). Assignment: choses in action, equitable, legal, notice (s.72).

Practice questions

These are original questions written in the style of the Institute of Chartered Accountants of Nigeria (ICAN) exam. Try each one before you open the answer. Full model answers follow the written questions.

Section A style: multiple choice

Section B style: written questions

Model answers

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