Why insurers face a bumpy road ahead

Under the current law which has been declared illegal and which came into force on January 28, 2014, an insurance firm would pay up to Sh3 million once the court gives an award against the insured. Anything over and above that figure would be met by the insured through his or her other means. PHOTO | FILE

What you need to know:

  • Under the current law which has been declared illegal and which came into force on January 28, 2014, an insurance firm would pay up to Sh3 million once the court gives an award against the insured. Anything over and above that figure would be met by the insured through his or her other means.
  • A footballer who loses his leg, the lawyers said, would have lost a more valuable part of the body because it is his tool of trade, and cannot thus be paid the same way as a person who loses a leg but does not use the leg to earn a living.
  • The move will however work to the benefit of transport players who had been left exposed by the law requiring them to take care of the difference between the award and the set limit.

The insurance industry faces a rough ride after the High Court last week ruled as unconstitutional a law limiting the amount payable to an accident victim.

The decision by Mr Justice Joseph Onguto will certainly see insurers increase third-party covers, a move that is likely to also lead to matatus increasing fares to cover the added cost.  

Justice Onguto declared sections of the Insurance (Motor Vehicle Third Party Risks) Amendment Act, 2013, which pre-determined the maximum compensation at Sh3 million irrespective of injuries sustained, as unconstitutional.

Sections 3 (a), (b) and section 6 provides that an insurance policy, “shall not be required to cover liability of any sum in excess of Sh3 million arising out of a claim by one person.”

Under the current law which has been declared illegal and which came into force on January 28, 2014, an insurance firm would pay up to Sh3 million once the court gives an award against the insured. Anything over and above that figure would be met by the insured through his or her other means.

“Where the State through statute seeks to limit the level of compensation, then it would be right to conclude that the right to bodily integrity is under threat of being taken away. The Schedule actually seeks to limit the amount payable under the insurance cover by the insurer,” Justice Onguto ruled.

The move will however work to the benefit of transport players who had been left exposed by the law requiring them to take care of the difference between the award and the set limit.  

However the insurance sector will be hit hard. The sector has gone through turbulent times over the years mainly due to huge claims — some fraudulent — by lawyers, doctors and fictitious victims demanding millions of shillings.

The last two decades has seen the collapse of Stallion Insurance Company Ltd, Lakestar Insurance Company Ltd and Liberty Insurance Company Ltd. Others are the United Insurance Company Ltd, and Invesco Assurance Company Ltd.

This prompted the players to propose adjustments to the law to ensure their survival. They settled on the law that would limit the amount an insurer could pay in each claim.

This saw the enactment of the Insurance (Motor Vehicle Third Party Risks) Amendment Act, 2013, which has now been struck out. The law was meant to safeguard the industry by limiting claim and ensuring less fraud. However, following the new ruling, the insurers are back to the drawing board.

According to the Association of Kenya Insurers (AKI) and Attorney General, the amendments to the Principal Act and the Amendment Act were largely informed by the rampant insolvency of many insurance companies that were underwriting Public Service Vehicles (PSV), and the reluctance by most firms to insure PSVs due to fraud and the high risk involved.

The government had to intervene. Consequently, there was an elaborate communication between the insurance regulators and government officials seeking to facilitate efficient regulation of the industry through amendments to the Insurance Act.

The AKI had supported the law saying the motor vehicle (third party risks) insurance sector had become unsustainable with rampant fraud, especially in PSVs, despite the vital role it plays in the economy.

“This has been evidenced by the collapse of some of Kenya’s top insurers at the time of enactment,” AKI had said.

However, the move to cap compensation for accident victims resulted in a protracted battle after lawyers through their umbrella body, the Law Society of Kenya (LSK) filed an application against the AG and AKI, arguing that “the type of injuries, even though the same, may not be equivalent” and that setting the maximum compensation at Sh3 million would violate the rights of the victims and was thus unconstitutional.

Footballer

A footballer who loses his leg, the lawyers said, would have lost a more valuable part of the body because it is his tool of trade, and cannot thus be paid the same way as a person who loses a leg but does not use the leg to earn a living.

Unfortunately for the insurers, sections 3 (a), (b) and section 6 were found unconstitutional by Justice Onguto, who while tracing the history of insurance in the country, said the intention has always been to ensure that even the most poor but insured persons are able to meet claims against them.

He gave the example of England where between 1919 and 1930 saw a great number of motor vehicles added to the traffic on the roads, and the accidents became numerous. However, it became evident that in a number of cases, serious hardship was caused where the person inflicting the injury was devoid of means and, being uninsured, was unable to pay the damages which he was liable.

It is against this backdrop that the Road Traffic Act, 1930 was enacted in England. It sought to provide a system of compulsory insurance against certain risks. Prior to the enactment of this law, there was no law of compulsory insurance in respect of third party rights in England.  Its aim was to reduce the number of cases where the judgment for personal injuries obtained against a motorist was not met.

In Kenya, The Principal Act commenced on October 1, 1946. The design and architecture of the statute was similar to that of English, even though there were still much fewer automobiles on the Kenyan roads in comparison to England.

Mr Justice Onguto observed that the essence of the Motor Insurance (Third Party Risks) Bill, 1945 was to enable persons injured in motor vehicle accidents to recover damages awarded even against impecunious drivers. Hence section 4 (1) of the Act, that has remained largely un-amended since its enactment in 1945.

The judge said the effect of the Amendment Act is a case of the court being left to determine liability and then the insurer determining what amount to pay for each injury suffered and payable under the Sh3 million limit.

“The purpose of the statute, being the Principal Act in general must not be ignored. The purpose as can be gleaned from history was to ensure that the security of a person as to his physical and bodily integrity is not compromised,” the judge.

He added that the State sought to improve on the challenges of victims rendered helpless by motor vehicle accidents and who ordinarily ended up not being compensated by careless or negligent drivers who were impecunious.

The judge said it ought to be appreciated that under the Constitution, the State ensures that the dignity and security of a person as guaranteed under Articles 28 and 29 are protected both through criminal sanctions as well as through other measures. Such measures, he said may be taken to include the compulsory third party insurance schemes and covers.

The judge said the court process would certainly be compromised if the insurer was allowed to apportion what the victim has been awarded.

While supporting the law limiting what insurance firms can pay, AKI said the judgment given by the Court is “against the insured and not the insurer, as the insurer is liable to satisfy the said judgment by virtue of the insurance policy taken up by the insured and therefore the insured remains liable to the beneficiary of the judgment to the full extent of the amount that remains unsatisfied”.

The judge however said the court ought to be able to award an amount even in the excess of Sh3 million for a lost limb or sight and that should be recoverable without any additional apportionment.