Right to Indemnity: Third Party in Insurance

“Justice is the insurance which we have on our lives and property. Obedience is the premium which we pay for it.”

William Penn

1. INTRODUCTION

Current the road traffic accidents are major cause of deaths and serious bodily injury in Tanzania. The essence of this article is to elaborate the practice of insurance in Tanzania and right of indemnity to third party. The article will discuss individual cases of claimants failing to be indemnified after accidents due to either lack of awareness or failure of meeting legal requirements when claiming for indemnity. These are referred to as third parties of which insurance third party scheme intends to cover.

In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. It is an equitable transfer of the risk of a loss, from one entity or party to another called insurer, in exchange for payment called premium. An insurer is a company selling the insurance, which is the promise to wear the insured shoes on the happening of loss caused by insured event. An insured or policyholder is the person or entity buying the insurance policy. The transfer of such risk depends on insurance rate. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium.

Legally two parties, insured and insurer concludes an agreement upon which the losses will be recovered on the happening of insured event specified in the insurance contract/policy.

In insurance contract there is a right of Third party. Third party is a person who is not part to insurance contract and who is specified or otherwise stated in the contract. Unfortunately third parties are still suffering partly because are not aware of the legal rights and protection available for them in the insurance policy also due to the way insurance contracts are structured.

The agreement of indemnity in the insurance contract between insured and insurer is the lynch pin of the insured’s legal claim of which the insurer promises to be responsible on behalf of the insured. Despite of the essence of insurance most of insurers, especially in motor insurance tend to delay or deny indemnifying the third party after suffering injuries due to insured’s negligent, especially in Motor insurance policy.

1.1 MOTOR INSURANCE: MANDATORY COVER

Motor insurance is an insurance that is required by law before individuals engages in driving motor vehicle. It is a mandatory policy issued by an insurance company as part of prevention of public liability to protect the general public from any accident that might take place on the road. The law mandates that every owner of a motor vehicle must have one motor insurance policy.

It is law in this country, as specified by the motor vehicle insurance Act, that all road users must be covered by a certain minimum level of insurance. Motor Vehicle Insurance Act (RE 2002), Sec 4(1) state that “subject to the provision of this Act, it shall not be lawful for any person to use, or to permit any other person to use, a motor vehicle on a road unless there is in force in relation to the use of the vehicle by that person or that other person, as the case may be, such a policy of insurance or security in respect of Third party risks as complies with the requirement of this Act”

It is mandatory basing on severity and frequency of road accidents. It protects negligent drivers from liability upon happening of the car crash and that crash would create damages and that the driver at fault would often be unable to pay for them.

2. MEANING OF INDENMINTY.

It is a way of undertaking to place the insured after the loss in the same position he would have been as if loss did not occur or to the same position he immediately was before the loss.

Indemnity in the legal sense may also refer to an exemption from liability for damages. The concept of indemnity is based on a contractual agreement made between two parties, in which one party agrees to pay for potential losses or damages caused by the other party. A good example is an insurance contract, whereby one party (the insurer) agrees to indemnify the other (the insured) for any damages or losses, in return for premiums (amount of money) paid by the insured to the insurer.

Business dictionary defines Third party insurance as “a liability insurance purchased by insured (first party) from insured (second party) for protection against claims of another (third party). The first party is responsible for its own damages or losses.” Insurer agrees to wear insured shoes when the insured risks/peril cause loss or damage to another person, the loss or damage must be specified (e.g. property damage or bodily injury ). Hence this coverage of Insurance provides protection against liability caused by accidental injury or death of other persons or damage to their property.

Indemnity may be paid in the form of cash, or by way of repairs or replacement, depending on exactly what is spelled out in the indemnity agreement.

In other words this means protection against future loss or legal exemption from liability for damages. Not all classes of insurance the indemnity apply. There are several exceptions to the principle of indemnity. Indemnity does not apply in the following policies:

1. Valued policies
2. Replacement cost insurance
3. Life insurance

Under a valued policy, insured collect the face value of the policy if a total loss occurs, regardless of the actual cash value at the time of loss. Such policies are commonly used to insure artwork, antiques and family keepsakes. Some states have enacted valued policy laws under which the face value of the policy must be paid if a total loss is caused by a specified peril such as wind, fire, or lightning.

Replacement cost insurance is another exception to the principle of indemnity. Under replacement cost coverage, the replacement cost of the asset is paid without an allowance for depreciation. This type of coverage is more expensive than actual cash value coverage. A fourth exception is life insurance. Life insurance policies are commonly purchased to provide income replacement should a breadwinner die. The principle of indemnity does not apply to life insurance contracts. The amount paid on the happening of insured event the full agreed amount is paid to the beneficiary

3. RIGHT OF INDEMNITY TO THIRD PARTY

In Tanzania the rules regarding disclosure of information to the third party are inadequate. The right to information does not arise until the liability of the insured is established. This results in the third party conducting litigation with the wrongdoer in ignorance of whether there is in fact an insurer against whom the third party may be able to proceed.

The third party is only able to exercise the right to information against a limited number of people excluding those who might have relevant information such as insurance brokers.

According to Tanzania insurance Act 2009 sec 59: The section requires the insured to give full information to third party in order for the third party to claim for indemnity. But the Act is silent, it does not say what measures will be taken to the person who fails or ignore to do so. Also it does not give the third party an alternative way or procedure for him/her to follow if that incidence happens.

The insured should give notice of a claim in accordance with the terms of the policy; failure to give such notice may allow an insurer to refuse to pay a claim.

CASE STUDY IN AUSTRALIA: In the recent case of Gosford City Council v GIO General Limited [2003] NSWCA 34; the New South Wales Court of Appeal held that an insured holding a claims-made policy which had failed to notify its insurer of a potential claim before the policy expired was not entitled to indemnity. The decision affirms previous decisions in this area which have limited the combined operation of Sections 40(3) and 54(1) of the Insurance Contracts Act 1984.

COURT HELD: At first instance, Justice Bergin held that the insurer was not obliged to indemnify Gosford City Council. Gosford City Council appealed that decision.

Appeal: Justices Spigelman, Meagher and Sheller unanimously upheld Bergin’s decision that a failure by the insured to notify of a circumstance during the policy period as required

In my opinion there must be changes in the Insurance Act and existing standard motor insurance policy. The Act should allow the third party to exercise insured’s duty whenever necessary. The duty to give notification to insurer. Insurer has the right to reject the claims due to failure to notification. Also the Insurance Act should order the insurance company to introduce another condition for third party to give notification if insured fails. Insured’s duty should be transferred to the third party if insured fail or ignore to exercise his duty as per insurance Act. This means it will prohibit insurers to rely on technical defences to defeat third party claims, such as that the insured failed to notify the insurer of the claim on time stated in the policy, even if the third party has given this notification instead. Insurers owe the duty of utmost good faith and fair dealing to the claimants.

Sometimes insurers use technical errors to deny or delay settling of claims, even if insured notified the insurer as per motor insurance policy condition, they take advantage of ignorance or unawareness of the Third Party. Charles Duhigg (Aged, Frail and denied care by their insurers, March 26, 2007) argued that “the bottom line is that, insurance companies make money when they do not pay claims. They will do anything to avoid paying…” this is bad faith claim against insurer. According Insurance Act, 2009, Sec 131(3) Bad faith claims refers to (a) “an insurer’s delay in processing of a legitimate claim beyond a time period consistent with normal industry practice” (b) An insurer’s delay in making payment to a claim beyond forty five days of the date of receipt of the executed discharge without consent of the commissioner”

The bad faith claims should not extended to Third party. Insurance companies save money by denying claims. Third party should not have to accept a denial as a final judgment, and the stated reasons for not paying can be challenged. Third party may find the insurance denial is not supported by the facts of the claim. Insurers delay paying of claims, knowing that Third party will give up. Insurers disobey Insurance Act Sec 131 Sec (1) by delaying paying a claim, the sections orders an insurer to pay claims within 45 days from the day of submission of the claim. The Act states “Every insurer shall pay claims within forty five days of the date of receipt of the executed discharge and where the insurer is enable to settle claims within that time, he may apply to the commissioner may for extension of time and commissioner may grant an extra time of not more than forty five days within the claim shall be settled” Practically this is not done in the industry. Hence bad faith claims on the side of insurer, whereby Third party claimants are still suffering. Unreasonable delay of claims payment has been declared as a bad faith claim by insurer, Subsection (2) “where an insurer fails without a reasonable cause to settle the claim within forty five days or within the time extended by the commissioner that claim shall be treated as a bad faith claim against insurer”

Betty Hobel argued that “insurance company made it so hard to make a claim that people either died or gave up.”

4. CHALLENGES AND WEAKNESS WITHIN THE INDUSTRY

The third party is required to proceed against both the insured and the insurer. This is the biggest challenge, because third party him/herself current is required to go head-to-head with the negligent driver at the same time with the insurer. Some of third party tends to give up due to the time consuming in collecting some of the document and information from the negligent driver.

Increasing number of motor vehicles owner of which they have different risk exposure lead to increase number of road accidents. Motor vehicle crashes are the leading cause of death in the recent years. Every single road user should be urged to take utmost care and caution on the road.

According to ROAD TRAFFIC ACT 1973, Sec24: If the examining officer is satisfied that

(a) The applicant is competent to drive a motor vehicle of the class of which he desires a driving licence; and

(b) The applicant has a good knowledge of this Act, the Highway Code, the road signals and the road signs, the examining officer shall, upon payment of the prescribed fee by the applicant, issue to applicant a certificate of competence in prescribe form.

Unfortunately there is increasing number of young drivers (inexperienced drivers) of which they are holding driving licence while they didn’t pass the required procudure.This is an emerging challenge. Also Sumatra regulations for road passenger vehicles sec 17 (2) (b) “a driver of a passenger vehicle is not less than thirty years old and sixty years is holding class “C” driving licence, passenger service vehicle certificate and five years experience with free accident records” but in the industry there a many drivers of passenger vehicle who are under thirty (30) years old.

The presence of large number of inexperience drivers who are not well aware of the road signs and some of them they do not even hold driving license. Hence increasing number of road accidents.

Sec 57 of the Road Traffic Act 1973 explains the duty of driver in case of accident .- Where an accident, arising directly or indirectly from the used motor vehicle or trailer occurs’ to any person or to any motor vehicle or trailer or to any other property, the driver of the, motor vehicle or trailer shall stop if, having regard to all the circumstances, it safe for him to do so and shall ascertain whether any person Provided that where, the driver does not stop because it is not, having regard to all the circumstances, safe for him to do so, he shall, immediately report the accident at the nearest police, station has been injured, in which event it shall be his duty to render all practicable assistance to the injured person

(2) In the case of any accident, if any person is injured thereby, the driver of the motor vehicle or trailer-(a) shall give to any police officer present and to any person concerned his name and address and also the name and address of the owner and the registration number assigned to the vehicle; and (b) shall report the accident in person at the nearest police station or to a police officer as soon as reasonably practicable and in any case not later than twelve hours after the time of the accident, unless the driver is incapable of doing so by reason of injuries sustained by him in the accident.

But several times it has been claimed the occurrences of road accidents and some drivers run from the accident scene and they do not even report to the nearest police stations. This makes the third party to be difficult to claim for indemnification from insurer. Hence third party’s right is hard to be awarded accordingly.

Also the current standard motor insurance policy under general condition requires only insured notifying the insurer on happening of the insured event. Even if the third party knows the insured’s insurer, he or she is not entitled to give a notification. Changes must be made to allow third party to notify the insurer upon failure of the insured.

The lack of use of seat belt is another challenge which gives rise to increase in bodily injury of passenger. The use seat belts often save people from death and serious injury. In Tanzania many people do not use seat belt may be because they are in a hurry, or they simply forget, and thousands die as a result.

Seat belts reduce risk of death and serious injury and cut the risk of serious injury. Seat belts prevent drivers and passengers from being thrown away from the vehicle if serious accident happens. People who do not wear a seat belt are more likely to be thrown away from a vehicle during an accident. Many people who are thrown during a crash die or get serious injuries were found that they were not using seat belt.

Despite of SUMATRA REGULATION for Motor cycles and tricycles regulations, 2010 Sec 13 (m) a licenced tricycles is fitted with safety belts for each passengers and driver and door or barriers on both sides of the passenger’s compartment and Road Passenger vehicle regulations Sec 17 (2) (i) a licenced motor vehicle which transport inter-urban transport services is fitted communication facilities and driver and passenger safety belts.

Both sections require the vehicle to be installed with the safety belt for driver and passengers. But in reality the bajaj and daladala are not installed with safety belt. Unfortunately police officers observe the violation of the regulations but they take no action.

Seat belts if well used can save thousands of lives each year, and increasing use would save thousands more. If drivers and passengers will use seat belt there will be low number passengers come to claim as a third party bodily injury claimants from the road accident.

The amendment of this regulation will enhance the police officer to charge the penalty even to those passengers who will violate seat belt section under Sumatra regulations. The existing regulations does not say what measures will be taken to passenger who violet the regulations for use of safety belt. The sec 28(k) of motor cycle and tricycle regulations and Sec 32(j) of road passenger vehicle regulations gives punishment only to drivers or operators of the vehicle. But it is silent to passengers. Passengers will prefer to use the safety seat belt effectively rather than paying fines.

Another challenge which gives rise to third party claims for bodily injury is the over carrying of the passengers as opposed to Motor cycle and tricycle regulations Sec 13 (d) the driver of motor cycle does not carry more than one passenger and Sec 59(1) and (2) of road traffic Act 1973. Nowdays motor cycles drivers carry up to three passengers. As well as in passengers vehicles (daladala) carry passenger exceeds its carry limit. This is prohibited under road passenger vehicle regulation Sec 17 (2) (f) standing passengers are not carried in motor vehicle providing inter-urban services.

The use of mobile phones also is the cause to road accident. Recently it seems is normal for drivers to use mobile phones while driving. Drivers tend to lose concentration on road signs and sometimes they over speed without noticing. By doing so they violet Sumatra regulation Sec 13 (k) the driver while driving shall not use a hand mobile telephone or use any equipment with interactive communication functions. Also drivers wears earphone listening to radio while driving and lose clear eye sight on the road.

Most of third party claimants do not know about their right and time required by insurance Act for the claims to be paid by insurer from the date of presenting a claim. The Act orders an insurer to settle claims within forty five days from the date of presenting a claim. In real practice insurers dealy paying claims within that time limit with no reasonable cause other that making third party to give up. Lack of awareness of third party leads it to be difficult for them to report to commissioner of insurance for legal action. Insurance Act Sec 166 (1) “every person who acts in contravention of the provision of this Act commit an offence and shall where no punishment has been stipulated by any other section in this Act for that offence, on conviction be liable for not exceeds five million” Sec (2) “where an offence to which this section applies is committed by a body of persons, every director, manager, controller or principal officer of the company and every partner, manager or principal officer of the partnership shall be deemed to be guilty” Public education should be given to people in order to report to the Authority any unreasonable delay of claims settlement.

The last challenge to be discussed in this article is drink and drives. Alcohol leads a person to lose its normal capability of judging what to do and when to do. It is strictly prohibited under Sumatra regulation Sec 18 (e) of motor vehicle passenger regulation, sec 15 (1) (e) of motor cycle and tricycle regulations and Sec 45 (1) of Road Traffic Act 1973. Drunken driver fails to take reasonable precaution to avoid road accident. Hence drunken drivers are cause to road accidents.

5. SUGGESTED SOLUTION:

5.1 FORMATION OF MOTOR RISK POOL AMONG INSURERS.

I suggest that the Tanzania Insurance Regulatory Authority’s should decide to form a declined motor risk pool for third-party motor insurance. Likely to reduce the losses and burden for medical cost incurred by individual after suffering from accident. The formation of third-party motor insurance pool is an important first step towards addressing the issues of innocent road accident victims.

CASE STUDY IN INDIA: India Insurance Regulatory Authority established Indian Motor Third Party Insurance Pool (IMTIPP), whereby all general insurance Insurers shall collectively, automatically and mandatorily shares the risks in a pooling arrangement of third party insurance business. All premium collected by non-life insurers are credited to the pool according to the market share of the respective insurer. With any motor third party risk getting shared by this pool, the issue of denying or rejecting any third party claims does not arise anymore.

In case of any accident leading to Third party claims on any of insurance companies. The police, hospital or claimant may report the accident to the pool authority-claims committee. Insurers share losses. In the industry insurance firms are reluctant to take on business because of low premium but high frequency and severity of claims. (Bimaquest Vol III, Issue II, 2008)

This kind of risk pool system will be applicable only to standalone third-party liability insurance. The declined pool would be extinguished at the end of every underwriting year by transferring the risks as per market share at per market share among insurers. This should be mandatory obligations. Every insurer will have to contribute a minimum percentage of 3^rd party premiums to the pool.

Third-party premiums should be pooled and losses in the third-party motor portfolio are shared among all general insurance players in proportion to their market share. Loss sharing should base on their market share, irrespective of the size of their motor insurance portfolio.

The big problem in motor insurance is that it happens most of the times pedestrians or passengers to be involved and lead into huge claims. Some of third parties are facing a lot of hindrance while looking for compensation and others have been abandoned in the hospitals. Hence family forced to bear the medical cost. Indemnity award to road accident victims from this pool should be formula-based, with a cap on the amount and a reasonable time for third party to give a notification on behalf of insured, if insured failed to do so. This will ensure quick settlement of claims and reduce unnecessary litigation.

The third party claims management has been inefficient in Tanzania and there are denials or rejections in claims settlement due to technical error on the part of third party because they do not know the claims procedures.

To prevent poor management of this shared risk pool, I suggest having special and proper audits of third party motor claims paid from this pool. To prevent leakages and biasness. Some reforms must be done to have a vibrant general insurance industry.

The premiums should also be brought into the free pricing regime. This will allow insurers to charge premiums as per the risk profile of the vehicle. We will also be able to reward good drivers, just as it happens in the ‘own damage’ part of motor insurance. This will be better than raising the prices every year and will also end the cross subsidy prevailing in the present scenario.
Apart from the capping of compensation, another burning issue is the time limit for filing third-party claims. In this pool an individual should be allowed to file a claim respective of the occurrence of the accident or loss. Within a reasonable time. The longer the time taken to file a claim, the greater the chances of fraud. There should be a time limit for filing a claim. It should be restricted to a certain period of time if the bodily injury is not too serious after the accident. I think six to one year would be better. Generally the time for indemnity should extend depends on the nature of individual risk in terms of severity.

5.2 ESTABLISHMENT OF FAIR CLAIMS SETTLEMENT PRACTICE AND REGULATIONS

There should be a fair claims settlement practice and regulations. These regulations will guide the insurers on how to handle Third party and give the Third party an alternative way of dealing with the claims if insured delay or ignored to notify the insurer as well as insurer’s denial.

The regulations should prohibit unfair settlement of the claims and to make it part of the general business practice. Claims regulations should govern the insurers to disclose to Third party the benefit, coverage or any other additional benefit which may be provided by the policy when presenting claim.

5.3 AMENDMENT OF INSURANCE POLICY, REGULATIONS AND ACT

I suggest the amendment of insurance Act. In my opinion there should be a section which gives power to third party to exercise insured duty whenever necessary if insured fails to notify insurer on the happening of insured event which give result to claims.

Sumatra regulations and road traffic act 1973 both of them insist on the use of safety belt but it does not say what measures will be taken to passengers who fails to do so. There must be a section which indicates the penalty to passengers.

In insurance Act the duty to be transferred to the third party will be subject to the same defences that the insurer could have used against the insured. I suggest the amendment to be read as follows:

(I) A third party is allowed to fulfill the insured’s contractual duties (conditions and terms) such as to provide notice of matters such as a claim and submitting of legal documents. This will be treated as if done by the insured.

(II) Third party should have right to exercise any condition which requires the insured to provide ongoing information or assistance to the insurer for claim to be paid. If insured failed.

5.4 PUBLIC AWARENESS

In Tanzania there is lack of public awareness in insurance. Large part of population knows nothing about insurance. It is important for the public to be informed about the benefit and limitation of the insurance. Public awareness is very important especially in this era where by there is a lot of road accidents of which result in disablement of many people and sometimes death of the breadwinner. Hence it affects manpower and some innocent road accident victims tend to lose income during treatment.

Insurance companies denied ensuring the availability of public awareness because they generate super profit from it. Due to the fact that most of the third parties do not claim for compensation of physical damage or loss caused by negligent insured. Mainly in motor insurance.

Tanzania Insurance Regulatory Authority should prepare special program to create public awareness in collaboration with road traffic police department. Insurance education should be publicized regularly so that the credibility of insurance is strengthened and maintained.

An effective public awareness can help innocent road accident victims, called Third parties to be compensated the cost of treatment they incurred after being injured due to drivers negligence. Hence the financial recovery and stability of the injured family member can be enhanced.

Educational material and broadcasting.

The governing body should produce the publication to inform the target audience, the third party about the insurance on what to do once they suffer from accident. These educational materials may include fliers, brochures, booklet and pamphlets. This detailed information may help innocent road accident victims to know what to do.

Also the use of broadcasting media is needed to create an awareness of insurance. The media serve as the best way of communication for spreading information to a broad audience.

6. Conclusion

Therefore, a plan to establish motor insurance pool for third party and fair claims settlement regulations will ensure a right compensation and reducing road accident risks by including clear language entitling it to recover from any third party claims, including any identified bodily injury and property damage or allocated to economic damages. This will give the plan an additional legal support from which third party will able to recover from negligent person .The introduction of seat belt law and phone-driving law may be implemented through amendment of road traffic act.