AMBO UNIVERSITY

SCHOOL OF LAW
Law of Insurance
Dhaba T
 Law of insurance is an area of financial law governing
nature and function of insurance
 It deals wz definition of insurance, types of insurance,
function of insurance, requirements for formation of valid
contract of insurance, requirements to operate insurance
business, rights and duties of parties to insurance K
 The course has generally five chapters:

COURSE OVERVIEW
 Chapter one (insurance in general, significance and basic
principles of insurance)
 Chapter two (regulation of insurance business: types of
insurance, parties rights and duties)
 Chapter three (Insurance of Objects: scope of risk covered,
scope of compensation)
 Chapter four (Liability insurance: third party vehicle
insurance, payment and right of substitution
 Chapter five (Life insurance: nature and scope of risk,
designation of beneficiary, insurance against illness and
disease)

OVERVIEW CONT’D
Insurance in general
A. The notion of insurance :
 It can be defined in several ways. It can be defined from an
individual (Insured) point of view which is a risk transfer
mechanism (from insured to insurer), from insurer view
point in which it is a risk distribution mechanism
 Insurance is a cooperative economic device to spread the
loss caused by a particular risk.

CHAPTER ONE
 In both definition there exist a term risks.

Q) What is risk? It refers to potential of loss, undesirable

consequence….Think of risks involved in health after
appropriate diagnosis is made, risks created by food poison, risks
occurred during transportation, risks occurred at place of work,
risks occurring during construction, damages that can be
sustained by machine while operating, damages on goods in
stock or vessel…
 Risks r known for their uncertainty, peril (damage sustained) and
hazard (የአደጋው አባባሽ) and others
 Risks could be divided as financial vs non financial,
fundamental/ those affecting the mass such as earth quake. Ex
suname/ vs particular risk/affecting a particular individual/

CONT’D
 Under Ethiopian law, art 654 ff commercial code talks
about insurance. However, the code gives no meaning to
insurance rather it defines insurance policy. As per proc
746/2004 (art 2/16): it is a contract whereby an insurer by
collecting a premium from the insured agreed to pay
compensation where specified risks in the agreement did
occur.
 The definition embodies the following elements:

INSURANCE DEFN
a. There exists two parties in the insurance (the
insured/beneficiary and insurer
b. There exists premium
c. Insurance is a risk transfer scheme
d. There exists compensation for the damage sustained.
Q) Does the forth element operate for life insurance?
Q) Do you think that insurance would avoid/prevent losses?

CONT’D
 An insurance contract is aleatory rather than
commutative/level/balanced. Aleatory contracts
have a chance element and an uneven exchange
 An insurance contract is a unilateral contract (one
party makes legally enforceable commitment)
 An insurance contract is a conditional contract
 No assignment of right is authorized under
indemnity insurance but in life insurance one can
assign his rights. (696-698)

FEATURES OF INSURANCE K
Q) R both the same or different? Both r different b/c
a. Their object is different (risk compensation vs gamble for
money)
b. In insurance there is an insurable interest whereas in
gambling there is no insurable interest.
c. Insurance is based on principle of indemnification except
for life insurance whereas there is no indemnification issue
for contract for gamble.
d. Insurance is based on scientific calculation whereas in
contract of gamble there is no calculation scientifically

INSURANCE VS
WAGERING/GAMBLING K
 Insurance has the following significances.
a. Indemnification for Losses. (cash, kind, repair, restitution)
b. Reduction of worry and fear
c. Serves as source of investment funds (ex. Real estate
purchase, capital goods)
d. It is a means of control of loss (creating awareness, restoring
property stolen, investigating frauds committed such as
suicide to claim life insurance)
e. To enhance credit. It creates a confidence or a better credit
facility. I.e it is advisable to extend loan on car that has
insurance than the one without insurance.

SIGNIFICANCE OF INSURANCE
1. Principle of Utmost Good Faith (helps insurance comp to assume the risk
& determine premium (667,668,669
 The duty to make a full and true disclosure of material facts. Disclosure has
to be made at the inception and subsequently). Misrepresentation and non
disclosure violates good faith ppl
2. Principle of Indemnity 665, 678, 679, 689
 All contracts of insurance are contracts of indemnity, except those of life and
personal accident insurances where no money payment can indemnify for
loss of life or bodily injury.
 The purpose of indemnity is restitution. Restoring back to his former status.
Equivalent compensation to damage.
 Compensation will depend on sum insured/should be equal wz what is
agreed up on the policy/, average principle/ ex under insurance/, excess or
deductibles (extent of amount covered by the insured),

BASIC PRINCIPLES OF
INSURANCE
3. Proximate Cause (the risk must be covered and hence it must not be the one
w/c the policy exclude or uninsured) 663, 665
 The insurer is liable only for those losses which have been proximately caused by
the peril/danger/risk/ insured against. I.e considering the last cause of the risk.
 This will enable to decide whether z stated risk is covered under the policy or not.
4. Insurable Interest (otherwise the k will become void k) 675,693
 This is refers to existence in actual sense of the property or subject matter of
insurance.
 Absence of insurable interest will make the policy the gamble or a wagering
agreement.
 In order to have an insurable interest the person must have lawful relation wz a
thing (whose source is from ownership, law such as k of bail, from k such as
construction k, from strict liability) and also must be subject to monetary value
except for life insurance. Example one cannot claim insurable interest on stolen
property.

PRINCIPLE CONT’D
5. Doctrine of Subrogation (aims at avoiding double compens
 It applies only to property insurance.
 It is a situation in which the insurer that pays on behalf of the
insured brings claim against third party at fault to take back the
money it has paid. (683)
6. Risk Must Attach
 If the subject-matter of insurance ceases to exist (e.g. the goods
are burnt) or the insured ship has already arrived safely, at the
time the policy is effected, the risk does not attach, and as a
consequence, the premium paid can be recovered from the
insurers because the consideration for the premium has totally
failed

PRINCIPLE CON’TD
7. Mitigation of Loss
 Insured must endeavor to minimize the risk.
8. Doctrine of Contribution 681
 Like the doctrine of subrogation, the doctrine of contribution also applies only to
contracts of indemnity, i.e., to property insurances.
 The essential conditions required for the application of the doctrine of contribution are:
 There must be double insurance (at different insurance firms
 There must be either over-insurance or only partial loss
9. Reinsurance
 An insurer assuming larger risk from the direct insurance business may arrange with
another insurer to off load the excess of the undertaken risk over his retention capacity.
 Such arrangement between two insurers is termed as ‘reinsurance.’ Thus, by the device
of reinsurance the original insurer transfers part of the risk to the reinsurer.
10. Third Party Interests in Liability Insurance

PPS CONT’D
Q) Ethiopian commercial code while defining insurance assert
that an insurer will pay a sum of money where specified
risk materializes. Does this mean that other mode of
compensation are not applicable under Ethiopian insurance
law?
Q) Many of the insurance company’s r applying excess and
deductibles as principle though not regulated under
commercial code. How will these principles enforced in
courts?

ASSIGNMENT
Q) Why regulation of Insurance needed?
-enforce monetary policy objectives;
-promote domestic and international competition;
- enhance efficiency;
- maintain financial stability and security;
- protect consumers;
- encourage information flow and prudential decision
making; and
- achieve general economic and social policy objectives.

CHAPTER TWO
REGULATION OF INSURANCE
BUSINESS
 Regulation of insurance in our country took place through
NBE. NBE has set different requirements starting from entry to
exit from the market.
 These requirements are requirements of licensing, capital
adequacy, reserving, accounting, valuation, liquidity, solvency,
functional and ownership separation, risk diversification, risk
transferring, information exchanging and fund guarantee
requirements, prohibitions of anti-competitive mergers,
agreements and practices, and abuse of dominant positions,
rules on insider dealing and market manipulation, auditing,
disclosure and others (refer proc 86/94 and supervision of
insurance business directive of NBE: SIB/1/94 up to
SIB/34/2012.

CONT’D
 Under commercial code, they r divided into two
1. Indemnity insurance (654/2). Further divided into
property insurance and liability insurance
2. Life insurance (654/3)
 Currently there r different types of insurance such as
health insurance, marine insurance, air insurance, vessel
insurance and etc)

TYPES OF INSURANCE
 When we say K, requirements for formation of valid k
must exist (1675). These are: meeting of mind, plurality of
parties, proprietary nature, legally possible and enforceable
obligations, form observance (optional). Generally
capacity, consent, object and form.
 K will be undertaken through offer and acceptance
mechanism.
 K of insurance must also comply z requirements of art
1678. failure to comply wz z requirements will result in
invalidation of k as per 1808.

K OF INSURANCE AND
INSURANCE POLICY
Q) What would be the effect of proposal form filled and
submitted by the insured and the insurer failing to respond
w/o delay?
 In USA there r 3 remedies.
a. Silence amounts to breach of implied agreement
b. If an insured fills the proposal and also effect payment
that is acceptance
c. Failure to respond will result in tortuous liability.
Q) What about Ethiopia? Commercial code is silent. Can we
apply provision of civil code by analogy?

CONT’D
 To conclude insurance K two documents r needed.
A. Proposal form (to be filled by insured).መግብያ ቅፅ). This
will help z insurer to determine premium and assume z
risk. Z insured will provide detail information here. Ex
description of proposed insured, description of risk,
circumstance affecting z risk, sum insured)
B. Policy (to be filled by insurer). It is a k and hence
includes place of k, parties address, property insured,
parties respective rights and obligations, duration,
amount of premium, risks covered.

CONT’D
 Under indemnity insurance they r insured and insurer
 Under life insurance in addition to the above two there
exists beneficiaries.

PARTIES TO INSURANCE K
a. Obligation of insurer
1. Duty to pay compensation as agreed on z policy (when
risk in z policy in z period stated materialize) 663/665.
earlier ppls such as good faith must exist to benefit
2. Duty to serve as insurer

PARTIES RIGHTS AND

OBLIGATIONS
b. Insured obligation
1. Duty to pay premium (659, 666, 709). Refer them for
effects of failure to pay premium too
2. Disclosure of information and notification of occurrence
of damage (670). Notification wz in 5 days. 5 days
requirement is amended to 10 for 3rd party insurance wz
procl 799/2005 art 17 (1)
Q) What is z effect of failure to notify z damage? 2 opposing
views (one it denies z right to get compensation and z
second view it will not deny). Refer cassation dec file no
17689 decided on tahissas 10/1998.

COUNT’D
 It is an insurance where by an owner of an object enters an
insurance for property he/she owns. In such kinds of
insurance, an insurer will indemnify an insured where risk
specified in the policy did materialize. Hence insurance of
object is a contract for compensation (Art 678).
Q) Who will enter into insurance of object? To enter into
insurance of object requirement of insurable interest must
exist. Insurable interest here refers to a person’s legally
recognized r/ship to z subject matter of insurance. Hence,
such r/ship must be of legal one in nature.
Q) How do u see article 675 from insurable interest point of
view? It says any person interested in preservation only?

CHAPTER THREE
INSURANCE OF OBJECT
 Insurable interest consists of the following essential elements;
a. Existence of an object (property) subject to insurance. A property must be
proprietary nature. (የመድን ሽፋን ሊሰጠዉ የሚችል ንብረት፤መብት፤ጥቅም እና ሁኔታ ሊኖር
ይገባል). For instance loss of an object insured will result in the termination of the
policy as per article 677 of commercial code.
b. Legal r/ship of a person entering insurance K wz an object ( መድን ገቢዉ የመድን ሽፋን
ከሚሰጠዉ ነገር ጋር ሕጋዊ ግንኙነት ያለዉ ስለመሆኑ ማሳየት አለበት)
c. R/ship between an insured and an object must be z one enforceable and
recognized under z law. (በመድን ገቢዉ እና የመድን ሽፋን በተሰጠዉ ነገር መካከል ያለዉ
ግንኙነት በህግ ተቀባይነት ያለዉ መሆን አለበት)
 An insurable interest could be obtained from
a. ownership over property, (w/c could be joint or sole o/p). Example; mortgagee
CONT’D
b. Interest arising from law (Example : K of bail)
c. Insurable interest arising from k (Example: construction K)
d. insurable interest arising from strict liability (Example: Art 96 of labor
proclamation)
 Therefore, to enter into insurance of object, requirement of
insurable interest must be complied with. This interest
could be either direct or indirect as enshrined on art 675.
 As far as scope of risks (remember the three types of risks
namely: insured risks, excluded/excepted risks and
uninsured risks) covered under insurance of object are
concerned, those risks that r covered by the policy will be
covered. Accordingly, it is only insured risks that will be
under the scope of risks of insurance of object. Article 676
of commercial code for instance talks about uninsured
risks; risks associated wz international or civil war).

CONT’D
 Insurance of object from the very outset is an insurance for
compensation.
Q) What would be the scope of compensation?
 In insurance K, amount of compensation will be
proportionate to the loss incurred. If the amount of
compensation exceeds the damage sustained, it will affect
the insurer as the premium collected is assumed to be the
public money. The very essence of compensating is to
reinstate the insured to its place.

SCOPE OF COMPENSATION
Q) What r the determining factors that limit scope of
compensation?
a. Sum insured (it refers to maximum amount recoverable
under insurance policy)
b. Average principle (when an insured enters into under
insurance). Here compensation paid will be:
 Sum insured X damage/loss sustained divided by
market value of an object
c. Excess and deductibles will be taken into account

CONT’D
Q) What would happened when there exists under insurance
and over insurance?
a. Under insurance (679). When z object insured is of
greater vale than z amount for w/c insured. The remedy
is self insurance
b. Over insurance (680): when compensation exceed z
value of z object insured. The effect is that if fraud exists
termination and if no fraud compensation paid will be
equivalent to z value of an object. Premium paid earlier
will be retained but for prospective premiums
adjustment (reduction) could be made.

CONT’D
1. Doctrine of subrogation (683). Will they bring direct
claim or substitute themselves under insured? የጋራ
የመግባብያ ሰነድ አላ፤፡ አንዱ መድን ሰጪ ሌላዉን የሚጠይቅበት፡፡
በተግባር እየተሰራ ያለዉ ነገር በደንበኛ እግር ተተክቶ ሳይሆን ቀጥታ ክስ
እያቀረቡ ነዉ፡፡
2. Salvage value related (የተሸከርካር ቅሪት አካልን በተመለከተ ዋጋዉ
ሳይሰላ ቀጥታ እየጠየቁ ነዉ፡፡የማይገባቸዉን እየጠየቁ ይገኛሉ፡፡ ማለትም
ቀንሶ መጠየቅ ስኖርባቸዉ ሳይቀንሱ እየጠየቁ ይገኛሉ፡፡)

DISPUTABLE ISSUES ON K OF
OBJECT (አከራካር ጉዳዮች)
1. Competition in Ethiopian Insurance market and its
regulation (Group 1)
2. Supervision and regulation of Insurance Industry in
Ethiopia (Group 2)
3. Regulation of licensed insurance brokers under
Ethiopian Insurance law (Group 3)
4. Comparison of Ethiopian Insurance Industry wz selected
African countries (Group 4)
5. Licensing and cancellation of Insurance licenses under
Ethiopian Insurance regime (Group 5)

GROUP ASSIGNMENTS
CHAPTER FOUR
LIABILITY INSURANCE (COMPULSORY THIRD
PARTY LIABILITY INSURANCE) PROCL 799/2013
Q) Why third party liability insurance necessitated? The
preamble has an answer. Accordingly the legislation is
enacted as a response to escalating vehicle accident (aims
at responding to the problem), the need to provide
emergency medical treatment to victims, reducing social
problems of such accidents, the need to fill the legal voids.
Q) Who is third party? Third Party” is as any person other
than the insured person’s family, the driver or any
person employed on a vehicle to which an insurance
policy applies at the time when an accident occurred giving
liability under such insurance policy. (Art 2(10)
 Hence the law excludes; insured person’s family, driver or
any person employed on a vehicle.
Q) Why such exclusion? What is z policy behind it?

CONT’D
 In line with the above preamble, article 3 of the same
proclamation stipulates that:
1, No person shall drive or cause or permit any other person to
drive a vehicle on a road unless he has a valid vehicle insurance
coverage against third party risks in relation to such vehicle.
2, Notwithstanding the provision of sub article 1 of this article, the
Ministry may determine vehicles to operate on the road without
requiring compulsory motor vehicle insurance coverage.
Q) What is z effect of driving a vehicle w/o the certificate? Article
13 (it will be regarded as primafacia evidence that z vehicle is
not insured. Detention of car and administrative penalty (art 30
fine ranging from 3,000 birr to 5,000 birr)

CONT’D
Q) Can insurer object payment based on various grounds?
Article 5 has an answer. It states that, once a certificate of
insurance (third party) is given for the insured, an insurer
cannot object payment of compensation based on the
ground of age, physical condition of the person driving,
condition and value of the car, number of person travelling,
time the vehicle is used. Hence this shows that there is
clear unlimited liability. The above statement is further
strengthened on article 6 which states that any agreement
which limit liability of insurer shall have no effect

GROUP DISCUSSION
 We have to notice that third party insurance does not cover all subject
matters. Hence, there are excluded subject matters. These are clearly
indicated on article 7. Accordingly; the following shall be excluded from
the coverage of any insurance policy against third party risks
1. death or bodily injury to the insured person or member of the insured
person’s family;
2. liability in respect of death or bodily injury caused to a person hired by the
insured person and occurred in the course of such employment;
3. damage to the insured vehicle;
4. liability in respect of damage to goods carried on the basis of rent or
payment on the insured vehicle; and
CONT’D
5. Damage to any property owned by or is under the custody of the insured
person.
 As it is clearly indicated under articles 9, 12, and 13 of the
proclamation, an insurance company shall issue a
certificate of insurance to third person at the same time
it issues an insurance policy and insurance stickers.
 The absence of an insurance sticker shall constitute a
prima facie evidence that the vehicle has not been insured
and the police shall have the power to detain such vehicle
until the appropriate certificate of insurance presented

CONT’D
 As to the extent of liability, article 16 clearly stipulates that:
the amount of compensation due to damage caused by an
insured vehicle shall not exceed:
 Birr 40,000 (forty thousand) in the case of death;
 Birr 15,000 (fifteen thousand) in the case of bodily injury; and
 Birr 100,000 (one hundred thousand) in case of damage to
property.
 Any person who alleges to be entitled to compensation above
the limit provided for under sub-article (1) of this article shall
have the right to claim the same from the insured person in
accordance with the relevant laws. I.e extra contractual )

CONT’D
Q) What about foreign registered vehicles such as diplomats vehicles and etc?
The treatment of Foreign Registered Vehicles is provided under article 26 of the
proclamation as follows:

 The driver of any foreign registered vehicle permitted to be driven on the roads of
Ethiopia shall possess a valid certificate of insurance and insurance sticker or,
where the insurance policy is not issued by a local insurance company, he shall
produce a yellow card or an equivalent proof of insurance coverage. It is a
certificate issued for payment of compensation as per COMESA protocol.

Q) What about extent of compensation?

The insurance coverage against third party risks with respect to an accident caused
CONT’D

by any foreign registered vehicle while driven on the Ethiopian road shall not be
less than the amount of compensation specified under Article 16 of this
proclamation.
1. Obligation of insured
 Providing true information (utmost good faith pple) Art 11
 Notifying the accident (wz in 10 days though it is 5 days
under property insurance). Art 17
 Duty to secure insurance coverage (Art 15)
2. Obligation of Insurer
 Providing compensation
 Duty to execute court judgment
 Obligation to provide insurance sticker

PARTIES OBLIGATION UNDER

LIABILITY INSURANCE
 Article 691 of commercial code defines it. The elements of the definition are:
a. it is a contract,
b. for payment of premium,
c. to subscriber/beneficiary
d. Presupposes occurrence of certain condition dependant on life/death of
subscriber.
 It is not a contract for compensation (Art 689). Amount to be paid is
subject to agreement b/n insurer and subscriber.
 One of the essential element of life insurance is that it imposes reciprocal
obligation on both parties (subscriber has obligation to pay payment
specified in the policy whereas insurer has an obligation to pay the
money/premium stated in the policy to beneficiary stated in the policy

CHAPTER FIVE
LIFE INSURANCE
 Commercial code of Ethiopia recognizes three types of life
insurance;
a. Endowment life insurance (692/1). Here payment of
premium will be made provided that the person is alive on the
specified date (premium will be paid until the specified date
lapses). If the person dies before the specified date, payment of
premium will stop. The very intention of this type of insurance
is to help the subscriber economically during retirement and to
encourage investment.
b. Whole life policy (692/2). Here payment of premium will
continue until the subscriber dies and stated payment be made
to beneficiaries. የመድን ገቢውን ሞት ተከትሎ የፖሊሲዉ ገንዘብ
ለተጠቃሚዎች ይከፈላል)

CONT’D
c. Combined policy (692/3). In such of life insurance, the
subscriber will enter into agreement of both nature
(endowment and whole life insurance). በዚህ መሰረት መድን
ገቢው ከ መድን ሰጪዉ ጋር የሚዋዋለው በተወሰነ ቀን ወይም ግዜ ውስጥ
በሕይወት ኑሬ ከተገኘሁ የፖሊሲው ገንዘብ ለራሴ ይከፈለኝ ነገር ግን
ከተባለው ቀን ከመድረሱ ከዚህ ዓለም በሞት የተለየሁ እንደሆነ በዉሉ ላይ
ለተጠሰዉ ተጠቃሚ የፖሊሲው ገንዘብ ይከፈል የሚል ይዘት ይኖረዋል

CONT’D
 Like any insurances, requirement of insurable interest must
exist. However it is possible to enter into life insurance by
third parties (693). But the consent of insured is mandatory.
If the person is married, the consent of his spouse is also
mandatory.
 Generally, life insurance is not an insurance for
compensation unlike others.

INSURABLE INTEREST
 From the very outset life insurance will be made on
conditions stated above (up on living alive on stated date or
up on occurrence of date within specified date).
 However, the following risks are not covered under life
insurance;
a. Entering into life insurance by third parties w/o consent
of insured
b. Commission of suicide by the subscriber (699)
c. Murder committed by beneficiary (700)

SCOPE OF RISK UNDER LIFE

INSURANCE
Q) How do you see article 701 (1) and 701(2) and art 705?
1. If beneficiary specified, those beneficiaries by operation of
law will not benefit. i.e those beneficiaries by law will
benefit if no beneficiary is stated in the policy
2. Even though specified they both will benefit
3. If no beneficiary is stated it will form part of succession.
How can a wife succed then?

GROUP DISCUSSION
 Rights of insured among others include, the right to benefit
from the insurance and has an obligation of maintaining
insurance principles such as utmost good faith, paying
premium and related
 An insurer has an obligation to pay stated amount and has
right to collect premium

RIGHTS AND OBLIGATION OF

PARTIES
 It is an insurance contract whereby an accident during
specified policy period did occur or suffer specified
disease.
 An accident is the result of unforeseen circumstance which
may result in disability.
Q)Labor law regulates occupational accident. When an
accident at place of work and during working hours did
occur, an employer has an obligation to provide medical
remedies which includes hospitalizing abroad. It also
regulates occupational disease. How do you see them with
insurance against illness and accident?

INSURANCE AGAINST ILLNESS

AND ACCIDENT (711,712)
 Life insurance for the event of death are specifically made
for the benefit of beneficiaries.
Q) Who are beneficiaries there? As far as Ethiopian
commercial code is concerned, it recognizes three types of
beneficiaries;
a. Designated beneficiaries (701/1)
b. Presumed beneficiaries (beneficiaries by law (701/2)
c. Beneficiary designated by will(ኑዛዜ), schedule
(የኢንሹራንስ ዉል በተጨማሪ ጽሑፍ) or endorsement (ለታዘዘለት
የሚለዉን ኢንሹራንስ ዉል በጀርባዉ ላይ በመፈረም)

DESIGNATION OF BENEFICIARY