Introduction to insurance,

insurance and general contract,

and principles of insurance
January 21-27-2015
Organized by :-
Ethiopian Insurance corporation
VENEU : EIC CONFERENCE HALL
Addis Ababa
Topics Covered

PRINCIPLES OF INSURANCE
- Insurable Interest
- Utmost good faith
- Proximate cause
- Indemnity
- Corollaries of indemnity:- Subrogation and
contribution

Underwriting practice
Corporate strategy
Underwriting Strategy
Marketing insurance and the product cycle
Risk assessment, policy terms, conditions, warranties
and exceptions determinations
Rating
Policy of insurance
 Topics Covered
 Claims practice
 Determining the existence of cover-policy terms, condition
against the cover
 Determining whether the insured is covered
 Claims made and loss occurring policies and claim
notification
 Claims investigation and the extent of indemnity
 Insurance fraud
 Negations and settlement terms
 Application of policy limits
 Right of subrogation and other recovery rights
 Assessment of quantum and settlement of third party claims
 Special condition in compulsory policies.
 Meaning & Concepts of Risk
Risk is
⁻ Risk implies both about the future and that the future outcome could
result in a worse situation that exists at present.
⁻ This can be contrasted with chance. Chance implies some doubt about
the outcome of a given situation, the difference being that the outcome
is normally favorable.
⁻ Risk can be use to express some outcome or loss that is uncertain or
threatening or placing one in position that is unfavorable.
Risk is defined by different scholars. The main definitions
include
₋ The possibility of unfortunate occurrence
₋ Combination of hazards
₋ Uncertainty of loss
₋ Possibility of loss
₋ Lost opportunities are also considered as risk in contemporary teachings
 Risk
 The idea of risk refers to a likelihood of an event
that could have a probability of 0<x<1. This implies
any event that we are sure to happen or that could
never happen is not a risk
 Risk is the threat that an event or action will
adversely affect an organizations ability to
maximize its stakeholders value
 Risks arise as much from the possibility that
opportunities will not be realized as it does from the
threat will materialize or that mistake will be made
 Risk is an integral to all opportunity and is as much
about opportunity as it is about threat
Meaning & Concepts of Risk
Underlying ideas of risk
Different ideas of risk have three common threads. Firstly, the
underlying idea of uncertainty; secondly the implications of differing
levels of risk and thirdly, the idea of a result being created by an
external cause.
Uncertainty: It is doubt about the future on an outcome that is
unfortunate , may base on a lack of or imperfect knowledge. This
implies whether that lack of knowledge is recognized or not.
Level of risk: the level of risk is expressed in terms of frequency and
severity. Frequency refers to the likelihood of an event whereas
severity is about the extent of damage should the event occur. There
are two main relations between frequency and severity. High
frequency and low severity; low frequency and high severity.
Heinrich Triangle: The link between frequency and severity can be
demonstrated by this triangle, shoeing the for every serious incident
there are many minor ones. Utility theory attempts to represent the
probability of loss and the cost of loss in one measurement.
Meaning & Concepts of Risk
Underlying ideas of risk
 Cause of eventual loss : risk can mean both the event
giving rise to loss and factors which may influence the
outcome of a loss. It is better to think in terms of
prime cause that will rise to the loss/peril/ and those
factors which may influence the outcome , operating
either to increase or decrease the effect if a peril
should occur/hazard/
 Hazard can be physical, relating to the physical
characteristics of the risk; moral, concerning the
human aspects /usually attitude/ which may influence
the outcome.
Benefits of Risk
 Risk enters in all aspects of business life. Risk
enables creation of wealth and it is at the very
heart of tree market economy.
 It creates hope for profit, entrepreneurs are
encouraged to take risk of all kinds, in the hope
that the reward will be higher than they could
achieve by choosing a safer option.
 Risk is a bar to entry into the market place for
ventures which are unsound, or likely to be short
lived.
 Risk encourages a safety culture. The most risky
environments require high risk management.
Real and perceived Risk
 The first thing is to compare perception against the known or real
level of risk. Risk from dramatic or glamorous events is
overestimated.
 Risks from medical related events is underestimated;
 There is a tendency to overestimate low frequency events and to
underestimate high frequency events.
The difference between real and perceived risk can be accounted for by:
⁻ Familiarity: a persons familiarity with a risky event will affect their
perception of how risky event is;
⁻ Control: people generally will underestimate the level of risk when
they feel in control of events.
⁻ Personal or societal effects; people may take a different view of risk if
they believe that the risk even will affect society as a whole.
⁻ Frequency and severity; evidently people are able to discriminate
between the probability that an event will occur and its potential
severity if it does occur.
Why do you classify risk?
What is the relevance of classifying risks?
It helps to analyze and categorize risks for the
purpose of underwriting insurance policies.

 There are various way of classifying risks: some

classify as financial vs non financial, speculative vs
pure, fundamental vs particular.
 Some classify as speculative vs operational risks
Classification of risk
For the purpose of insurance, the main classification of risk as most
practitioners agree is as follow:
1. Financial vs non financial risks: This classification based on whether the
outcome could be measured in financial terms or not. Financial risk is risk
that could be measured in financial terms such as material damage to
property, theft of property or loss of business. Non financial risk is not
measured in financial terms such as marriage partner, selection of career,
having children with expected behavior.
2. Pure vs speculative risks: This classification is based whether the
outcome/possibility/ could be loss, gain or no loss situation. Pure risks
refers to risks the outcome of which is either loss or no loss situation or in
other words outcome is either loss or breakeven.
In case of speculative risks the outcome could be loss, gain or breakeven;
i.e. three possibility.
3. Fundamental vs particular risks: It refers to risk classification whether the
risks are impersonal, uncontrollable and widespread. In this regard,
fundamental risks are uncontrollable, impersonal and widespread and
hence uninsurable.
 Particular risks are insurable as they are controllable, personal and not
widespread. This classification is based on cause and effect of the
incidents
Classification of risk
 Fundamental risks are further classified into social and
natural risks.
 Examples for social risks include unemployment,
terrorism, inflation war, sonic bangs radio active wastes.
 Natural risks include famine, drought, earthquake,
volcanic eruption, and hurricane and atmospheric
disturbances among others. In any case both are highly
distributed and uncontrollable and widespread so that
they are not within the reach of insurance companies.
 It doesn't mean they are totally uninsurable-that has
been eroded as insurance companies have been insuring
as part of fulfilling the customers demand using different
risk sharing mechanisms example of flood insurance in
the UK and many European countries.
SUMMARY-CLASSIFICATION OF RISK
Financial and non-financial Risk
₋ Based on effect of a risk as to its measurability in financial or
monetary value, risk is classified as financial and non financial.
Pure and Speculative Risks:-
₋ Based on outcome of the loss. Pure risks involve an outcome of a
loss or at best a break-even situation i.e. the outcome could be
unfavorable or would leave us in the same situation.
Fundamental and particular Risks
₋ based on both cause and effect.
₋ Fundamental risks are impersonal in origin (cause) and widespread
and uncontrollable in effect.
₋Particular risks have their origin in individual causes and are
controllable.
they are not widespread.
FUNCTIONS OF INSURANCE:
 Risk transfer is the main function of insurance that is done by way
of paying premium equitable to one has brought to the common pool.
The role of insurance companies is to take risks by way of
administering the pool and charging equitable premium.
 Risk transfer: the major function of insurance is to serve as a risk
transfer mechanism. The risk transfer mechanism works by way of
creating common pool and charging equitable premium.
1. Creation of common pool
- it takes the contribution in a form many people and pay for losses
to the unfortunate few from such fund.
2. Equitable Premium:
- There can be several of the pools, one each for main type.
- The insurer should charge what is known as equitable premium,
i.e.
contribution made by each party should be fair to all parties
participating. Each members of the pool will be charged based on
severity, frequency, value at risk and factors such as competition.
Characteristics of Insurable Interest
 Fortuitous – the happening of a loss must be fortuitous as
far as the insured is concerned.
 Financial value – There must be some way of measuring the
loss in financial terms.
 Homogeneous exposures – As the name implies
homogenous exposure means large number of similar risks.
 Pure risks – insurance is primary concerned with pure risks
the effect of which are either loss or no loss.
 Particular risks – particular risks are not widespread and
controllable. The widespread, uncontrollable and
indiscriminate nature of fundamental risks has resulted in
them traditional being uninsurable.
 Public policy – It is common principle in law that contracts
must not be contrary to what society would consider right or
moral thing to do.
Benefits of insurance
 Peace of mind:
- The knowledge that insurance exists to meet financial consequences of
certain risks provide a form of peace of mind.
 Loss Control:

- Insurers do have an interest in reducing the frequency and severity of a

loss, not only to enhance their profitability but also to contribute to the
general reduction in economic waste which follows from losses.
 Social benefits:

- Availability of insurance cover to recover from losses provide stimulus

to the business activity.
 Investment of funds:

- There is a time gap between the receipt of premium and payment of claim.
this vast sum of money should not be kept idle. It is invested in a wide
range of different forms of investment. By making loans available for
mortgages and other business, buying shares in the market, investing in
bonds and others, insurers have become major institutional investors in an
economy.
Benefits of insurance

 Invisible earning:
Insurance like bank and tourism is invisible trade. A
substantial amount of money is earned through service
export towards improving balance of trade. This
substantial foreign exchange helps to a positive balance
of trade to an economy.
Enterprise Risk Management
ERM is defined as the discipline by which an
organization in which an organization in any
industry assess, controls, exploits, finance,
and monitors risks from all sources for the
purpose of increasing the organization’s short
term and long term value to the
stakeholders.
The over view of ERM framework evolves
around four main risk areas such as hazard,
finance, operation, and strategic risks.
Risks at corporate level can be classified as
speculative risks and operational risks.
Speculative risk is where a director or
Enterprise Risk Management
Operational risk on the other hand, is
concerned with the unexpected and
unpleasant hits an organization’s an
operation of an organization. It is concerned
with the identification, analysis and control of
those risks which can threaten the
operations, assets and other responsibilities
of an organization.
Risk management is the identification,
analysis of, and economic control of factors
that can threaten the assets and earning
capacities of an enterprise. As it is well
known, the identification of a problem is the
first step in solving a problem.
 Enterprise Risk Management
Steps in risk management

 Develop risk development philosophy

 Write basic policy statement

 Decide on levels of impacts to be retained

 Establish responsibility of in lines of authority

 Have a reporting system upward through

the board
 Enterprise Risk Management
 Risk management is the identification, analysis of, and
economic control of factors that can threaten the assets and
earning capacities of an enterprise.
 The first and most important step is identifying the risk
through formal and structural way.
 Once you identify the risk, analyze the potential frequency
and severity of the risk(measure the level of the data from
past experience.
 After analyzing, we will prioritize from the choices available for
prioritizing the degree of risk. Now comes step where we look
into the impacts of the risk.
 The risk and impact control refers to the physical and financial
aspect mechanism. Physical risk control could be steps taken
before loss occurs(pre loss control) and steps taken
immediately after the loss has happened(post loss control).
Risk management
Risk retention mechanism
 Risk retention mechanism is a financial control way of risk
control. It is a way where the firm decides to retain the
risk. It could be way of non insurance or self insurance.
Self insurance is conscious decision of creating fund where
as non insurance non conscious decision of risk retention.
Risk retention is justified when the risk has been
identified properly and the amount retained per incident
and in aggregate per year is within the capacity of the
enterprise.
More over retention, requires that the cost of retention is
less than the cost of claim.
It is means of transferring risk to some organization
which is made by concluding contract .
One of the most common form of risk transfer
mechanism is insurance.
Enterprise Risk Management
Risk improvement mechanism
Risk reduction: could be pre loss post loss and non physical
risk control.
Pre loss risk mechanisms refers to the mechanisms
anticipated in advance such that the risks are kept to
minimum e.g. fire protections and health and safety
measures, security controls, duplications of offsite
computers.
post loss risk control refers to the steps taken to minimize
the loss once after the risk has materialized e.g. actions
taken by fire brigade, fire sprinkler, towing and guarding
services after the accident.
None physical risk control mechanism refers to risk control
mechanisms include staff recruitment, employee training,
safety system devised.
Development of insurance
 Insurance in its older form existed in Roman for their burial society.
People contributed to fund and members pay to the common pool to
cover costs of burial cost. Modern insurance in the 17th century is mainly
attributed to Lloyds of London. The earliest modern insurance is probably
marine insurance where marine was exercised by sharing losses among
seafarers as early as 9th century. Lloyds is the most known market for the
start of marine ships and cargo which were underwritten by merchants
who were willing to carry part of the risk of voyage. Edward Lloyds was
the owner of the Lloyds coffee house which was situated in the London in
1688.
 Aviation business is the most recent as regular civil aviation started in
1919. Aviation insurance started in 1923 by the British Aviation Insurance
Group. Loss or damage property can be traced to the insurance which is
also the case in Ethiopia. In London fire insurance started in 1667. The
period of renaissance and the industrial revolution led to further growth in
the economy and the growth of towns which in turn increased risk of fire.
Fire brigades were initially organized by insurance companies. The growth
of insurance in engineering sector can also be attributed to the growth of
technology which has always been under development.
MARKETING INSURANCE PRODUCT
How insurance policy is marketed
1. For insurance to exist the first thing is a risk to be insured.
2. The proposer will offer the need for insurance.
3. The insurer, having assessed the risk either by proposal
form filled by the proposer or by way of both proposal form
and survey risk assessment mechanism, determines
whether to accept or reject the risk. If the insurer decides
to accept then it determines the terms and conditions of
the risk acceptance.
4. Once it determines the terms and conditions of the
acceptance then the underwriter determines the premium
that is equitable to the risk brought to the common pool.
5. Issue the policy by stamping and signing on the policy.
GENERAL STRUCTURE OF INSURANCE
MARKET
 Buyers
₋ The public,
₋ Commercial enterprise, and
₋ Government (public authorities).
 Intermediaries
₋ Insurance agents,
₋ Brokers(ordinary and Lloyd’s re insurance brokers)
₋ Consultants and home service insurance agents
 Sellers
 Lloyds insurance companies or syndicates,
 Ordinary life and general insurance companies, mutual
indemnity associations,
 Captive insurance companies,
 The state
GENERAL STRUCTURE OF INSURANCE
MARKET
Sellers
Friendly societies, and
Industrial life assurance
Micro insurance
Reinsurance companies
Reinsurance companies
Consultants and home service insurance
agents
Underwriting
 Definition of underwriting
 The legal environment of
underwriting
 The regulatory environment of underwriting
 Factors influencing underwriting
• Corporate strategy
• Underwriting strategy
• Competition for capital, market share and profit
• The underwriting cycle
• Major events and cycle
• Legal changes
 Marketing strategy
Underwriting
Underwriting policy and practice
Physical and moral hazard
Risk classification and categorization
Underwriting and risk improvement criteria
Policy cover, terms, conditions, and
restrictions
Risk exposure and control
Liaison between underwriting and claims
Counter fraud initiatives
Rating
THE LEGAL ENVIRONMENT OF
UNDERWRITING
(proclamation no.746/2012 enacted August
22/2012)
 At times of failure identified, the NBE can intervene when
the examination requires close follow up
 The NBE can suspense or revoke license of the insurance
company
 At times, it can take up receivership and liquidation
 Other laws governing insurance services
• The 1960 commercial code of Ethiopia
• Proclamation of consumer protection
• The 1960 civil law
• Other pertinent laws as formal necessary such vehicle insurance
against third party
• No insurance business can be under unless one is authorized to
underwrite (article 1 of proclamation)
• The insurer has to be licensed by NBE
• Insurance companies are established as share company except the
Gov’t insurance company, EIC
THE LEGAL ENVIRONMENT OF
UNDERWRITING
(proclamation no.746/2012 enacted August
22/2012)
 Any insurance company has to have
• The minimum capital required by law as set by the
directives of NBE
• Reinsurance scheme, reserve required to operate at
any branch, assign, its chief executive and board of
management subject to approval of NBE.
 Insurance and others financial services are highly regulated
• It has to be audited actuarial annually valuation
• Report its financial position every quarter
• Publicize its audited report
UNDERWRITING INSURANCE PRODUCT
 In its initial origin, the term underwriting refers to
writing under the policy contract. Underwriting is
assessment of risk so that the insurer decides
whether to accept the risk or not, if accepted
determining the rates, terms and conditions or
otherwise reject the offer.
 Before making underwriting, one has to classify and
categorize risks. We can classify risks first by
account and then by class of business. For example,
we classify based on accounts such as motor,
personal and property insurance. Motor accounts
can be further classified by private, commercial,
fleet, and motor trade in our country. Personal
insurances are classified in to personal accident,
household, pet, etc
Underwriting
 In the process of underwriting, different classification
are used by different insurers. For example, an insurer
can classify motor by type of vehicle, use of vehicles or
age of driver.
 Categorization is made on comparable groups for ease
of analysis an rating. For example, there are different
car rating groups such as damaged and parts costs,
repair times, new car values, body shells, performance,
car security, among others.

 In burglary, we can use risk categorization by allocating

post codes to different rating areas based on claims
experience and crime statistics. For example, marketo,
bole, and cmc could be classified in different ways.
Underwriting
 Once risks are classified and categorized, insurers will set
how and what level the risk falls based on their
underwriting criteria which is derived from the corporate
strategy. These criteria are derived from underwriting
strategy and implement the underwriting policy.
 A company may take only highly riskier business or
personal general insurances such as motor, householders
comprehensives, etc
 Insurance underwrite businesses depend upon their distinct
segment of business.
 In property insurance for example,
 some underwriter prefer only highly protected risks only(risks with
good standards of protection) or
 Restricts trades written (acceptance of risks with its preferred trade
classification) or accepting risks within certain geographical areas only.
Underwriting
 In motor insurance, an insurer may prefer to underwrite covers
for young drivers only, fleets only, commercial vehicles only or
limit percentage of certain category of vehicles
Risk Improvement Criteria
 Risk improvement criteria is derived from the underwriting
criteria. In order to suggest what risk improvement criteria is
needed, we need to assess the risks according risk criteria and
acceptable risk improvement criteria.
 Risk improvement criteria is derived from the scientific findings
over the years taken from underwriting experiences and
scientific findings on risk management science.
 Recall the definition of risk, peril and hazard. Peril is the prime
cause of a loss where as hazard is the factor that increase or
decreases the risk once the peril starts to operate.
Assessment of physical and moral
hazard
 Physical hazard is the tangible aspect of the risk that is
likely to influence the occurrence and or the severity of
loss. Physical hazards can be identified any features
which
• Is likely to cause an insured event to take place
• May contribute to the increase in size of the
consequent claim
• May hinder attempts to stop the damage or contain it
• May delay detection of the event
The two main categories of physical hazard
include
• Those within the proposer’s/ insured's control
• Those outside the proposer’s/ client’s control
Physical and moral hazard
 Moral hazard is concerned with the attitudes and
conduct of people. It includes carelessness,
dishonesty of insured, insured who considers
insurance as a kind of investment and unjustifiable
delays implementing risk improvement, reluctance
to questions posed by risk assessors or
underwriters.
 Risk as the center of human life that man can not
live without it. It is, therefore, important that man
has to manage it in order to survive. Therefore, it is
critical
Risk control surveys
 Risks for control surveys reports are required
for almost all large cases in property, business
interuption, liability and motor fleet insurance.
 Typical fire insurance surveys have the
following information for the underwriter
 Description of the risk: the premises and activities,
construction and condition, stock, hazardous goods
and fire protection system.
 Surveyors Assessment of the risk: estimated
maximum loss, reinstatement cost, quality of
management, security, and adequacy of sum insured
 Risk control: requirements, recommendations
INSURANCE CONTRACT FORMATION
PROPOSAL FORMS:
 The proposal form is the most common mechanism
used by the insurer to seek answers to basic and
necessary facts from the proposer. It is prepared by
insurers to record information, which is necessary
to underwrite and assess the nature of the risk
being proposed. Its length and form vary depending
upon the information required by insurer.
 Proposal forms should be simple and easy to
complete. The proposal forms have general
questions, questions asked in almost all cases of
insurance and specific questions which are risk
specific to certain class.
INSURANCE POLICY
 Proposal forms is the basis of the contract. The
proposal form is used for most classes of
business. The exception is in marine insurance
(a slip used) and fire insurance (the risk details
is much that all details cannot be
accommodated by proposal form and hence we
use survey reports and other means of
assessing risk).
 Proposal forms should be simple and easy to
complete. The proposal forms have general
questions, questions asked in almost all cases
of insurance and specific questions which are
risk specific to certain class.
INSURANCE POLICY
PROPOSAL FORMS:
General questions in proposal forms include:
 The name and address of the proposer (business)
• For identification – to identify the physical and moral hazard, indicative for
nature of trade.
• For identifying geographical address
 Occupation and age-may show whether there is abnormal hazard.
 Details of past claims and in some cases past and present
insured.
 The period of time over which insurance is required.
 The basis upon which premium is to be calculated. e.g. types and
cost of stock in fire insurance.
 Proposal forms should have declaration and warning that affirms
information provided in the questionnaire are true to the best of
the proposers belief and knowledge.
 INSURANCE POLICY

Policy: A policy is an evidence of the contract of insurance.

The formation of insurance contract follows the process of
offer and acceptance. The main policy the following
subsections
a) Heading – the heading includes the name of the insurer,
addresses of the company and sometimes the company’s
logo
b) Preamble/Recital clause- the preamble contains three
main parts;
i. The proposal as the basis of the contract and incorporated in it.
ii. Mentions that premium has been paid or agreed to be paid
iii. That the insurer will provide cover stated in the policy
c) Operative clause/Insuring clause- this section of the
policy is the parts where the actual cover provided is
outlined. It begins with the word, ‘‘The Company will….’’
by stating the covers as outline.
 INSURANCE POLICY
d) Definitions: defines key terms used in the insurance
contract
e) Limit of indemnity/sum insured: usually included in
the policy to express the limit of indemnity in any one
loss, each and every claim or in aggregate.
f) Deductible/Excess: is the first amount of loss to be
covered by the insured. Such provisions are not
allowed in third party insurance such as compulsory
insurances.
g) Interpretations: provisions on the interpretations are
included in this section.
h) Governing laws and disputes: this provision tries to
cite the laws applicable in case of dispute between
the parties to the contract.
 INSURANCE POLICY
i) Extension: extension widen cover to include areas of risk or
perils that do not fall within the standard cover. How much
additional cover to be given is left to each insurer or its
willingness to add for additional premium. Market demand
and competition often dictate what is included in the
insurers policies. Consequently, the standard and the
extensions vary depending upon the market. The extensions
or limits carry their own limits and deductible. This is to be
given due to consideration at the time of claim.
j) Exclusion: the insuring clause defines cover whereas the
exclusion has to be read in conjunction with the exclusions
to the policy. Exclusions have effect of narrowing cover and
should be listed in the policy to avoid any conflict in case of
policy interpretation. If the cause of loss falls within the
exclusion, the insured is not obliged to provide indemnity.
 INSURANCE POLICY
The common exclusions are the following
 More specific cover:
 Other insurance
 Losses which are not fortuitous
 Deliberate act of the insured
 dishonesty and fraud
 Certain perils which are fundamental in nature such
as social risks as war, riot, terrorist attack, radio-
active contamination, nuclear risk, sonic booms,
pollution un employment and inflation. This category
also includes natural risks such as typhoons, hail,
flood, earthquake, volcanic eruption, etc.
 Some policies expresses amount of excess as an
exclusion.
 INSURANCE POLICY
k) Schedule: policies are usually standardized and
it is personalized to insured person by way of
schedule. The facts that are stated in the policy
to personalize the policy include, among others;
 The insured’s name and address
 The nature of the business
 Premiums
 Policy number and reference made to any special
exclusions, conditions and aspects of cover
 The insured property and sum insured
 The period of insurance
 Limit of liability
 Deductible/Excess
 The territorial limit
 Endorsement
 INSURANCE POLICY
l) Signature: this refers to the signature of the company’s
official who has signed to show that contract has been
concluded.
m) Conditions: at the end of policy is a list of conditions.
Conditions could be implied and expressed.
Implied conditions do not appear on the policy but are
nevertheless important. In other words, implied policies
are found as legal provisions. Such conditions are
implied by law to apply to all classes of insurance.
Major implied conditions include;
1. The fact that the subject matter of insurance is actually
existence and is able to be identified.
2. That the insured has insurable interest.
3. That there has been utmost good faith.
INSURANCE CONDITIONS
Express conditions are those, which are expressly written in the
policy. Express policies may be found as legal provision. The
clauses include in express conditions are:
1) A conditions stating that the insured will comply with all the
terms of the policy.
2) The requirement that the insured notify the insurer of any
change in the risk(notification clause)
3) What procedures should be followed in the event of claim?
This will vary from cover to cover but will include reference
to the time as then which the claim will be notified
(Notification clause). This is five days in the Ethiopian
commercial code.
4) The effect of fraud.
5) Reference to the fact that the insured is to take all reasonable care
to minimize the risk of loss/damage or of incurring liability. (in
other words, existence of policy of insurance is not being regarded
as a mandate for carelessness).
 EXPRESS POLICY CONDITIONS
6) The arbitration condition relates to the amount to be
paid under the claim and not liability for the claim and
not liability for the claim itself (Arbitration clause ). Here
there is a difference in amount regarding the claim.
Most insurers who didn’t admit the claim liability will
not accept arbitration.
7) Condition will outline what will happen if there are other
policies in force covering the same (contribution clause).
8) There may be a condition allowing the insurer and the
insured to cancel the policy and saying how it is to be done
(cancellation clause).
9) Many premiums are based on an estimated figure and
adjusted once the actual figure is known (Declaration clause).
These are common in stock (fire insurance), workmen’s
compensation (employer’s liability), and money.
THE BASIC OF CLAIMS HANDLING

The principle of claims handling requires us

that an insurer must
• Handle claims promptly and fairly
• Provide reasonable guidance to help
policyholders make a claim and appropriate
information on its progress;
• Not unreasonably reject a claim (including
terminating or avoiding a policy); and
• Settle claims promptly once settlement terms
are agreed
 CLAIMS HANDLING
Underwriting or other contract information
can serve to assist the verification
By comparing the claims information it is
possible to verify, some of the following
data.
• The identity of the insured
• The policy period
• The policy conditions have been complied with
• That the cause of the loss/peril is covered
• Answer questions as to whether there is a voidance
issue or breach of condition or warranty.
 CLAIMS PRACTICE
Information needed to verify the claim
 Information for claims is forwarded by the insured by
telephone, fax, email, letter, claims notification form or
any other relevant media however, the need to fill
claims form is very important prerequisite as it affirms
the nature of the accident.
 Typical claim form will ask the following questions in
general
• The name of the insured
• The policy number or reference
• The date, time, and place of the accident giving rise to the
claims
• The description of what took place
• The description of the damage suffered
• The signature of the insured
• The date in which the insured notifies
 CLAIMS PRACTICE
 Once the claims forms is filled, the insurer
makes preliminary assessment which may lead
to
• The straight forward rejection for lack of cover
• An acceptance of liability, subject to confirmation of
amount (including application of policy limit,
deductibles, excess, and the like)
• An indication of further professional advise that may be
needed from your lawyer, loss assessor or loss adjustor
• The need for third party recovery and any important
evidences to be collected on time
• An indication of information required from other third
parties such as police or fire brigade reports, further
investigation needed to complete the process of claims
handling.
CLAIMS HANDLING
 The requirement of further information may depending on
the nature of the insurance. In burglary insurance, police
report is required as a precaution against potential fraud.
 In case of third party claims or claims caused by third party,
we need to know the identity of third party, as party of
further investigation, negotiations as to liability or
contribution for the pursuit of any subrogation or recovery.
 In case of personal accident or travel insurance, we need
some medical verification of the cause and duration of
illness or injury.
 For what ever information request the rationale for request
is not to embarrass the insured, it is rather to get
evidentiary documents for further processing, determining
the real cause of loss, the person to be compensated, to
determine whether the insurer is legally liable to pay as we
if it has to pay the quantum/amount of money to be paid.
Insurable Interest

 Insurable interest is the legal right to insure

arising out of a financial relationship
recognized at law, between the insured and the
subject matter of insurance.
 Key elements
 A subject matter of insurance
 The policy holder must have an economic or financial
interest on the subject matter
 The interest must be current interest
 The interest must be legal
WHAT IS CONTRACT

 A contract is an agreement whereby two or

more persons as between themselves create,
vary or extinguish obligation of a proprietary
nature.
 Elements of contract
 Consent
 Object
 Form
 Capacity
 Consideration
 CONSENT

 There should be expression of interest

 There is process of offer and acceptance
 Offer and acceptance can be made orally, by sign or
conduct
e.g. public reward, bus entry, ECX market conduct
 Declaration of intention is not an offer and requirement
of the offerer when needed
 Defective acceptance/counter offers does not amounts
to rejection
 Changing terms or counter offers amounts to rejection
 Silence does not amount to acceptance unless there is
pre-existing business relation e.g. renewal notice,
invoices
CONSENT AS EXPRESSED BY OFFER AND
ACCEPTANCE

 Offer can remain open as per set time frame or

reasonable time frame, if not expressed clearly
 Contract can be made between absent parties
 Ethiopia follows dispatch method with regard to time
limit-when acceptance was sent-article 1692 of the
civil code of Ethiopia(1960)
 Contract by telephone shall be deemed to be made at
a place where and time when acceptance was sent
 How about if offer is withdrawn before acceptance was
received? Article 1693
 Contract is formed when parties agree on all terms
 Defects in consent can be as a result of mistake,
duress, false statements, fraud and the like.
CONSENT AS EXPRESSED BY OFFER AND
ACCEPTANCE

 Offer accepted unconditionally is to be accepted

 Prospects or any advertisement is deemed to be invitation
to treat.
 Offer is made by proposer by filling proposed form
 Acceptance must be generally communicated
 In general silence does not amount to acceptance. If there is
preexisting business relation, silence is taken as acceptance.
 Agreement in insurance contract are expected to include
nature of risk, subject matter of insurance, duration of
contract and amount of premium
 Renewal notice is considered as invitation to treat. Each
renewal is considered as independent contract. There fore,
fresh offer and acceptance is required at each contract
renewal
OBJECTS OF CONTRACT

 Objects shall be freely determined by parties

 The obligation could be to give, to do or not to do
 Defined clearly
 Possible
 Lawful and moral
 Motives are not taken into account in making of
contracts
FORMS OF CONTRACT
 Generally there is no special form to contracts unless stated by
law or the parties agree to its form in the formation of contract.
 Forms can be in writing, orally or by conduct
 Variations or cancellation of contracts should follow the same
form like that of the original contract
 Contracts in written form has to have signature, attested by two
witness and supported by special document
 Witnesses are required by law or agreement shall be of age of
majority, not judicially interdicted.
 Once contacts are formed they are binding on the parties to the
contract (civil code 1960 article 1761
 The terms of the contract shall be determined by parties.
 Insurance contracts must be made in writing
 Insurance contracts are evidenced by a document called
insurance policy
 CAPACITY OF PERSONS
 Persons could be physical or legal
 A person has legal personality as of birth, subject to certain
exception (physical) or it is getting legal personality by its
establishment (legal person)
 A person can be incapacitated because of minority age, legal
interdiction, drunken/intoxication, insanity/infirmity, lack of license to
conduct insurance among others
 Insurance contracts requires capacity of the person who processes
the contract
 Like any other contract requirement, drunken persons, mental
patients, judicially interdicted persons, unlicensed insurers,
insane/persons cannot enter into insurance contracts.
 Capacity is created by the law even though all natural persons are
assumed to have capacity by nature
 Insurance companies need to be licensed by the National Bank of
Ethiopia if they are supposed to make insurance contract with any
person.
 CONSIDERATION

 Consideration is amount of money to enforce the contract.

 The insurance proclamation currently in force requires the
insured to pay the premium in advance which otherwise
make the policy void ab initio initially. Exceptions include
federal and regional governments
 Proclamation No 746/2012 requires premium be paid in
advance with exception of federal and regional
governments as well those allowed by the regulatory,
which otherwise makes the policy void ab intio (from the
beginning).
 Even if payment is not effected, there should be
agreement by parties to the contract as to payment of
premium
 CONSIDERATION
 According to proclamation no. 746/2012 premium
payment is a precedent to the contract except federal and
regional governments who are allowed for credit facility.
 Consideration is a requirement for insurance contract
 The term consideration refers to some right, interest,
profit or benefit accruing to one party, or some
forbearance, detriment, loss or responsibility given,
suffered or undertaken by the other.
 The general rules of consideration are
 Consideration need not be adequate
 Consideration must move from the promise
 Consideration must not be something which the promiser is already
bound to do
 OBJECT OF THE CONTRACT

 Like any other contract, insurance contract

requires that object of the contract must be clear,
possible, lawful and moral
 Even though two parties have reached
agreement, there may be no contract if they did
not intend their agreement to be legally binding.
OBLIGATION OF PARTIES IN THE INSURANCE CONTRACT

 Parties to the insurance contract

 The insured
 The insurer
Offer and acceptance made
 Offer is made by the insured by filling the proposal form
 Acceptance is made by the insurer by accepting the
premium
 Renewal notice is not an offer, it is rather an invitation to contract
 The proposal form is part of the insurance contract

 Duty of the insurer

 Guarantee to cover against the risks specified in the
policy
 Risks covered are unforeseen-not intentional
 Guarantee against losses or damages due to the fault
of the persons the insured/beneficiary is responsible.
OBLIGATION OF PARTIES IN THE INSURANCE
CONTRACT

 Legal obligation of the insured

 Pay the agreed premium article 666 com code of 1960
and insurance proclamation No 746/2012
 Make true statement in the formation and in the
subsequent period of insurance article 667 com code of
1960
 Inform any change in risk article 668 com code of 1960
 Notify the materialization of risks/loss within not exceeding
five days, unless there is force measure – article 670 com
code of 1960 and this goes up to 10 days in case of third
party compulsory motor insurance
 Perform as per contract provision-subject to the
relevant civil code and commercial code provisions of
Ethiopia.
 PRINCIPLE OF INSURANCE-INSURABLE INTEREST

How do you determine insurability?

if one has to insure a property, liability, or life, then he must
have an insurable interest. Insurable interest is the legal right
to insure arising out of financial relationship recognized at law,
between the insured and the subject matter of insurance. The
key elements in insurable interest are
 The subject matter of insurance-economic/financial interest, current
interest, legal interest
 The policy holder must have an economic or financial interest in the
subject matter of insurance
 The interest must be current interest, not merely expectancy
 The interest must be legal interest

What are the interests insured?

Generally the interests insured are property, liability, and life.
The insurer has interest to reinsure what it has insured and
hence it has legal interest for what it has insured.
 INSURABLE INTEREST

 Effect of policy without interest is generally void

 Creation of insurable
 Every person is presumed to have unlimited interest on his
own life or property.
 Contracts between a tenant and a land lord may require
the tenant responsible for maintenance or repair
 Part/Joint owners executors and trustees land lord and
tenant bailers finders and people in possession mortgages
and mortgage partnerships etc create insurable interest
 Transporter, employer-employee, creditor debtor have
insurable interest
EXISTENCE OF INSURABLE INTEREST
In life insurance
 Own life
 Spouse/in common law
 business partners
 Employer and employee
In property insurance
 Owners
 Part or joint owners
 Guardian
 Mortgages and mortgagors
 Executers and trustees
 Tenant
 Bailees
Liabilities
 Any person who could be legally liable on any venture at civil law
and it is legal interest we insure
 INSURABLE INTEREST
 The law requires insurable interest or the purpose
behind this principle is
• To reduce moral hazard
• To discourage wagering
 Insurable Interest: may be needed at inception, during
the period of insurance or the time of claim depending
up on the nature of the class of insurance
• Marine insurance-at the time of loss
• Life policies-at the time of inception
• Policies on goods motor, goods in transit, etc requires insurable
interest at inception as well as the time of loss
What is legal interest for insurer?
The insurer has interest to reinsure what it has
insured and hence it has legal interest for what it has
insured
 UTMOST GOOD FAITH
 The duty of utmost good faith (Uberrima fides) is
central to buying and selling of insurance.
Therefore, insurance contracts are contracts of
utmost good faith
 The duty of utmost good faith imposes two duties
on the parties to the contract
 A duty to represent any material fact relating to insurance
 A duty to disclose all material facts i.e. duty not to conceal
anything is relevant
 UTMOST GOOD FAITH

To affect validity of agreement the false statement

must
 Be one of fact
 Made by the party to the contract
 Be material fact (something which influence a
reasonable person in deciding whether to enter in to
agreement
 Induce the contract (the party relied upon in deciding
to inter into the contract)
 Cause some loss/disadvantage to the person who rely
upon
 Misrepresentation could be fraudulent or innocent
 The duty of disclosure is a positive duty, to be provided
whether asked or not
 UTMOST GOOD FAITH
 Misrepresentation example
 Proposer of burglary insurance says that his premises are
protected by burglary alarm
 Proposer of a car saying that the car has not been modified
 Proposer of life insurance misrepresenting his age-35 instead of
40
 Providing full and accurate information whether asked
or not
 It is a reciprocal duty-duty for both the insured and
insurer
 Material facts which influence prudent underwriter to
accept or reject as well put different conditions while
underwriting
 Every circumstance is material which would be
influence the judgment of prudent insurer in fixing the
premium or determining whether he will take the risk
 UTMOST GOOD FAITH

Material which must be disclosed

 Physical hazard
 Adequate description of the subject matter of insurance
 Details of any unusual features
 Moral hazard
 Identity of the insured
 Criminal or any other previous claim history
 Any adverse insurance history

Facts that need not be disclosed

 Matters of law
 Factors that lessen the risk
 Facts known
 Information waived by insurers
 Factors covered by the terms of the policy
 Facts which the proposer does not know
 Convicts that are spent
 UTMOST GOOD FAITH
Duration of disclosure
 Any time from the formation of the contract up to
claim
 Duty of disclosure revives at the time of renewal
 No fresh duty of disclosure in long term insurance
 The duty of the disclosure is a continuing duty
 Changes in the contract
 Increase in risks
 Good faith in claims process
 The insurer could retain even premiums paid in
case of concealment or fraudulent
misrepresentation
UTMOST GOOD FAITH
Misrepresentation is
 On the fact
 Be made by the party to the contract
 Be material
 Induce the contract
 Cause some loss or disadvantage to the person who relied up on it
 Material fact is every circumstance is material which would
influence the judgment of a prudent insurer in fixing the
premium or determining whether he will take the risk
 Utmost good faith is a reciprocal duty
 There are matters which need to be disclosed or not
 Matters to be disclosed include an adequate description of
the subject matter of insurance
 Detail of any unusual features of the subject matter of
insurance
 UTMOST GOOD FAITH
 The duration of duty from inception of contract up to
the materialization of claim or in other words until
contract is performed.
 Examples include one at the time of negotiation,
during the currency of the policy such as increase in
risk and those to be exercised at the time of claims
 What the position of insurance principle of utmost
good faith in Ethiopian commercial code?
 What is the effect of breach of utmost good faith in
the commercial code and the criminal code of
Ethiopia?
 What is its effect if the contract is formed through an
agent?
• Discussion on the Ethiopian law of agency
 INDEMNITY

Indemnity is protection or security against

damage or loss where the insured is placed
to his previous financial position
Measure of indemnity
• Measure of indemnity in property is
determined not by its cost, but by its
value at the time of loss and at the place
of loss
• Incase of building it is the cost of repair
or reconstruction at the time of loss with
deduction in betterment
INSURABLE INTEREST & UTMOST GOOD
FAITH……….
Utmost good faith and good faith
Good faith is common in most business transactions.
Utmost good faith is common in insurance contract
as the fiduciary relation goes to great length.
The doctrine of utmost good faith imposes two
duties on parties to the contract. They are
Duty not to misrepresent any matter relation to
the insurance i.e. duty to tell the truth
Duty to disclose all material facts relating to the
contract i.e. duty not to conceal anything which
is relevant
fd
 INDEMNITY
Valuation for principle of indemnity
 Less than a full indemnity
 The sum insured
 Limit of liablity
 Other policy limits
 Under insurance or over insurance
 Excess/deductible
 Franchise

Extension to principle of indemnity

 Cover on reinstatement bases
 New for old cover
 Agreed value cover
Methods of providing indemnity
 Cash – in majority
 Replacement e.g.stock
 Repair e.g.vehicle
 Reinstatement e.g. rebuilding property
PRINCIPLES OF INDEMNITY
 In machinery and equipment the indemnity is valued by the cost
of repair less an allowance for wear and tear or the cost of
replacement less wear and tear if repair is not possible
 In manufacturers stock the cost includes the cost of raw materials,
work in progress and finished goods . In case of raw materials it is
the cost of replacement including cost of delivering to the site.
 In case of work in progress and finished goods it include the cost
of labor, cost of raw material, other costs including machinery and
other over head cost.
 In farming stock such as livestock and other produces the local
market price is the normal basis of indemnity
 In liability insurance, it is the legal liability that is taken as normal
basis of indemnity.
 Marine is either insured on valued or non valued basis which ever
the case the normal compensation is the sum insured or market
value which ever is lower.
PROXIMATE CAUSE
 What is the law of causation? Whose responsibility is the burden of
proof?
 Insurance claim should be notified within the time limit set in the
law and cause of loss has to be proved by the insured. The loss
must be fortuitous as far as the insured is concerned.
 The issue of causation has many issues-the perils for the loss is
either insured, excluded and uninsured.
What is proximate cause?
 Proximate cause is the active, immediate, real, dominant, and
direct cause
 Proximate cause could be in chain of events, concurrent or
independent
 Causation in marine insurance is stated as follows unless and
otherwise provides, the insurer is liable for any loss proximately
caused by a peril insured against, but…he is not liable for any loss
which is not proximately caused by a peril insured against.
 PROXIMATE CAUSE

 Specified and named perils are covered as stated in the

policy e.g. fire as the result of lightening
 Excluded perils are not covered e.g. loss by theft after fire
 Proximate cause is not remote cause for the accident
 It is the main cause of the accident
 In case of chain of events, dependent and independent
causes may happen at a time. At times insured and
uninsured peril may happen at a time concurrent causes
may be both insured and uninsured-we need to decide
which is the cause-insured peril combined with uninsured
peril or insured peril combined with excepted peril.
 In case of concurrent perils, where independent perils
combined with, each would have caused some loss on its
own-insurer pays for the loss attribute to the insured peril
only.
 PROXIMATE CAUSE

 Independent perils combined-neither would

have caused loss on its own then
 Insured perils plus excluded peril: no liability for the loss
 Insured perils plus uninsured peril: liability for the whole
loss is covered by the insurer.
 Discuss on the principle of proximate cause on
an issue regarding an accident that was caused
by flood after the vehicle was left in a river
bank due to mechanical failure
 SUBROGATION & CONTRIBUTION

 Subrogation prevents guilty party from being left off the

hook and ensured that they do not escape their financial
responsibilities simply because the other party has been
careful enough to arrange insurance.
 The doctrine prevents the underwriters or insurers in order to
prevent the assured from recovering more than indemnity.
 The insurer can stand in the foot of the insured to recover
once it pays the claim.
 The insurer can exercise this right once it indemnifies the
insured.
 The insurer can bring action in the name of the insured and it
should be brought once.
 The insurer can not recover more than what it has paid.
SUBROGATION & CONTRIBUTION
 The factors for subrogation to arise
In tort
Contract
Statute
Factors for denial of subrogation rights
Market agreement
Contractual waiver of subrogation
Coinsurance cases
Public policy
The insured has an obligation to take
reasonable care not to contribute to the loss of
subrogation right of insurers
 Double insurance or contribution

This is another corollary to indemnity principle

The purpose is not to indemnify the insured
for being issued from two insurers
It does not apply to life and accident insurance
Contribution arises in the following ways in
case of common law
Two or more policies of insurance
A common subject matter
A common peril
A common interest
Each policy liable for the loss