Topic 8

🟢 Lite — Quick Review (1h–1d)

Rapid summary for last-minute revision before your exam.

Topic 8 covers insurance law and the law of banking as applied in Nigeria. These two areas of commercial law are critically important for accountants — insurance protects businesses against risk, and banking provides the payment systems and credit facilities that underpin commercial activity. Understanding the rights and obligations of insurers, insured parties, banks, and customers is essential for professional practice.

Insurance Law — Key Principles:

Principle	Description
Insurable Interest	The insured must have a financial interest in the subject matter of the insurance
Utmost Good Faith	Both parties must disclose all material facts; breach allows the insurer to void the policy
Indemnity	The insurer will put the insured in the position they were in before the loss (not profit)
Contribution	If the insured has two policies covering the same risk, insurers share the loss rateably
Subrogation	After paying a claim, the insurer steps into the insured’s shoes to pursue the wrongdoer

Banking Law — Key Concepts:

• Banker’s duty to honour cheques up to the credit balance
• Banker’s duty of secrecy
• Types of accounts: current, savings, deposit
• Overdraft vs loan

⚡ Exam tip: The principle of utmost good faith (uberrimae fidei) is unique to insurance — both parties must disclose ALL material facts, even facts that are not asked about. Failure to disclose allows the insurer to avoid the policy.

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🟡 Standard — Regular Study (2d–2mo)

Standard content for students with a few days to months.

Insurance — Insurable Interest:

Every insurance contract requires the insured to have an insurable interest in the subject matter — a financial interest that would be prejudiced by the loss. Without insurable interest, the contract is void as a wagering contract.

When is insurable interest required?

• Life insurance: Must exist at the time of effecting the policy (for one’s own life, interest is presumed; for another’s life, must have an interest)
• Property insurance: Must exist at the time of loss (not necessarily at the time of effecting the policy, though it must exist then too)

What constitutes insurable interest:

• Ownership of property
• A creditor’s interest in the debtor’s life/property
• A parent’s interest in a child’s life
• An employer’s interest in the life of a key employee

The Doctrine of Utmost Good Faith:

Insurance is a contract of uberrimae fidei (utmost good faith). Both parties must disclose all material facts — facts that would influence a prudent insurer in deciding whether to accept the risk and at what premium.

What must be disclosed:

• All facts material to the risk (occupation, health for life insurance; location, construction for property insurance)
• Facts that the insurer has asked about
• Facts the insurer could find out from their own records or from public sources (these need not be volunteered)

What need NOT be disclosed:

• Facts known to the insurer (waived by asking)
• Facts that reduce the risk
• Facts of common knowledge
• Facts the insurer ought to know (ordinary trade knowledge)

Consequences of Non-Disclosure: The insurer can avoid the policy (treat it as if it never existed) and refuse all claims. If the insurer also had a duty to disclose a material fact (e.g., a fact the insurer knew but did not communicate), the insurer may be liable in damages.

Indemnity and Its Exceptions:

The principle of indemnity means the insured cannot profit from insurance — the insured is restored to the position they were in before the loss.

Types of insurance by indemnity:

• Indemnity insurance: Motor, property, marine — insurer pays the actual loss
• Fixed-sum insurance: Life, personal accident — pays a pre-agreed sum regardless of loss

Valued Policies: The parties agree on the value of the subject matter at the outset. In case of total loss, that agreed value is paid — this avoids disputes about actual value.

Underinsurance: If the sum insured is less than the actual value of the property, the insured is treated as their own insurer for the shortfall. Claims are paid proportionally: (sum insured / actual value) × loss.

Contribution:

Where the insured has two or more policies covering the same risk and the same interest, the insurers share the loss in proportion to the sums insured. The insured cannot recover more than the actual loss from all insurers combined.

Subrogation:

After paying a claim, the insurer is subrogated to all the insured’s rights against third parties who caused the loss. The insurer can pursue the wrongdoer in the insured’s name and recover amounts paid. Any excess recovery belongs to the insured.

Banking — The Relationship:

The relationship between banker and customer is fundamentally one of:

1. Debtor and creditor (for current/checking accounts): The bank owes the customer a debt repayable on demand
2. Bailor and bailee (for safe custody)
3. Agent (when the bank acts as agent for the customer, e.g., collecting cheques)

Bank’s Duty to Honour Cheques:

The bank must honour cheques drawn by the customer up to the available balance (or within any overdraft limit). The bank wrongfully dishonours if:

• There are sufficient funds and no legal reason to refuse
• The bank wrongfully countermands payment

Consequences of wrongful dishonour:

• Damages for defamation (implying insolvency)
• Loss of credit reputation
• Consequential losses (e.g., if a businessman cannot pay a supplier due to the dishonour)

When the Bank May Refuse to Pay:

• Insufficient funds
• Legal restrictions (garnishment, court order)
• Customer’s countermand (stop payment instruction)
• Forged or altered cheque
• Death or bankruptcy of the customer (for current accounts)
• Mentally incapacitated customer

Customer’s Duties:

• To exercise reasonable care in drawing cheques (preventing forgery)
• To promptly notify the bank of any forgery or alteration
• To maintain adequate funds or overdraft arrangements

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🔴 Extended — Deep Dive (exam-level mastery)

For students preparing for top-rank selection.

Life Insurance — Further Details:

Types of Life Insurance:

1. Term assurance: Pays on death within a specified term (cheapest; no surrender value)
2. Whole life: Pays on death whenever it occurs (premiums throughout life or for a limited period)
3. Endowment: Pays on death within a term OR on survival to the end of the term (combines protection with savings)
4. Annuity: Pays a regular sum during the annuitant’s lifetime in exchange for a lump sum premium

Assignment of Life Policies: A life insurance policy can be assigned (transferred) by:

1. Absolute assignment: Transfers all rights to the assignee; the assignee becomes the new owner
2. Collateral security assignment: The policy is assigned to a lender as security for a loan; on repayment, the policy reverts to the original owner

Assignment must be notified to the insurer in writing.

Insurance Act 1906 (Nigeria) — Key Provisions:

The Insurance Act 1906 (as amended) regulates insurance business in Nigeria:

• No person may carry on insurance business in Nigeria without a licence from the National Insurance Commission (NAICOM)
• Insurers must maintain minimum solvency margins
• Deposits must be made with the Central Bank of Nigeria
• Life insurance funds must be kept separate from other assets

Marine Insurance:

Marine insurance is governed by the Marine Insurance Act 1906 (applied in Nigeria). Key features:

• Subject matter: Ships, goods, freight, and liability
• Insurable interest must exist at the time of loss
• Voyage policy: Covers a specific voyage
• Time policy: Covers a specific period
• Mixed policy: A combination of voyage and time

Losses:

• Actual total loss: The subject matter is completely destroyed or lost
• Constructive total loss: The cost of repair exceeds the insured value; the insured can treat it as total loss
• Partial loss (particular average): Damage to part of the cargo/ship
• General average: Voluntary sacrifice of part of the cargo/ship for the common safety; loss shared by all parties

Banking — Negotiable Instruments in Depth:

The Bank as a Collecting Banker: When a banker collects a cheque for a customer, the banker acts as agent for the customer. The collecting bank:

• Must credit the customer’s account only when the cheque is cleared
• Has a duty to act in good faith and without negligence
• If the cheque turns out to be forged, the collecting bank may be liable to the true owner if it received the proceeds

The Bank as a Paying Banker: When a bank pays a cheque, it acts as the drawer’s agent. The paying bank:

• Must verify the drawer’s signature (authority)
• Is not required to verify endorsements unless there is reason to suspect fraud
• If it pays a cheque with a forged endorsement, it is liable to the true owner
• If it pays a materially altered cheque, it can only debit the customer’s account for the original amount

Electronic Banking and Liability:

With electronic banking (online transfers, mobile banking, ATMs), the question of liability for unauthorised transactions is governed by:

• The customer’s duty to keep security details (PIN, password) secret
• The bank’s duty to maintain adequate security systems
• Forgeries: if the bank’s system is at fault, the bank bears the loss
• If the customer’s negligence causes the loss, the customer may bear liability

Key Cases in Banking Law:

• Barclays Bank v. Ascherson [1931] — bank not liable for honouring a customer’s cheque drawn in a way that made forgery easy
• London Joint Stock Bank v. Macmillan [1918] — customer was negligent in drawing; losses fell on the customer
• Schroders v. D. & T. Bank — the bank’s failure to detect obvious forgeries was negligent
• Selangor United Rubber Estates v. Cradock [1968] — bank liable for assisting in fraudulent misappropriation of funds

Insurance — Wagering Contracts:

A wagering contract is void as contrary to public policy. Insurance avoids being a wager by requiring insurable interest. If insurable interest is absent, the contract is void.

Double Insurance: If the insured effects two policies covering the same risk and the same interest without informing the insurers, the second policy is void (if effected with knowledge of the first).

Return of Premium: If the risk has not attached (the contract never became effective), the premium is returnable. If the insurer avoids the contract for misrepresentation or non-disclosure, the premium is not returnable.

ICAN Accounting Context: Accountants must understand:

• Insurance premiums are deductible expenses for tax purposes (subject to conditions)
• Insurance claims are taxable income when received (business interruption insurance)
• The accuracy of disclosure in insurance proposals affects claim validity
• Bank charges and interest are deductible
• Overdraft interest is deductible; term loan interest is capitalised