Categories: General

THE STATUTORY NO PREMIUM NO COVER

By Jide Bodede LLM(Lond)

CONDITION OF INSURANCE CONTRACTS

Section 50 Insurance Act

Section 50(1) of the Insurance Act 2003 states that, “The receipt of an insurance premium shall be a condition precedent to a valid contract of insurance and there shall be no cover in respect of an insurance risk unless the premium is paid in advance.” In the case of Ajaokuta Steel v Corporate Insurance (2004), the Court of Appeal pronounced on the provisions of section 50(1) of the Insurance Act and held that the no premium no cover condition was a condition precedent to the formation of a valid insurance contract. Therefore, failure of the insured to pay premium before the inception of the policy rendered the insurance contract null and void and unenforceable. That decision has now been affirmed by the Supreme Court in Corporate Insurance v Ajaokuta Steel,[1] Since 2004, a plethora of insurance litigation has arisen on the above provisions of the Act and they have raised certain issues which will now be discussed.

Waiver of Condition Precedent

2.1 There is sufficient judicial authority that any party can waive a constitutional or statutory right which is made for their benefit. Parties can waive a right which is for their sole benefit but the law will not permit the waiver of a right in which the public has an interest. See, Ariori v Elemo,[2] and Mobil Producing v LASEPA[3]. The question is whether, even though premium has not been paid but the insurer assumes the risk, can it be argued that an insurer has waived the condition precedent in section 50(1) of the Insurance Act. The matter was settled by the decision of the Supreme Court in Corporate Insurance v Ajaokuta Steel (supra), which held that, the no premium no cover condition precedent, cannot be waived by an insurer.

2.2 In that case, counsel to Corporate Insurance argued that the provision was made for the benefit of the insurer and therefore the insurer could waive the condition. Counsel to Ajaokuta Steel argued that the use of the word “shall” in the section meant that the provisions were mandatory and could not be waived. Inyang Okoro JSC said,

“The argument of the appellant that Section 50(1) of the Act inures to the appellant and as such it can waive it does not appeal to me at all. Had the Legislature intended to confer a special right of waiver on the insurer, it would have said so. Moreso, and as already stated, the word “shall” used in the provisions of Section 50(1) of the Insurance Act clearly imposed a mandatory condition precedent to the making of a valid insurance contract on all the parties thereto, and does not seek by any stretch of interpretation to confer any right of waiver of same on the insurer or any other party at all.”

Part Payment of Premium

3.1 The import of section 50(1) of the Act is that premium must be paid in advance and must be paid in full. Part payment of the agreed premium does not constitute compliance with the condition precedent. In Industrial and General Insurance v Adogu,[4] the Court of Appeal held that part payment of premium did not fulfill the condition precedent in section 50(1) of the Act. Abba Aji JCA said,

“If the section intends to make payment of premium in part or by instalment, it would have stated so as what is not stated is meant to be excluded. Section 50 of the Act therefore does not contemplate instalmental payment of premium in an insurance contract. The payment of premium is a condition precedent to the contract of insurance and where parties have entered into a conditional contract, the condition precedent, like in the instant case, that is, the full payment of premium must happen before either party can become bound by the contract.”

3.2 There is still another issue. One may seek to distinguish IGI v Adogu (supra), where part payment of premium was made before the inception of the policy but the balance of premium was paid after the loss and when the subject matter of the policy had ceased to exist. However, what is the effect where there is part payment of premium before the inception of the policy but full payment of the balance before the loss and when the subject matter of the policy is still in existence? Will this constitute compliance with the condition precedent? On the authority of the decision in IGI v Adogu (supra),the contract will still be void and unenforceable regardless of payment in full before the loss. Furthermore, the later decision in Corporate Insurance v Ajaokuta Steel, did not give room for flexibility on the interpretation of the condition precedent.

3.3 One other matter must be raised. What happens when there is payment of provisional premium? This occurs in some liability policies where the full premium cannot be ascertained at the commencement of the policy. In my humble opinion, the short answer is that payment of the premium assessed at the inception of the policy constitutes satisfaction of the no premium no cover condition.

Payment by Post-dated Cheques

In Prestige Assurance Plc v Sara Foods,[5] goods stored in a warehouse were destroyed by fire. The insured had issued post-dated cheques which the insurer accepted in full payment of the premium and had obtained credit on some of the cheques before the loss. Upon a claim by the insured, the insurer relied upon section 50(1) of the Act to repudiate liability on the ground that that the premium was not paid fully in advance. The Court of Appeal held that the insurance contract was invalid and unenforceable. Ekanem, JCA said,

“The payment of premium by post-dated cheques runs foul of the requirement of section 50(1) of the Insurance Act, 2003. Acknowledgement and receipt of such post-dated cheques, as in this instance, does not change the situation as they do not turn those post-dated cheques into money. Unless and until a cheque is honoured, it cannot be said to be the same thing as money. There was therefore no valid contract of insurance to ground the respondent’s claim of indemnification against the appellants.”

Insurance Brokers

Section 50(2) of the Act states that, “An insurance premium collected by an insurance broker in respect of an insurance business transacted through the insurance broker shall be deemed to be premium paid to the insurer involved in the transaction.” Where premium is paid through a broker, the money is treated as already in the hands of the insurer and the insured shall not be held liable for the refusal or failure of the broker to remit the premium. This issue arose for decision in Shoreline Lifeboats v Premium Insurance Brokers,[6] where the Court of Appeal held that payment to a broker was as good as payment to the insurer. Agbo JCA said,

“This is because once the insured pays his premium to the broker he has met his obligation to the insurer and the insurer cannot resile from the contract whether or not the broker remits the sum paid to the insurer. It was therefore not the business of the appellants whether or not the 1st respondent remitted the premium paid to the insurer.”

See also, Unity Kapital Insurance v Akut Investment,[7]

The No Premium Condition & Marine Insurance

6.1 In Jombo v Leadway Assurance,[8] the appellant imported goods and was issued two “marine insurance policies” by the respondent to cover the goods. The ship left port on 6^th March 1997 and the two policies were issued on the 10^th and 12^th March 1997 but premium was not paid before the policies were issued. On 18^th March 1997 the appellant was informed that the goods were lost at sea. Therefore a claim was made on the respondent. The issue for determination was whether or not the no premium no cover condition applied to contracts of marine insurance.

6.2 The Supreme Court held that there was no valid contract of marine insurance between the parties because the provisions of section 50(1) of the Insurance Act impliedly repealed the provisions of section 23 of the Marine Insurance Act. Sanusi JSC said,

“For purpose of clarity, it can be said that by section 23 of the Marine Insurance Act, marine insurance can be covered and valued upon oral transaction and also permits payment of premium to be made subsequently. Conversely, section 50(1) of the Insurance Decree of 1997 which is later in time of promulgation, makes a contract of marine insurance valid and enforceable ONLY upon condition precedent to the effect that premium MUST be paid in advance, once such condition precedent of prepayment of premium is not met, the contract becomes void and unenforceable. To my mind, the provisions of the later Decree of 1997, which provides a condition contrary to the one in the provisions of section 23 of the 1961 Act, one can say without any fear of contradiction, that the position provided in section 23 of the 1961 Act is no longer tenable or applicable by reason that the legislature provides a contrary provision which can be said to mean that the condition or position provided by Section 23 is no longer valid and no longer subsists.”

6.3 One broad issue which was settled by the decision in Jombo v Leadway Assurance (supra), is that the provisions of the Marine Insurance Act cannot be operated and interpreted independently of the Insurance Act. I have argued elsewhere that the duty of disclosure in section 20 of the Insurance Act has therefore been impliedly repealed by the provisions of section 54 of the Insurance Act.

Policy Renewal

7.1 The no premium no cover condition also applies at every annual policy renewal and not only at commencement. In one case, a householder’s comprehensive policy expired in January but the insured failed to pay the renewal premium. In February, the house was destroyed by fire. The insured unsuccessfully attempted to pay the renewal premium but then notified the insurer of the loss and made a claim. The insurer repudiated the claim and litigation commenced.

7.2 At the trial we argued that the insured was not on cover at the time of the loss. The insured argued that premium for the year before was paid in March rather than January (annual renewal) and so cover took effect from March and was therefore valid when the loss occurred in February of the following year. The Judge held that the policy was still in force in February and the insurer was liable to settle the claim.

7.3 The import of this decision is that insurance policies are renewed from the date of payment of the renewal premium (whenever paid) and not from the anniversary of the policy. In this case, the insurer collected premium in March but backdated cover to January and issued a certificate which the insured accepted. The attempt to hurriedly pay the renewal premium in February when the loss occurred was an admission of the period of insurance. The insurers settled the claim and refused to appeal and the benefit of appellate judicial authority on the point was lost. We must observe that the reluctance of insurers to litigate claims disputes has led to the paucity of judicial decisions to guide insurers on important areas of insurance law.

Nullity or illegality of contracts

8.1 It is now settled that failure of the insured to pay premium before the inception of the policy renders the contract of insurance unenforceable. The tricky question is whether or not the failure to fulfill the no premium no cover condition precedent renders the contract of insurance null and void and also makes it illegal. The issue was addressed by the Supreme Court in Corporate Insurance v Ajaokuta Steel(supra) where Inyang Okoro JSC delivering the lead judgment said,

“It is crystal clear that any contract or transaction entered into by parties, which contract or transaction is either expressly or impliedly prohibited by statute, is illegal and unenforceable. It is my view therefore that any contract or transaction which seeks to circumvent the provisions of a statute is ex-facie illegal and no party can take benefit from it. For me, 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.”

See also, Unitrust Insurance v Ambico Sendiarin,[9]

8.2 I beg to differ with my lordships on this point and humbly submit that failure to comply with section 50(1) of the Act only renders the insurance contract null and void but not illegal. Illegality attracts a punishment either by way of fine or imprisonment and this means that since section 50(1) of the Insurance Act does not impose a sanction or penalty for non compliance with the condition precedent, the insurance contract can only be void but not illegal. In Pan Bisbilder v First Bank,[10] Lord Achike JSC said,

“It will be enough to say that contracts which are prohibited by statute coupled with provision for sanction (such as fine or imprisonment) in the event of its contravention are said to be illegal. There is however the need to make a distinction between contracts that are merely declared void and those declared illegal. For instance, if the provisions of the law require certain formalities to be performed as conditions precedent for the validity of the transaction, without however imposing any penalty for non-compliance, the result of failure to comply with the formalities merely renders the transaction void, but if a penalty is imposed, the transaction is not only void but illegal, unless the statute stipulates otherwise.”
(2000) LPELR-2900(SC)

8.3 For example, the Land Use Act provides that any transaction without the consent of the Governor is null and void but the law does not impose any penalty for failure to obtain consent. Therefore, a deed of assignment or legal mortgage executed without the consent of the Governor is void but not illegal. In Union Bank v Ayodare,[11] the parties failed to obtain the consent of the Governor to a legal mortgage. The Supreme Court followed the decision in Savannah Bank v Ajilo,[12] and held that the mortgage was void but not illegal.

Jide Bodede LLM(Lond)

Jide@lawfieldslawyers.com

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