How many of us can raise our hands and claim to have been baptised with the spirit of ‘buying insurance’? Well, this pandemic period has proven that insurance is a necessity and there is a need to always go through our policy documents to demystify some of the mysteries behind the insurance contracts we sign up for every time. So, what happens after buying an insurance contract? Do you buy and keep the document for display in your bookshelf or endeavour to go through and understand what your policy says?

All these questions and many more will be thoroughly discussed and improved upon for your understanding pleasure.

When insurers give us a policy document, generally, all we do is glance over the decorated words in the policy and pile it up with the other bunch of financial papers and books on our shelf, right? Some even give it to their kids to use as writing materials for homework, while some never collects from their insurance agents. If you spend thousands of Naira yearly on insurance, don’t you think that you should know all about what is covered and what is not? Your insurance advisor/broker is always there for you to help you understand the tricky terms in the insurance contracts, but you should also know for yourself what your contract says.

Insurance Contract Necessities

• Offer and Acceptance: When you apply for an insurance cover through an insurance company or a broker, a proposal form will be given to you to fill with your details and insurance requests, the form is sent back, risk assessed and premium payable calculated and sent to you. This is your offer. If the insurance company agrees to insure you, this is called acceptance. In some cases, your insurer may agree to accept your offer after making some changes to your proposed terms.

• Consideration: This is the premium or premiums payable for the future that you have pay to your insurance company. For insurers, consideration also refers to the money paid out should you file an insurance claim. This means that each party to the contract must provide some value to the relationship.
• Legal Capacity: How legal are you to enter into an insurance contract with your insurer? A minor/child or mentally ill person cannot qualify to make a contract. Insurance contracts can only be bought on behalf of a child/children by an adult.

• Legal Purpose: If the purpose of your contract is to encourage illegal activities, it is invalid.

Principle of Indemnity: This principle states that insurance companies will not pay more than the actual loss suffered. The purpose of an insurance contract is to leave you in the same financial position you were in immediately prior to the incident leading to an insurance claim. If your old Toyota Camry is stolen, you can’t expect your insurer to replace it with a brand new Mercedes-Benz. In other words, you will be remunerated according to the total sum you have placed on the car.

However, there are cases or situations that warrants you not getting full value of your insured asset when a claim arises:

Under-Insurance: Naturally, insurance customers want to save on premiums, you may insure your car for N8,000,000 when the total value is actually N10,000,000 in the market. At the time of total loss, your insurer will pay only a proportion of N8,000,000 while you have to dig into your savings to cover the remaining portion of the loss. This is called under-insurance, and you should try to avoid it as much as possible.

Excess: While avoiding trivial claims, insurers usually introduce provisions like excess. E.g. You have a car insurance with an applicable excess of N10,000 or 10% whichever is higher. Unfortunately, your car had an accident with the loss amounting to N25,000. Your insurer will pay you the N25,000 less 10% because the loss has exceeded the specified limit of N10,000. But, if the loss comes to N7,000 then the insurance company will not pay a single dime and you have to bear the loss expenses yourself. In short, the insurers will not entertain claims unless and until your losses exceed a minimum amount set by the insurer.

However, there is what is called Excess Buy Back, which allows a customer to buy the excess back into the policy, this allows no deduction from your total claimable amount.

Insurable Interest: It is your legal right to insure any type of property or any event that may cause financial loss or create legal liability for you. This is called insurable interest.

Suppose you are driving your Auntie’s car and you apply for car insurance cover with the hope that your aunty gives out the car to you later. Insurers will decline your offer because you are not the owner of the car and, therefore, you do not stand to suffer financially in the event of a loss. In insurance, it is not the car, house or machinery that is insured. Rather, it is the monetary interest in that house, car or machinery to which your policy applies.

The principle also allows married couples to take out insurance policies on each other’s lives, on the principle that one may suffer financially if the spouse dies. Other cases where it exists include a Bank/Fintech and a borrower, aggregators (Kobo360, Zido and truckers), partners or between employers and employees.

Principle of Subrogation: Subrogation allows an insurer to sue a third party that has caused a loss to the insured and pursues all methods of getting back some of the money has been paid to the insured as a result of the loss.

For example, if you are injured in a road accident that is caused by the reckless driving of another vehicle owner, you will be compensated by your insurer. However, your insurance company may also sue the reckless driver to recover that money.

The Doctrine of Good Faith: All insurance contracts are based on the concept of ‘uberrima fides’, or the doctrine of utmost good faith. This doctrine emphasizes the presence of mutual faith between the insured and the insurer. In simple terms, while applying for insurance, it becomes your duty to disclose your relevant facts and information truthfully to the insurer. Likewise, the insurer cannot hide information about the insurance coverage that is being sold.

Duty of Disclosure: You are legally obliged to reveal all information that would influence the insurer’s decision to enter into the insurance contract. Factors that increase the risks—previous losses, driving history and claims under other policies, insurance coverage that has been declined to you in the past, the existence of other insurance contracts, full facts and descriptions regarding the property or the event to be insured—must be disclosed. These facts are called material facts. For instance, in life insurance, your smoking and drinking habits are an important material fact for the insurer. This will positively or negatively impact on the premium charged on your policy.

Co-insurance refers to the sharing of insurance by two or more insurance companies in an agreed proportion. For the insurance of a large shopping mall, for example, the risk is very high. Therefore, the insurance company or broker may choose to involve two or more insurers to share the risk. So, when a claim arises, the first insurer will pay its proportion while the other pays the remaining depending on how the policy is structured.

So, when next you see the names of more than one insurance company in your policy document, be aware that there are more than one insurer carrying your risk and they would be liable proportionally when a claim evolves.

…SO, THE BOTTOM LINE

When applying for insurance, you will find a huge range of insurance products available in the market. If you have an insurance advisor or broker, he or she can shop around and make sure that you are getting adequate insurance coverage for your money (premium). Even so, a little understanding of insurance contracts can go a long way in making sure that your advisor’s recommendations are on track. What this means is that, we are all encouraged to learn a little about insurance.

Furthermore, there may be times when your claim is cancelled because you didn’t pay attention to certain information requested by your insurance company. In this case, a lack of knowledge and carelessness can cost you a lot. Go through your insurer’s policy features instead of signing them (whatever is not acceptable to you can be adjusted via endorsements from your insurer) without delving into the fine print. If you understand what you’re reading, you’ll be able to ensure that the insurance product that you are signing up for will cover you when you need it most.

In conclusion, we advise that going forward, there should be a proper scrutiny of your policy documents – this can be done during the COVID-19 pandemic period to ascertain the extent of your cover and know what limits exist and how to properly request for adjustments, pay additional premium for higher cover or request extensions (e.g life insurance covering pandemic causes) where needed. We all deserve to know what we are covered against.

Acknowledgment

The author would like to thank and acknowledge the contributions made by Adebiyi Muhammed, a Team Lead, Schemes and Retail with YOA Insurance Brokers Limited in their Lagos office. He can be reached at muhammed.adebiyi@yoainsurance.com.