LEGAL ASPECTS OF A BUSINESS
See syllabus and textbook(s) also.
INSURANCE
▪ Insurance is a promise for financial compensation for a risk that may or may not occur
such as accidents, theft, fire. Unexpected events may occur at times when individuals
cannot afford to restore themselves.
Insurable and Uninsurable Risks
▪ Insurable risks are events that the insurance company will be able to calculate and charge
customers a premium. e.g. fire
▪ Uninsurable risks are events that the insurance company will not be able to calculate and
charge customers a premium e.g. you cannot insure if a business will be successful or not.
The Insurance Contract
▪ An insurance policy is a document sent by the insurer to the insured which states what
has been agreed between the two parties.
Ques: Who is the insurer and who is the insured?
▪ Insurance policies may be obtained through an agent working for a particular company
or through brokers selling insurance for a number of different companies.
▪ Insurance can be provided by insurance companies, underwriters and the government.
POOLING OF RISK – main principle of insurance
▪ The pooling of risk is where people faced by the same events come together to protect
themselves.
▪ Every person or business faced with a risk pays a small amount of money called a
premium to the insurance company, to compensate for losses suffered by themselves
and others.
▪ If a home-owner loses his house due to the risk of fire, instead of one person bearing
the loss, it is shared by several persons of a large group.
VALUE OF INSURANCE IN LOWERING RISK ASSOCIATED WITH BUSINESS
1. It provides financial protection and compensation if a risk occur e.g. fire
2. It provides business confidence and peace of mind, that is, people will invest their
money in a business without the fear of losing it
3. It is an invisible export, which brings revenue/foreign exchange to a country, this helps
to improve the country’s balance of payment position
THE PRINCIPLES OF INSURANCE
The principles of insurance include:
1. Pooling of risks- main principle of insurance 2. Utmost good faith 3. Insurable
interest 4. Proximate cause 5. Indemnity - See rules of indemnity 6. Subrogation
and 7. Contribution
INDEMNITY
▪ This means to restore the insured to where he or she was before the loss or damage
occurred. This principle does not apply to life assurance since no money can
compensate death
▪ The principle of indemnity is not to make a profit from a loss, but you receiving a fair
compensation
Rules Governing Indemnity
(i) Subrogation
▪ This is where the insurer after being compensated, surrenders the right of ownership
to the insurance company
▪ E.g. If your car was completely wrecked in an accident, the insurance company would
compensate you, but they would take the wreck to ensure that you do not sell the
wreck and make a profit.
(ii) Contribution
▪ This occurs when more than one insurance company is liable for the loss, the amount
of loss is shared in proportion by different insurance companies
▪ E.g. If you have insured your car with two different insurance companies and your car
was stolen, the two insurance companies would contribute half the value of your
stolen car and buy you a new car, so you are fully compensated. You cannot get a
car from each insurance company
UTMOST GOOD FAITH
▪ This principle states that the insured must give all relevant information about the thing
or person being insured, he/she must be truthful. Failure to give accurate information
may mean the insurance company may refuse to pay on the claim
▪ Note: The insurance company must also give all relevant facts about the policy
INSURABLE INTEREST
▪ A person cannot take out an insurance policy to protect property in which they do not
have insurable interest
▪ E.g. you cannot insure your neighbour’s house, it is not yours and you will lose
nothing
PROXIMATE CAUSE
▪ The insurance company can only pay out compensation if the loss suffered was
caused by the risk covered in the policy
▪ E.g. if a person insures his house against fire but it was destroyed by flood, then he
cannot expect to get compensation from the insurance company
TYPES OF INSURANCE POLICIES
(i) Life Assurance
(ii) Non – life (Business Insurance)
LIFE ASSURANCE POLICIES
▪ Life assurance is a promise of financial compensation for events that must happen such
as death. Life assurance is the insurance of people’s life or health. It is a form of
savings plan which benefits the dependents of the assured.
▪ The principle of indemnity cannot be applied under this coverage as no amount of
money can restore a person back to life.
(i) Whole Life Policy
▪ Provides payment after the death of the insured, the spouse or dependents should
benefit from this policy.
(ii) Endowment Policy
▪ Allows a sum of money to be paid, payable at a certain age or on death of the policy
holder, whichever comes first.
▪ Upon maturity, if the insured survives the period covered by the policy, then he
receives a lump sum of money.
(iii) Term Policy
▪ This is used by persons who need a mortgage on their home, in the event of
death, the policy is used to pay off the mortgage.
BUSINESS INSURANCE POLICIES
1. Fire Insurance
▪ Covers both domestic and business premises and their contents. It also includes
explosions, flood, burglary
▪ Premiums paid depend on the type of building, its layout, nature of the contents
[flammable]
1. Liability Insurance
(i) Public Liability: provides coverage for firms which may have to pay claims
for injury to persons caused by their negligence.
(ii) Employer’s Liability: provides coverage for employees having accidents
on the job, all businesses are required by law to have such a policy.
(iii) Fidelity Bond: this is where insurance companies will compensate against
theft by employees.
(iv) Product liability: it provides coverage to a business if a customer takes
legal action as a result of unsafe goods being supplied by the business.
3. Motor Vehicle Insurance Policies
(i) Third Party Policy: covers death or injury caused to other road users apart from the
insured on the road, plus damage to other people’s property.
(ii) Third party, theft and fire insurance: this covers the damage to other people’s
property plus the owners’ car through fire or theft.
(iii) Comprehensive Policy: this includes third party, fire and theft, damage to the insured
vehicle, personal injury to the driver and loss of possessions in the vehicle
4. Consequential Loss: covers loss of profit as a business would have earned if the
business was still operating.
5. Goods in transit or goods out of transit-coverage for loss/theft of goods or cash being
transported.
6. Personal accidents: covers injuries to a person that prevents you from working
7. Marine insurance: covers damage to the vessel, the cargo (damaged goods) and
the ship owner’s liability, that is, coverage for injury of passengers/crew or
collision with another vessel.
8. Aviation insurance - covers aircraft against damage or death of passengers or
crew.
