Tag Archives: Ethiopian Insurance law

Effect of Formalities on the Enforcement of Insurance Contracts in Ethiopia


Effect of Formalities on the Enforcement of Insurance Contracts in Ethiopia

Fekadu Petros

(LL.B, LL.M; Arbitration Tribunal Manager, Ethiopia Commodity Exchange; Part-time Lecturer at AAU Faculty of Law)

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Introduction

The problems addressed in this article are related to the functions, purposes, and effects of non-observance of legal formalities in contracts of insurance in Ethiopia. Failure to meet the formality requirements provided in the law entails nullity of a contract. However, this paper attempts to explore and examine the various perspectives of this proposition with regard to insurance contracts. To this end, the writer has reviewed literature, conducted extensive interviews and analyzed cases.

The first section deals with formalities in Ethiopian contract law in general, and makes a general overview in respect of all types of formal contracts. It attempts to show the broad social and institutional purposes and justifications of formalities beyond narrower immediate effects viewed in the context of individual cases and present needs. The last two sections are devoted to analysis of insurance formalities both in the law and in the practice.

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Consequential loss in Insurance Cases: Review of Cassation Decisions (Part I)


Consequential loss in Insurance Cases: Review of Cassation Decisions

One of the basic principles of insurance applicable to property insurance is the principle of indemnity. This underlying principle provides that compensation payable to the insured upon occurrence of loss to his property could not exceed the actual value of the property at the time of loss. This principle is clearly stated in article 678 of the commercial code. However, the clarity of the provision didn’t save courts from giving contradictory decisions in determining the amount of compensation to be paid to the insured. When a dispute as to the amount of compensation arises, some courts took a position that the amount payable should be equal to the maximum amount specified in the insurance policy. In order to justify their position courts usually rely on article 665 of the commercial code which imposes an obligation on the insurer to pay “the agreed sum” within the time specified in the policy or when the risk insured against occurs or at the time specified in the policy. In principle a court does not make a mistake if interprets “the agreed sum” as “the amount stated in the insurance policy.” It becomes a mistake if a court applies it to property insurance or insurance of objects.

Article 665 of the code is found in the general provisions applicable to all forms of insurance contract. Hence, the relevance of the provision is limited to determining the time of making payment. As regards the amount of compensation it could only make sense if it is made applicable to life insurance policies. As the value of a human body or life could not be valued, the amount to be paid at the time of materialization of risk is left to the agreement of the parties. The principle of indemnity does not apply to such type of insurance. In property insurance cases article 678 of the code always prevails over the general insurance provisions.

Consequential loss and principle of indemnity

One of the challenges in applying the principle of indemnity in insurance cases is the issue of consequential loss. The commercial code does not make any reference to consequential loss and whether the insurer has an obligation to make payment for such type loss in the absence of a specific policy to this effect. Consequential loss in short refers to lost of profits  and  income resulting  from  harm  to  or  destruction  of  one’s  insured property. It is an indirect loss since it is not a result of a direct act but a loss incurred due to the consequences or results of the act. If a commercial vehicle insured against collision is totally destroyed the owner in addition to the direct loss of his property incurs an indirect loss of income as a consequence of the loss of his vehicle. This will be usually loss of income from the time of destruction of the vehicle until he is paid compensation by the insurer. Now the question is: is it possible to claim for such type of consequential loss under Ethiopian insurance law?

In this regard the position of the Federal Supreme Court Cassation Bench is that the insurer has an obligation to compensate the insured for consequential loss. The absence of any clear provision in the insurance policy providing coverage for consequential loss is not a valid ground to relieve the insurer from his liability. What if there is an exclusion clause in the policy? According to the cassation bench, the insurer’s obligation is still effective even though the policy clearly excludes compensation for consequential loss.

However, this firm position of the cassation bench could not be taken as a full answer to the question raised above. Depending on the nature of the claim by the insured ‘consequential loss’ may refer to loss caused as a result of an act (harm to  or  destruction  of  one’s  insured property) or it may also be similarly used to refer to loss caused as a result of an act of a party (i.e. an act of the insured.) An act of the insurer causes consequential loss on the insured when there is unjustified delay in making payment upon occurrence of loss.

According to article 665 of the commercial code compensation should be paid within the time specified in the policy or when the risk insured against occurs or at the time specified in the policy. If the policy does not provide such time, then payment should be effected immediately (Article 1756 of the Civil Code.) Unjustified delay constitutes non-performance of contract entitling the other party to claim damage caused to him by non-performance. (Article 1771 sub article 2 of the Civil Code)

It is only in this sense that the decisions of the cassation bench could be understood and analyzed. This is important because in most of the decisions no clear distinction is made between consequential los as a result of the act and as a result of the insurer. The absence of clear distinction is not totally the fault of the bench. The parties are also partially responsible for the confusion. When one looks in to the argument of the insured and the insurer, they tend to be at variance in understanding the underlying issue and even in the usage of terminology. Usually the insured claims “compensation for the loss of income” and the insurer challenges such claim on the ground of the absence and/or exclusion of consequential loss in the insurance policy. Yes it is true that a party is not entitled to compensation for loss of income as a result of loss of his insured property. However, what the insured is really demanding by “consequential loss” or “compensation for the loss of income” is payment of compensation for delay of non-performance of the insurance contract. This usually happens when the insurance company delays payment or refuses to compensate the insured upon occurrence of loss.

Consequential Loss in Liability Insurance Cases

Case One

Applicant  Ethiopian Insurance Company

Respondents 1.Ato Demesie Werekeneh

2. Genesis Farms Ethiopia Pvt.

Cassation File Number 27565

Date: Hidar 24-2000 E.C.

Court: Federal Supreme Court Cassation Bench

In this case, a vehicle belonging to 2nd respondent caused a total damage on 1st respondent’s vehicle. Applicant became a party to the case as it has insured 2nd respondent’s vehicle. The value of the 1st respondent’s vehicle was estimated to be 80,000 br. (Eighty thousand birr). In addition to this amount 1st respondent also claimed 18, 300 br. (Eighteen thousand three hundred birr) lost income for 211 days.

Applicant challenged the claim for lost income on the following two grounds:

  1. 1st respondent should not be compensated twice for a single loss, as compensation for the loss of income will have the effect of double compensation.
  2. 1st respondent could not claim compensation for the loss of income caused as a result of damage to his property, without having consequential loss insurance policy.

The cassation bench, responding to applicant’s 1st argument stated that once 2nd respondent is found liable for causing total damage to 1st respondent’s vehicle there is no reason it could not be liable for the loss of income to 1st  respondent as the result of the damage. As regards the second argument the bench said:

“Applicant has not argued (or submitted similar argument) that the insurance policy it issued to respondents excludes consequential loss”

In other words, it held a position that consequential loss is always payable unless the insurance company shows to the satisfaction of the court that it is excluded by the insurance policy.

The cassation bench may not be criticized for its analysis of consequential loss but, for its failure to relate it to the maximum liability of the insurance company. Applicant was made a party to the case because it insured the liability of 2nd respondent. Since this is a liability insurance case the applicable provisions are articles 685 to 688 and of the Commercial Code and the general provisions of insurance (articles 654 to 674 of the Code.) Irrespective of the type of insurance article 665 sub article 2 of the code states that the insurer’s liability shall not exceed the amount specified in the policy.

If the maximum liability of applicant in the insurance policy is 80,000 br. (Eighty thousand birr), then that is the only amount it is obliged to pay. Even assuming that the policy limit is above 80,000 br. (Eighty thousand birr) the insurance company is still not liable to consequential loss. In liability insurance case, the nature and extent of liability of the insurer is determined based on the terms and conditions of the policy. If the policy only provides coverage against the liability of insured as a result of direct damage to the property of third parties, then there is no contractual or legal ground to make the insurer liable for consequential loss. The bench found 2nd respondent liable for the loss of income caused to 1st respondent. However, how this liability is transferred to the applicant insurance company is not clear.

The Requirements to Carry on Insurance Business in Ethiopia


(Taken from Law of Banking, Negotiable Instruments and Insurance

Prepare by Fasil Alemayehu and Merhatbeb Teklemedhn
Sponsoredby Justice Justice and Legal System Research Institute)

           The Requirements to Carry on Insurance Business
Art 656 of the Commercial Code provides that the law shall determine the conditions under which physical persons or business organizations may carry on insurance business.
Therefore, we have to refer to other parts of the commercial code and other laws to find out as to who may undertake insurance business and the conditions under which it may be undertaken. Accordingly, Art 513 of the code provides that banks and insurance companies cannot be established as private limited companies, i.e., a private limited company cannot engage in banking, insurance or any other business of similar nature. Similarly, Art 6(1) of the Licensing and Supervision of Insurance Business Pro No 86/1994 provides that no person may engage in insurance business of any type unless it applies to and acquires a license from the National Bank
of Ethiopia for the particular class or classes of insurance. Furthermore, Art 4(1) and Art 2(3) of the same proclamation provide that such person has to be a share company as defined under Art 304 of the commercial code.
These requirements / conditions in effect prevent foreigners from engaging in insurance business and foreign banks from opening branches and operating in Ethiopia. The most probable reason for this position is the need to protect infant domestic insurance companies which do not have the desired financial strength, knowhow and human resources to be able to compete with foreign banks which have superior capacity in these areas.
The other condition that a person must fulfill to obtain a license relates to the minimum capital of the company, i.e., it must have a minimum capital of 3 million Birr if it is applying for license to undertake general insurance business i.e., insurances other than insurance of persons, and 4 million Birr if it is applying for a license to undertake long term insurance business, i.e., insurance of persons and 7 million where the application is to undertake both classes of insurance. Such capital has to be paid up in cash and deposited in a bank in the name of the company to be established as an insurance company.

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