Continental Reinsurance Plc

Presents

Life Business Underwriting & Products Development Venue: Masai Lodge, Nairobi-Kenya
Date: June 6 10, 2011

FUNDAMENTALS OF LIFE ASSURANCE CONTRACTS

By Abdul-Rasheed Agboola Akolade Head, Life Business Operations Continental Reinsurance Plc.,

COURSE OUTLINE

Introduction to Life Assurance as a Contract Essentials of a Valid Life Assurance Contract Legal Principles of Insurance as Applied to Life Assurance Assignments of Life Policies - Definition. - The Effect of Giving Notice of Assignment - Priority of Notice Regulates Priority of Claims - Exceptions to The Priority Rule - Major Types of Assignment Life Policies and Trust Corporation - Definition. - The Three certainties of a Trust - Major Types of Trusts Conclusion

Life Assurance as a Contract

It is an agreement between two parties, the assured and the life office, where by upon payment of premium, the latter agrees to pay a sum certain either to the assured or his named beneficiary when any of the events assured against occurs. Unlike in the non-life contract, it is almost certain that the event assured will take place, except say in a term assurance and pure endowment policy.

Essentials of A Valid Life Assurance Contract

Offer and Acceptance Consensus ad-idem Consideration Contractual capacity Intention to create legal obligation

Essential of A Valid Life Assurance (Continued)

Offer and Acceptance: An offer is a firm statement made by a party (offeror) to the other party (offeree) and inviting him to the contract.
In life assurance contract, the offer is made by the proposer (through the completion of proposal form), while the acceptance is done by the life office once the proposal is acceptable to it.

Essential of A Valid Life Assurance (Continued)

Consensus ad-idem: This is the coming together of minds of the two parties to the life assurance contract. Consideration: This is the premium payable by the assured to the life office and which guarantees the payment of sum assured (benefit) when the event assured against occurs.

Contractual Capacity: Both parties to the life assurance contract must have full capacity to enter into it. The life office must a license to operate, while the assured must have attained the age of majority

Essentials of A Valid Life Assurance (Continued)

Intention to create legal obligation: The life assurance contract must not in any way be contrary to public policy. However, in addition to the above five essentials, three of the legal principles of insurance equally apply to perfect life assurance as a valid contract.

Legal Principles of Insurance as Applied to Life Business

Insurable interest (Very important and fundamental) Utmost good faith ( Very important and might be fundamental) Proximate cause (Important) Indemnity (Not applicable to life business) Subrogation (Not applicable to life business) Contribution (Not applicable to life business)

Insurable interest

This is the legal right (and not a moral right) the assured has and enables him to take up a life policy. Without insurable interest, there is no life assurance contract. However, with an own life policy, there is no question as to whether or not an insurable interest exists. Insurable interest in life assurance is that which was in existence from policy inception and the Act governing it is the Life Assurance Act 1774 (otherwise referred to as The Gambling Act)

Key Features of Insurable interest

It must be definite It must be capable of financial evaluation It involves the loss of a legal right It must be legally valid and subsisting It involves a legal liability It needs not exist at the time of the loss, but must exit at policy inception

Some Examples of How Insurable Interest May Arise:

A man has unlimited amount of insurable interest on his own life A creditor on the life of debtor A surety on the life of his principal An employer on the lives of his employees Life offices in respect of policies in its portfilio

Utmost Good faith

This is a legal principle which requires both parties to a life assurance contract to disclose to each other all relevant information relating the contract This relevant information in insurance is referred to as material fact In most cases, the duty of disclosure rests heavily on the proposer than the life office. Facts which do not materially affect the risk need not disclosed

Remedies for Non Disclosure

Non disclosure or concealment of material fact gives the aggrieved party the right(s):
To repudiate the contract ab-initio To sue for damages in addition to above To waive his rights in respect of above and allow the contract to continue unhindered

Proximate cause

This is the legal principle that governs the events or contingencies assured against in a life assurance contract Thus, if a death claim occurs as result of an event which was not covered in the ordinary course of the policy then the life office is NOT legally liable to meet the death claim. However, there are times where the life office may have to go on Ex-gratia payments. Ex-gratia payments are payments made when a life office is not legally liable to pay a claim.

Assignments of Life Polices

Generally, an assignment is the transfer of ownership from one person (assignor) to another person (assignee). With life policies, an assignment means change of ownership of the life policy from one person to another or transfer of the policy proceeds from one person to another The Act which regulates and governs assignments of life policies is The Policies of Assurance Act 1867

Assignments of Life Polices (Continued)

The most important section in this Act is Section 3, which deals with Notice of Assignment. Though, preferable in writing to the life office No assignment of a life policy shall perfect on the assignee or his legal personal representatives any right to sue, unless a written notice of both the date and purpose of the assignment is given to the life office

Effects of Giving Notice

Gives the assignee the right to sue in his name Gains priority of claims payment over earlier assignees Preserves priority of claims payment over subsequent assignees Binds the Life office not to pay any other claimant Right to further assignment

Assignments of Life Polices

Priority of notice regulates priority of claims: Meaning he first give the life office of his notice of assignment shall be the first loss payee Exception to this rule: Does not apply to voluntary assignment Does not apply between the assignee and assignor Does not apply to trustees in bankruptcy Does not apply to willful blindness on the part of assignee for value Does not apply to mortgages for unlimited amount

Major Types of Assignments

Absolute Assignment Joint Assignment Assignment by way of mortgage Voluntary Assignment Assignment to Trustees Assignment by Operation of Law (Through Bankruptcy Proceedings)

Life Polices and Trust Corporation

The legal definition of a trust is an equitable obligation binding the trustee to use the trust property only for the benefit of the named beneficiary(ies) of whom he may be one and anyone may enforce the obligation
A trust will arise in a situation whereby a party known as the settlor transfers his property to another party (trustee) to hold and use only for the purpose of the named beneficiary (ies).

Three Certainties of A Trust

Certainty of words: The words used in creating the trust must be free from all ambiguity
Certainty of subject matter: The subject matter refers to the trust property and must be capable of description and identification Certainty of object(s): The Objects are the named beneficiaries and must equally be capable of description and identification.

Major Types of Trust

Express trust Implied trust Resulting trust Successive trust Public trust Bare trust

Individual Versus Corporate Trustee Individual Trustee:

Assumed to be mortal Less expensive Not as experienced as that of corporate trustee on trust administration May not be able to deal with complex trust matters

Corporate Trustee:

Possesses all the advantages above over an individual trustee

Conclusion
Thank you

Dieu Est Bon