WAEC SSCE - Insurance - 2017 (Case Study and Essay)

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(a) Two factors that could reduce the amount of indemnity under an insurance contract

• Under-insurance and the application of the "average" clause: Where the sum insured is less than the true value of the property at the time of loss, the insured is treated as his own insurer for the shortfall. Under the average clause the claim is scaled down in the proportion that the sum insured bears to the actual value, so the insured recovers less than the full loss. \( \text{Claim} = \dfrac{\text{Sum Insured}}{\text{Value at Risk}} \times \text{Loss} \).
• Excess (deductible) or franchise: Many policies require the insured to bear the first part of every loss (the excess). This agreed amount is deducted from the claim, so the indemnity actually paid is reduced by the excess. (Other valid factors: deduction for depreciation, wear and tear since indemnity restores the insured only to the value immediately before the loss; deduction of salvage value; and contribution where more than one policy covers the same loss.)

(b) Calculation of each insurer's liability (contribution)

Where the same property is covered by more than one insurer, each insurer contributes rateably in the proportion that the sum it insured bears to the total sum insured. This follows the principle of contribution.

Total sum insured: \[ N150{,}000 + N120{,}000 + N90{,}000 = N360{,}000 \]

Loss to be shared = \( N60{,}000 \).

Insurer A: \[ \frac{150{,}000}{360{,}000} \times 60{,}000 = N25{,}000 \]

Insurer B: \[ \frac{120{,}000}{360{,}000} \times 60{,}000 = N20{,}000 \]

Insurer C: \[ \frac{90{,}000}{360{,}000} \times 60{,}000 = N15{,}000 \]

Check: \( N25{,}000 + N20{,}000 + N15{,}000 = N60{,}000 \), which equals the total loss. Each insurer's liability is therefore A = N25,000, B = N20,000 and C = N15,000.

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(a) Five duties of insurance brokers

1. To advise the client on the most suitable type and amount of cover for his needs.
2. To place the risk with a sound and reputable insurer offering competitive terms.
3. To assist the insured in completing the proposal form and in disclosing all material facts.
4. To assist the client in the presentation and negotiation of claims against the insurer.
5. To collect premiums from the insured and remit them to the insurer, and to keep proper records of business transacted.

(b) Five duties of insurance agents

1. To canvass for and introduce new business to the insurer he represents.
2. To explain the terms and conditions of the policy to prospective policyholders.
3. To assist proposers to complete proposal forms accurately.
4. To collect premiums on behalf of the insurer and remit them promptly.
5. To help policyholders report claims and provide after-sales service such as reminding clients of renewals.

(c) Five duties of the Nigerian Insurers Association (NIA)

1. To protect, promote and advance the common interests of member insurance companies.
2. To set and enforce a code of ethics and good market conduct among members.
3. To liaise with the government and the regulator (NAICOM) on matters affecting the industry.
4. To operate industry schemes such as the ECOWAS Brown Card and to maintain records like the industry database on claims.
5. To promote public awareness and confidence in insurance and to settle disputes among member companies.

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(a)(i) What a proposal form is

A proposal form is the printed document supplied by the insurer which the intending insured (the proposer) completes and signs to apply for insurance cover. It contains a set of questions through which the proposer supplies all the material facts about himself and the subject matter of the insurance. The information given forms the basis of the contract, enabling the insurer to assess the risk, decide whether to accept it and fix the appropriate premium.

(a)(ii) Four general questions contained in a proposal form

1. The full name and address of the proposer.
2. The age, sex and occupation of the proposer.
3. A description of the subject matter to be insured and the sum to be insured (its value).
4. Details of previous insurance and claims history, including whether any insurer has ever declined, cancelled or refused to renew a policy.

(Other acceptable general questions: the period of insurance required and a declaration that the answers are true.)

(b) Three documents used in effecting insurance contracts

• Proposal form: As explained above, it is the document by which the proposer formally applies for cover and discloses the material facts on which the insurer bases its decision. It represents the offer stage of the contract.
• Cover note: A temporary document issued by the insurer to confirm that cover is in force pending the preparation of the full policy. It gives the insured immediate protection and states the main terms, remaining valid for a short period (often 30 or 60 days) until the policy document is ready.
• Insurance policy (policy document): The formal, legal contract between the insurer and the insured. It sets out in detail the names of the parties, the subject matter, the risks covered, the sum insured, the premium, the period of cover, the exclusions and the conditions. It is the conclusive evidence of the terms of the agreement.

(The certificate of insurance and the premium receipt are also acceptable documents.)

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(a) Explanation of terms used in insurance

• (i) Peril: A peril is the actual cause of a loss, that is, the event or contingency that gives rise to damage, injury or destruction. Examples are fire, flood, accident, theft, storm and death. It is the immediate reason why a loss occurs and is what an insurance policy is taken out to protect against.
• (ii) Hazard: A hazard is a condition or circumstance that increases the chance (frequency) or severity of a loss arising from a peril. It does not cause the loss directly but makes it more likely or more serious. A physical hazard relates to the physical characteristics of the risk (for example, storing petrol near a fire), while a moral hazard relates to the attitude, honesty or carelessness of the insured (for example, deliberate carelessness or fraud).
• (iii) Disclosure: Disclosure is the duty of the proposer, under the principle of utmost good faith (uberrimae fidei), to reveal voluntarily and truthfully all material facts that could influence the insurer's decision to accept the risk or fix the premium. Failure to disclose such facts (non-disclosure or concealment) can make the contract voidable at the option of the insurer.

(b) Differences between the classes of risk

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(a) What reinsurance is

Reinsurance is the arrangement by which an insurer (the ceding company or direct insurer), having accepted a risk from its policyholder, transfers or passes on part of that risk to another insurer (the reinsurer) in return for a share of the premium. In effect it is the "insurance of the insurer": it enables the original insurer to spread very large or heavy risks, avoid a single catastrophic loss, increase its capacity to accept business, and protect its solvency and stability. The policyholder still deals only with the original insurer, who remains fully liable to him.

(b) Four essential features of insurable interest

Insurable interest is the legal right to insure arising from a financial relationship, recognised at law, between the insured and the subject matter of insurance. Its essential features are:

• There must be a subject matter of insurance: There must exist some property, life, right, interest or potential liability that is capable of being insured, for example a house, a life, a motor vehicle or a legal liability.
• The insured must have a legal relationship with the subject matter: The interest must be recognised and enforceable at law, arising through ownership, possession, a contract, a mortgage or another legal right, and not merely from sentiment or mere expectation.
• The insured must stand to benefit from its safety and to suffer from its loss: The insured must be so situated that the continued existence or safety of the subject matter brings him financial benefit, while its loss, damage or destruction causes him a financial loss.
• The interest must be capable of being valued in money (financial value): The loss that would follow from damage to the subject matter must be measurable in monetary terms, so that a definite pecuniary interest can be established and compensated.

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(a) Three types of policy in motor insurance

1. Private motor policy: This policy is designed for vehicles used for social, domestic, pleasure and private business purposes. It does not cover use for hire, reward or commercial carriage of goods.
2. Commercial vehicle policy: This covers vehicles used for business purposes, such as carrying goods, passengers or materials in connection with trade. Examples include lorries, vans, taxis and buses.
3. Motor cycle policy: This is designed for motorcycles, scooters and similar two-wheeled vehicles. It provides cover for the rider’s legal liability and may include fire, theft and accidental damage, depending on the scope selected.

(b) Three scopes of cover in motor insurance

1. Act only cover: This is the minimum cover required by law. It provides compensation for third-party bodily injury or death caused by the use of the insured vehicle. It does not normally cover third-party property damage or loss of the insured’s vehicle.
2. Third party only cover: This provides indemnity to third parties for death, bodily injury and damage to their property caused by the insured vehicle. It does not cover loss of or damage to the insured’s own vehicle.
3. Comprehensive cover: This is the widest scope of cover. It covers the insured’s legal liability to third parties and also covers loss of or damage to the insured vehicle arising from accident, collision, overturning, fire or theft, subject to the policy terms.

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(a) Policy under which the injured employees will be compensated

The four staff were injured in an accident with the company's car while returning from rendering a home service to a customer, that is, in the course of their employment. The appropriate policy is the Employer's Liability Insurance (backed in Nigeria by the Workmen's/Employees' Compensation arrangement).

This policy covers the employer's legal liability to pay compensation for bodily injury, disease or death suffered by employees arising out of and in the course of their employment. Since Madam Scholastica has renewed this cover for the past five years, the two seriously injured staff and the other two can validly claim under it.

(b) Two policies the director should have taken to cover liabilities to customers and third parties

• Product (Products) Liability Insurance: This covers the insured's legal liability for injury, illness or damage caused to customers or the public by goods or substances supplied or used by the business. The harmful chemical bought for washing hair, which damaged many customers' hair, is exactly the kind of loss this policy indemnifies. It would have met the compensation paid to the affected customers.
• Public Liability Insurance: This covers the insured's legal liability to members of the public (third parties) for bodily injury or property damage arising from the conduct of the business or the condition of its premises, for example a customer slipping in the salon or being injured by a generator. It protects the salon against claims from persons who are neither employees nor parties to a contract of sale.

(A Professional Indemnity Insurance, covering negligence in the professional styling service, would also be acceptable as one of the two.)

(c) Insurance policy to cover the cashiers that handle cash

The company should take a Fidelity Guarantee Insurance. This policy indemnifies the employer against loss of money or property caused by the dishonesty, fraud or embezzlement of named employees who handle cash, such as cashiers. The cashier who disappeared with N2,100,000 withdrawn from the company's account is precisely the risk covered. A Money (Cash-in-Transit and Cash-on-Premises) Insurance, covering loss of cash by theft while in transit or on the premises, should also be added.

(d) Two other useful insurance products for the company

• Fire Insurance: The salon operates from a large premises containing fifty hair driers and two motorised generators. Fire insurance would indemnify the company against loss of or damage to the building, equipment and contents caused by fire, lightning and explosion, allowing the business to rebuild and re-equip after such a loss.
• Burglary/Theft Insurance: This covers loss of or damage to the salon's stock, equipment and fittings resulting from forcible and violent entry into the premises by thieves. Given the valuable equipment and cash handled, it protects the assets of the business against burglary.

(Group Personal Accident/Group Life cover for the staff and Business Interruption (Consequential Loss) insurance would also be valid answers.)