INSURANCE AND OFFICE RESOURCES
DEFINITION:
Generally, Insurance is act of polling risks together in order to alleviate the suffering of the member of the group that pooled resources together in events of any calamities or misfortunes befallen any of them.
Also, insurance is a fund to which all who face pure risk make periodic money contributions called premium and from which any of the contributors is financially compensated in the event of loss or injury (Adewunmi 1988).
Insurance is the name for planned protection provided by sharing economic losses, since many individual or business may come together (unknowingly among themselves) to insure against a common risk (William 1985).
Adebo Lawal (1978): A person is said to be “insured” when an insurance company undertake to indemnify him if he suffers any financial loss as a result of the occurrence of a specific event. However, the possibility that the specified event will occur forms the subject of the insurance.
Isimoya (1998): Insurance could be defined as a social scheme which provides financial compensation for the effects of misfortune. The financial compensation is .provided from the pool of accumulated contributions of all members participating in the scheme.
By and large, insurance is contributions of large number of people to a fund, out of which compensation can be paid to those experiencing a particular types of type of loss. However, organization’s resources are machinery, material, money, manpower (personnel). All the resources must be insured for the continuity and growth of the office’s business
FUNCTIONS OF INSURANCE
It encourages saving: Insurance payment in the form of premium is a very important means of saving for the rainy days. One to poor level of banking business and lack of awareness in rural areas, insurance becomes a very important and reliable means of saving for future days.
Spreading and Reduction of losses and risk: Insurance reduces the level of risk an individual or firm can face. This encourage such firms individual in their economic activities.
Common pool/It serves as a ready sources of capital: Insurance company serves as a ready source of capital or pool for government and investment in case of necessity or need. They make substantial donations to government agencies, individuals etc in case of emergency and assist in other projects.
Stimulus to Business: Without the risk transfer mechanism, most businesses would establish a contingency fund to meet emergencies. Pooling of risk is much cheaper way of saving money to a fund. The released fund could be invested in a new plant building, stock etc.
Relief to Dependant: Endowment life assurance provides good protection for the insured’s dependants in the even of death of such person or permanent impairment of the insured.
Loss Prevention: Fire surveyors are trained to identify sources of potential risks in the production process, storage of materials and use of electricity. Similarly, theft and liability surveyors make their recommendations, which may prevent the insured even from occruing.
Social Benefits: With insurance protection, there is a lot of social benefits accruing to the society, (compensation, dependent benefits, replacement, etc)
Provision of Salvage Corps: Salvage corps is body developed and maintained by insurers. It functions like the fire services/brigade. They attend to fires and reduce losses resulting from fires. It plays a prominent role in post fire salvage operations.
Research and Liaison: Through the specialist associations, insurance contribute to the research on prevention and control of losses etc. It Provide security to all concerned. Risks that can cripple small or big business are handled by insurance company and thereby brings about relief, and adequate security to them.
Provision of Employment: The Insurance industry provides gainful employment for people particularly in their immediate business environment. The Nigerian insurance industry provides jobs for hundreds of thousand either as agents, brokers, canverser, loss adjusters, actualists others etc.
Collateral: The policies serve as collateral for borrowings from banks and other financial institutions
TYPES OF INSURANCE
There are two general types of insurance companies. They are:
Stock company
Mutual Company
STOCK (INSURANCE) COMPANY
The stock company is a company that is formed according to the laws of a particular country (Nigeria). The stockholders own the company and operate it, although they are not necessarily policyholders. The main aim is to earn a profit. The stock company in insurance is usually obtains money from the sales of stock to stockholders, as well as from the collection of premiums from the policy holders.
MUTUAL (INSURANCE) ,COMPANY The mutual company must be organized, equally, under the laws of particular nation (Nigeria). In the case of mutual company, the policy holders are the owners. Each person or business that is insured in a mutual company becomes a member of the company and is entitled to share in the ownership, the management, earning profits etc.
Mutual insurance companies are noti – profit corporation, owned by policyholders. There are no stockholder rather the policyholders are the owners. The policyholder elect a board of directors to manage the company. Bye-law may provide for assessment to policyholders to meet losses.
CLASSES OF INSURANCE
The insurance Act of 1976 as amended thereafter, which is the main legal instrument regulating insurance business in Nigeria, divides insurance business into two (2) major classes (section 2 (i) $ 2 (2))
> Non Life Insurance
> Life Assurance
NON LIFE INSURANCE
This can be further divided into:
> Fire insurance business
> Accident insurance business
> Motor vehicle insurance business
> Workmen’s compensation (fidelity)
> Marine, aviation etc
Miscellaneous insurance business not falling under any of the above listed.
LIFE ASSURANCE
This can be classified into three:
> Term life assurance
> Whole life assurance
> Endowment life insurance
NONE LIFE INSURANCE
i. FIRE INSURANCE: has been in existence as far back 1680, in London, It is against any havoc that fire may caused to property of asset. As the name indicates, the primary purpose of fire insurance is to relieve the policy holder financially in the event of a loss or damage to the insured property caused by burning. The source of ignition may be lighting or accidental explosion. Insurance company’s insist on suitable pre cautionary and fire safety measures before the policy can be agreed upon. Fire insurance provides fund to replace such items as building, furniture, machinery, raw materials and finished goods destroyed by fire.
Consequential losses are those other things incidental to or side effects that occurred as a result of fire incidents. Con-insurance is a term applied to an insurance policy in which the insurer and the insured share the risks. EX-GRATIA payments are compensations made by the insurance company outside its legal scope of responsibility or obligations.
SPECIAL CLAUSE Covers those additional risk such as windstorm, smoke damage, riot etc.
ii. ACCIDENT INSURANCE: One of the most popular types of policy under this is the personal accident and sickness. An accident in insurance, is a. misfortune which is not expected or designed by the potential insured, that has the capacity of a. financial loss. The various types of insurance contract classified as accident insurance are broad, and un~related. Accidents are classes of insurance business not covered by marine, fire and life assurance department, with the exception of National or social insurance managed by the state where its exists. Among others, accident insurance cover the followings: Personal accident and sickness
Employers liability
Burglary
Fidelity Guarantee
Public liability insurance
Others are: legal expenses and credit insurance.
iii MOTOR VEHICLE INSURANCE: The road traffic Act of 1930 was the first Act’hat brought about a profound effect on the development of motor insurance. However, the basic intention of this Act was to ensure that funds were made available to compensate unfortunate victims killed or injured in road accident.
The Act was been amended in 1934, 1960, and thereafter, to ensure that insurer comply by simplifying the technical jargons that enable the insurer to avoid liability.
Under the road traffic, it is a legal offence to use or permit to use a motor vehicle on road unless there is a policy covering.
Bodily insurance
Bodily injury liability
Medical payments
Protection against un-insured motorists
b. Property damage liability Property damage liability Collision
Comprehensive, physical damage that happen to the vehicle either by fire, accident or third party influence.
iv. WORKMEN’S COMPENSATION INSURANCE: The provision for workmen’s compensation could be traced to decree 1987 as amended from time to time. It is stated that personal injuries such as broken limbs, injured eyes and all traumatic injuries and external injuries to the body as well as occupational diseases are covered by the provision of the decree. Business organization with this kind of obligation to discharg do enter into contracts of insurance and transfer the burden of the compensation or conversely, the danger inherent in the working environment normally determine the premiums to be paid.
As employers provide more safely devices and improve on safety precautions, all things being equal, the premiums are correspondingly reduced.
v. MARINE, AVIATION AND TRANSIT INSURANCE: This is concern with marine or aircraft adventure and, it involves insuring the followings according to insurance regulation 1977 and as amended subsequently.
Vessels or aircraft or machinery and the furniture to hereof
Good merchandise or property the vessel or aircraft
The freight of, any other interest in, or relating to vessel or aircraft
Risks incidental to the repairs or docking or vessel including 3rd party.
Transit risks {sea, inland, air or land).
There are many types of policies available in marine insurance such as: TIME, VOYAGE, FLOATING etc
LIFE ASSURANCE
Death is inevitable. Anybody that come to the world will not live eternally but died. The uncertain things about death are WHEN, WHERE and HOW. That is why we talk about life assurance because death is obvious and quiet certain. To obtain life assurance, most companies (insurers) demand a written medical report before a policy can be issued. There are three (3) basic types of life assurance: they are:-
TERM ASSURANCE: provides protection against loss of life for a definite period or term of time. It is the least expensive form of live assurance. It may be for a year, five or ten years.
WHOLELIFE ASSURANCE: is permanent policy that extends over the life time of the insured. The popular type is called straight life assurance. Premiums remain constant as long as the policy holder lives.
ENDOWMENT LIFE ASSURANCE: This is the savings plan which also gives the insurance protection. An endowment policy may provide a fund or money for the insured at the end of a certain period. If the insured dies before the end of the endowment period, the face value of the policy is paid, to the beneficiary (ies).
GENERAL PRINCIPLES OF INSURANCE
These are essentials bases of agreement between the insured and the insurer that serve as guides for better understanding and to foster good relationship among trie parties involved. They include:
1. INSURABLE INTEREST
This is the principle that stipulates the need for the insured to have a positive interest in retaining the present position and status. That is, he must be directly affected and concerned, must be at stake in case of loss, theft and burglary, accident etc. Insurable interest is he legal right to insure arising out of the financial relationship between the insured and the subject matter of insurance which must be recognized by the law.
When we say a person has an insurable interest, it means that such person has a legally recognized financial relationship with the subject matter of insurance, and stands, to lose if the subject matter of insurance is physical damaged. The subject matter of insurance may consist of material goods property, human being liability and financial rights.
Legal requirements of insurable interest:
A legal relationship with subject matter of insurance (i.e insured must be the owner of the object or part owner.)
Financial Loss: The insured must suffer. Some level of financial loss if the object is destroyed or damaged by the insured event.
Extent of Insurable Interest: An insured can not insure the S.M.I more than the amount of his financial, interest.
The subject matter of interest (S.M.I): There must be some property, rights, interest, life potential liability etc involved.
Legally Recognized by Law: The relationship between the SMI and the insured must be recognized by the law of the land.
2. UTMOST GOOD FAITH: This is also known as Uberrima fides. The principle states that all parties to an insurance contract must disclose all relevant particulars or facts which might influence any parly’s willingness to make the contract. However, failure to do so invalidates or nullifies the contract/Utmost good faith means that each party to a proposed insurance contract is legally bound to reveal all the necessary information which would influence the other’s decision, to enter the contract whether such information is asked or not. Each party must be truthful. Tell the truth, whole truth and nothing but the truth, about the proposed contract.
UTMOST GOOD FAITH AND MATERIAL FACTS – There exist good relationship between the disclosure of material facts and utmost good faith.
A material fact can be defined as a fact that would influence the mind of a provident underwriter to assessing a risk. Marine insurance Act 1906 state that “every circumstance is material which would influence the judgment of an insurer in fixing a premium or determining whether he will take the risk”
Insurers have the right to avoid a contract if they can prove that:-
There is a misrepresentation of material fact.
There is non disclosure of material fact.
GENERAL FACTS THAT MUST BE DISCLOSED
Facts which show that the risk being proposed is greater internally than would normally be expected e.g. value of items a trading shop.
Facts about external factors that make the risk greater than normal e.g. a house nearest to a petrol filling station.
Facts of previous losses and claims
Facts restricting subrogation rights due to contractual obligation on the part of the insured.
Facts relating to full description of the subject matter of insurance.
Existence of other non-indemnity policies such as life assurance, for the risk’s proposed.
Previous proposal made but declined by the insurer.
3. INDEMNITY
This is the agreement whereby one person stands to make good any loss suffered by a contract to which himself is a stranger. That is, restoring back to original stage before the misfortune occurred to the insured by the insurer. The principle of indemnity in insurance states that following a loss, an insurer should provide financial compensation which would restore the insured to the same financial position as he was just before the loss. All classes of insurance are subject to indemnity except LIFE.
This is a principle that regulates the financial compensation to be made available by the insurer to the insured following the loss experienced by the insured caused by insured perils to the insured property.
METHODS OF INDEMNITY
The financial settlement of any reported and admitted claim by insurer to the insured following the destruction of the subject matter of insurance by insured perils are provided through any of the followings:
(i) Cask Payment: this is the simplest and most suitable means of settling claims especially in outlay in repairs and 3rd party claims liabilities
(ii) Replacement: Where the property is new before the loss occurred or it is an article of jewelleris where depreciation will be negligible, insurer may settle claims through replacement. Glass, new car, Gold, diamond, jewelleris, furs etc. This is deviation from the strict interpretation of indemnity in view of the depreciations suffered by the lost property which have not be deducted from the new one.
(iii) Repairs: An adequate repair is a form of indemnity. This form of settlement is common in motor vehicle insurance, where the insurer settles the bill of repair to the garage concerned (motor vehicle, property).
(iv) Reinstatement: This is a term often used in fire policy. It is concerned with the condition (not necessary on the same site).
However, this may give rise to some difficulties as the insured may not be satisfied with the standard of work.
4. SUBROGATION
The rights of the insurance company to take over what is left of the properties or assets which they had paid the insured for. Likewise, all the legal and equitable right of the insured person, including the right to sue the third party for damages. The principle of subrogationis one of the corollaries of indemnity because it prevents the insured in the event of claim to obtain more than what he suffered in financial terms, no profit or gain making from loss.
Subrogation literately means standing in place of another. It is the legal right of one person to stand in the name of another and avail himself of all the rights and remedies of the other person, against third parties whether already enforced or not.
Subrogation rights can accrue to insurers in four ways:
In Tort: A tort is a civil wrong inflicted on a legal neighbour such as negligence, trespass, defamation etc.
Contract: The third party may be bound by the contract to make good any loss thereof.
Statute: Most subrogation rights by statute arise via Acts.
Salvage: When there is a valuable debris after a total loss, the insurers have subrogation rights on the SMI. (scrap, damaged vehicle etc)
5. CONTRIBUTION
This is the principle that allows on insurer the right to call upon other insurers similarly liable (but not necessarily or equally) to the same insured to share the cost of indemnity payment. Contribution arises where there is double insurance, so that the insured is covered more than once in respect of the same loss. Contribution, as a corollary of the principle indemnity, it is important that the insured does not receive more than full indeminity through having several policies covering the same subject matter of insurance (SMI). Insurer can recoup part of his outlay from other insurers latter or if not already paid, all the insurers involved will share the cost of indemnity in proportion to ther sum insured.
ESSENTIALS OF CONTRIBUTION PRINCIPLES
Contribution principles apply where the following conditions are fulfilled:
Two or more policies of indemnity exist
The policies cover the same S.M.I
The policies cover the same peril that causes the loss
The policies protect the interest or the same insured.
The policies are in force during the time of loss, therefore, simultaneously liable.
At the time of claim, the insuer would always want to know if there are other existing insurance covering the same loss. Where other insurance exist, each policy is liable to the valid claim, contribution principle will apply, and so the respective insurers would share the loss ratebly.
Sum insured of a insurer x loss
Total sums insured by all insurers 1
5. PROXIMATE CAUSE
The principles states that the cause of loss must be against which insurance company was contracted. Proximate cause means the active, efficient cause that sets in motion a train of events which brings about a result, without the intervention of any force stated and working actively from a new and independent source.
In insurance, claims only succeed if the loss is proximately (nearest before or after) caused by an insured peril.
Similarly the remote causes are causes which are too far from the cause responsible for the loss of the subject matter of insurance.
The concurrent Cause: It involves situation where two or more causes occured at the same time wihtout depending on each other for their concurrence but are both responsible for the loss.
The need to determine the proximate cause
For Insurers to be liable, it is reasonable that the cause of loss must be determined. Relevant perils are:
Insured Perils: These are perils specifically named in the policy as insured. They are insurable and are insured in an insurance policy.
Exempted or excluded Perils: These are perils which have been excluded from insurance cover, because they are un-insurable.
Un-insured and other perils: they are perils which though, are insurable but have not been insured or covered in specific policies e.g. storm, smoke one not mentioned in fire policy.
6. PREMIUM: This is the amount paid to insurance company by the person that took insurance policy. He may pay either monthly, quarterly, yearly etc.
7. INSURANCE POLICY: This is the agreement papers given to the insured by the insurer in which all the dos and don’ts and the major principles are stated.
8. INSURER AND INSURED: The former is the insurance company who pays or indemnifies the insurance policyholder while the insured is the person who pays premiums to the insurance company to minimize his loss in case of any misfortune.
MAJOR TERMS USED IN INSURANCE
A. THIRD PARTY INSURANCE: It is used for a person other than the insured and the insurer. An insurance against 3rd party is compulsory in Nigeria for all motor vehicles. This risk cover ensures that damages or injuries on 3rd party. Such as those sustained by pedestrian, cyclist or structures including by the side of road can lead to payment when such accident occur.
B. SURRENDER VALUE: This is the amount in cash which can be paid back by an insurance company with particular reference to endowment life assurance. When the insured decides to withdrawn at a date prior to that on which the policy is due to mature the amount depends on amount already paid as premium and must be 1/4 of year due
C. RE-INSURANCE: This is the process whereby very large risks are shared by more than one insurance company. These risks include loss of ship, aircraft, multi-billion investments. (NITEL, MTN, NNPC, CADBURY etc). The aim is to minimize the burden involved by an insurance company in case the loss occur.
D. COMPREHENSIVE INSURANCE COVER: This is a form of insurance usually associated with total loss, accident and casualties, it covers loss due to damage theft, destruction and protect the third party. Premiums are usually higher than all other forms of insurance
E. EXPORT CREDIT: This is a guaranteed or an assurance offered to exporter against bad debts incurred as a result of sales to foreign buyers or businessmen. It can be guarantee by a banker or an insurance company.
