PROPOSALS FOR REFORM OF THE INSURANCE ACT 2003

PROPOSALS FOR REFORM OF THE INSURANCE ACT 2003

1. Consolidated Insurance Bills.
There have been two previous Insurance Bills since 2003 namely, the Insurance (Consolidated) Bill 2013 and the Insurance (Consolidated) Bill 2016 and both Bills contained comprehensive legislation which consolidated the NAICOM Act 1997, the Insurance Act 2003, the Marine Insurance Act 1961 and the Motor Vehicles (Third Party) Insurance Act 1950. The Insurance Bill 2020 has largely followed the same pattern and produced consolidated insurance legislation. However, the Insurance Bill 2020 (unlike the 2013 and 2016 Bills) did not incorporate the provisions of the NAICOM Act. I agree with the position of the new 2020 Bill and the statute governing the regulatory body should not be in the same legislation with the provisions governing the industry players. For example, in the banking industry the CBN Act is separate from BOFIA.

2. Legality of fines imposed by NAICOM
Regardless of the fact that the NAICOM Act has not been consolidated under the Insurance Bill 2020 we must still examine one critical aspect of that legislation. One major lacuna or flaw in the NAICOM Act is the absence of the express power to impose civil penalties and fines. The power to prescribe and impose fines must be expressly granted by the enabling statute of the regulator. See for example, section 64(1) of BOFIA which grants the CBN power to impose fines. Furthermore, a regulatory agency with quasi-judicial powers must observe fair hearing before imposing fines. Therefore, NAICOM, being an administrative regulatory body, cannot act ultra vires its statutory powers to impose fines and does not have the capacity to act as a judicial body to impose fines without adherence to the principles of fair hearing. Therefore, I propose the introduction of provisions in the NAICOM Act granting the regulator the express power to impose fines and directing the regulator to observe fair hearing before imposing fines.

3. Classification of business
There are two broad categories of insurance business; life and non-life and under non-life business there are eight classes. Marine insurance is the only class of business that has a separate legislation but the Insurance Bills have sought to consolidate the Marine Insurance Act under the same legislation. The modern classes of insurance such as engineering, oil & gas and aviation do not have separate legislation. In many other jurisdictions insurance is governed by the same general legislation and there is no separate legislation or separate sections in the insurance legislation for different classes of insurance business except in the case of life insurance. It must be pointed out that while the underwriting of these classes (marine, engineering, oil & gas and aviation etc) may require special knowledge they are all essentially material damage and liability insurance policies and subject to the same general statutory provisions and the common law on insurance contracts as other insurance policies and do not require separate legislation.

4. Dispute resolution
Some insurance policies contain an arbitration clause for the settlement of disputes and insurance litigation will be stalled by preliminary objection to stay of proceedings pending arbitration. However, arbitration is an expensive method of alternative dispute resolution. Another method of ADR is mediation which is simpler and cheaper. Section 43 of the Insurance Contracts Act 1984 of Australia is instructive and states that, (1) Where a provision included in a contract of insurance has the effect of: (a) requiring, authorizing or otherwise providing for differences or disputes in connection with the contract to be referred to arbitration; or (b) limiting the rights otherwise conferred by the contract on the insured by reference to an agreement to submit a difference or dispute to arbitration that provision is void.

I therefore propose a new section in the Insurance Bill as follows:
“Notwithstanding the provisions of any arbitration clause in an insurance policy the parties to a claims dispute or other dispute arising from the insurance contract or policy may commence mediation or litigation without recourse to arbitration.”

5. Joinder of insurers
5.1 The now repealed provisions of the Insurance (Special Provisions) Act 1988 and later section 68 of the Insurance Act 1997 expressly gave third parties a direct right against the insurer. Those provisions were not re-enacted in the Insurance Act 2003 and have therefore been impliedly repealed. There no longer exists any legal right for a third party claimant to join an insurer as co-defendant in an action against an insured. However and despite this implied repeal the matter of joinder of insurers is still the subject of legal argument and a frequently contentious matter before the courts. Insurers are still dragged to court on claims by third parties against the insured and there is a galaxy of judicial authorities on this matter caused by the uncertainty of the law.

5.2 A third party claimant against the insured should not be confused with a third party beneficiary who has a right of action against an insurer. Section 189(1) of the 2020 Bill states that, a third party beneficiary under a contract of general insurance has a right to recover from the insurer the amount of any loss suffered by the third party beneficiary within the limit insured in the contract even though the third party beneficiary is not a party to the contract.

I propose a new section in the Insurance Bill as follows:
“For the avoidance of doubt and subject to the provisions of the Act a third party claimant shall not have a direct right of action against an insurer unless and until judgment has first been obtained against the insured.”

6. Jurisdiction for civil matters
This is another matter that still generates unnecessary preliminary objections and prolongs litigation in insurance cases. There is no provision on jurisdiction for civil matters and insurance contracts in the Insurance Bill. Section 207 of the 2020 Bill grants the Federal High Court jurisdiction for prosecution of criminal offences under the Insurance Bill. This has led to the erroneous conclusion that the FHC also has jurisdiction to hear civil litigation of insurance matters. Many lawyers therefore hold the erroneous view that insurance matters should be commenced at the Federal High Court whereas several judicial decisions of the Supreme Court have held and it is settled law that insurance matters are contracts between the insured and the insurer and the proper venue is the High Court of a State.

I propose a new section in the Insurance Bill as follows:
“The High Court of a State shall have civil jurisdiction over all matters involving disputes between the insured and insurer concerning the terms of an insurance contract, policy or claims arising from insurance contracts.”

7. Right of insurers to subrogation
There are some important areas of insurance law and practice which have been settled by common law and judicial authorities but were not codified by the Insurance Act 2003 and not included in the Insurance Bill 2020 such as the principles of subrogation and contribution. The absence of statutory provisions is why subrogation has generated a lot of confusion among lawyers and Judges. In Midland Galvanising v Comet Shipping (2014), the trial court erred on the subrogation rights of insurers and held that if there was subrogation of the claim then the insurer should have instituted the action in its own name but the Court of Appeal held that the trial judge was in error.

I propose that new provisions on subrogation should be included in the Insurance Bill as follows:
“Where the insurer pays for a total loss, either of the whole, or in part, of the subject matter insured, he shall thereupon become entitled to take over all the interest of the insured in whatever may remain of the subject matter so paid for, and shall thereby be subrogated to all the rights and remedies of the insured in and in respect of that subject matter as from the time of the accident causing the loss.”

8. Insurers right to contribution
8.1 Like subrogation, contribution is one of the cardinal principles of insurance without any statutory provision or codification of the principle. The usual policy wording in use by Nigerian insurers is the rateable proportion clause which provides that an insurer shall not be liable to pay or contribute more than its rateable proportion of any claim. There are other types of double insurance clauses (e.g excess or escape clause) and the Insurance Bill 2020 should outlaw the use of any other wording other than the rateable proportion clause. This will avoid situations where the difference in clauses will lead to one insurer bearing the loss in full while the other insurer escapes liability.

8.2 In order to avoid a situation where there is double insurance and one of the insurance policies contains an “other insurance” clause that excludes or limits an insurer’s liability, section 45 of the Insurance Contracts Act 1984 of Australia provides that where there is double insurance any clause which excludes or limits an insurer’s liability will be void.

I propose that new provisions on contribution should be included in the Insurance Bill as follows:
“(1) Where the assured is over insured by double insurance, each insurer shall be bound, as between himself and the other insurers, to contribute rateably to the loss in proportion to the amount for which he is liable under his contract. (2) Where any insurer pays more than his proportion of the loss, he shall be entitled to maintain an action for contribution against the other insurers, and be entitled to the like remedies as a surety who has paid more than his proportion of the debt. (3) Where there is double insurance and one of the insurance policies contains an other insurance clause that excludes or limits an insurer’s liability to contribute rateably to the loss that clause shall be void.”

9. Reinstatement: Claims on building destroyed by fire
9.1 Section 67 of the 2020 Bill (section 66 Insurance Act 2003) essentially incorporates the provisions of section 83 of the Fire Prevention Metropolis Act 1774. Section 67(3) of the 2020 Bill gives an insurer the right to elect whether to re-instate the house or building damaged or destroyed by fire, or to pay the insured for the loss suffered but not exceeding the insured sum. However, an insurer must not be allowed to exercise the option to pay money where the intention of the beneficiary or insured is to reinstate the building destroyed by fire except reinstatement is impracticable. In England, the recent decision of the Court of Appeal in Endurance Corporate Capital v Sartex Quilts & Textiles (2020) held that the reinstatement basis was the proper measure of indemnity for property severely damaged by fire.

I propose an additional proviso to section 67(3) of the Insurance Bill 2020 as follows:
67(3) “Notwithstanding the provisions of subsection (1) of this section, the insurer shall have the right to elect whether to re-instate the house or building damaged or destroyed by fire, or to pay the insured for the loss suffered but not exceeding the insured sum. Provided that the insurer must reinstate where the person entitled or the insured shows a genuine and settled intention to re-instate the house or building damaged or destroyed by fire and except reinstatement is impracticable.

10. No premium no cover condition
10.1 The Supreme Court in Corporate Insurance v Ajaokuta Steel (2014) held that, “The contract of insurance between the parties herein, which was made in clear contravention of Section 50(1) of the Insurance Act, is ex-facie illegal and unenforceable.” I beg to differ with their Lordships on the point and submit that failure to comply with section 50(1) of the Act only renders the insurance contract null and void but not illegal. An illegality expressly attracts a punishment or fine. There is need to clarify the legal effect of the violation of this condition precedent and state that the insurance contract is null and void but not illegal.

10.2 In Jombo v Leadway Assurance (2016), the Supreme Court held that the no premium no cover condition applied to contracts of marine insurance because section 50(1) of the Insurance Act 2003 impliedly repealed section 23 of the Marine Insurance Act 1961. The effect of this decision is that even when an insurer has issued a policy, as long as the insured has not paid premium before the policy was issued, there is no valid contract of insurance. However, section 127 of the Insurance Bill still retains the provisions of section 23 of the Marine Insurance Act which were struck down by the Supreme Court decision of Jumbo v Leadway Assurance. Therefore, section 127 of the 2020 Bill contradicts section 52 of the 200 Bill (section 50 Insurance Act 2003).

11. Fraudulent claims
11.1 The issue of claims is probably the most contentious matter in insurance practice but the issue is not adequately covered by the provisions of the Insurance Act 2003 or the Insurance Bill 2020. Section 55(2) of the Insurance Act 2003 states that, where there is a breach of a warranty or condition of the contract, the insurer shall not be entitled to repudiate the whole or any part of the contract or any claim on the grounds of the breach unless; (a) the breach amounts to fraud; or (b) it is a breach of a fundamental term of the contract but the Act does not define the meaning of fraud. In some jurisdictions the issue of fraudulent claims has been included in insurance legislation and the common law rule on fraudulent claims has been codified.

11.2 Section 12 of the UK Insurance Act 2015 gives the common law rule on fraudulent claims statutory authority and states that where the insured commits a fraud against the insurer, the insurer is not liable to pay the insurance claim. There is also a need to state the effect of fraudulent claims. Section 12 of the UK Insurance Act 2015 states that, if a fraudulent claim is made the insurer is; (i) not liable to pay the claim; (ii) can claim back from the insured the money already paid; (iii) can treat the policy as terminated from the date of the fraudulent act without refund of the premium.

I therefore propose a new chapter on CLAIMS with two (2) sections on fraudulent claims:
(1) In the determination of fraudulent claims the adjudicator may take into consideration the fact that the insured; (i) fabricated the entire claim or substantial or material parts of the claim; (ii) dishonestly and substantially exaggerated the amount of the claim; (iii) deliberately misrepresented or concealed material facts to mislead the insurer.”

(2) Where a fraudulent claim is made the insurer is; (i) not liable to pay the claim; (ii) can claim back from the insured the money already paid; (iii) can treat the policy as terminated from the date of the fraudulent act without refund of the premium.

12. Marine insurance
13.1 The provisions of the Marine Insurance Act 1961 have been consolidated into the Insurance Bill 2020 as was also done with the Insurance (Consolidated) Bill 2013 and the Insurance (Consolidated) Bill 2016. One must remark that some of the provisions relating to marine insurance in the Insurance Bill 2020 are divergent from the provisions on the same matters in the rest of the same Bill. Most important is that the provisions on premium in marine insurance found in the Insurance Bill 2020 are different from the no premium no cover provisions of the same Bill.

13.2 The provisions on disclosure in marine insurance found in the Insurance Bill 2020 are different from the disclosure provisions found in other sections the same Bill similar to section 54 of the Insurance Act 2003. The new duty of disclosure in marine insurance in the 2020 Bill has now been expressed by the duty of fair presentation. This new duty of fair presentation was borrowed from the UK Insurance Act 2015. It is strange that the duty of fair presentation should be created for marine insurance whereas other forms of insurance should continue to be guided by different provisions on disclosure.

Jide Bodede LLM(Lond)
Lawfields Solicitors & Advocates
08035130694
Jide@lawfieldslawyers.com