1. THE CONCEPT OF FREEDOM OF CONTRACT.
The doctrine of freedom of contract exists at common law which is to the effect that parties should enter the market and choose their fellow contractors with the terms and conditions they agree on. Thus two elements accrue to the doctrine that is choice of a party and choice of terms and conditions to the contract. This was held in Swisse Atlantique Societe d’Armament SA V NV Rotterdamsche Kolen Centrale (1967) IAC 361, that where parties agreed on the exemption clause as a term of the contract it was binding on them.
The doctrine entails negotiation, as held in Stockloser V Johnson (1954) 1 ALL ER 640, that people who freely negotiate and conclude a contract should be held to their bargain rather than the Judge intervening to substitute terms which are contrary to what the parties agreed for themselves. In other words, once the intention of parties is established in making a contract, the court enforces the contract by ensuring that parties perform part of their bargain as held in Tweddle V Atkinson (1861) 1 B&S 393. The performance of the bargain is known as Sanctity of a Contract which arises where there is equal bargaining power among the parties (Akerlof,1970). Thus the three elements of the doctrine include, party freedom to choose a contracting partner, term freedom to agree on terms governing the contract and bargaining or rather sanctity of a contract involving enforcement of the agreed terms.
The sanctity of a contract is the foundation that courts will not intervene in the adequacy of consideration, as held in Thomas V Thomas (1842) 2 Q B 851, that is parties have the discretion to determine the consideration, and court only intervenes in the contact bargain when there is a mistake, frustration and duress among others which is prejudicial to the other party as held in Smith V Hughes (1871) L R 6 Q B 597.
The doctrine of freedom of contract in insurance contracts is limited as,
2. STANDARD CONTRACTS.
An Insurance Contract is an Aleatory Contract which means that the insurer needs to perform only if the risk insured materialized into a loss hence the contract is contingent on the insured peril occurring which makes the insurer liable to compensation, as held in Prudential Insurance Company V Inland Revenue Commissioners (1904) 2 K. B.
The standard contracts are used where one of the party to the contract has a higher bargaining power than the other party who only accepts without an alternative of refusal. This makes standard contracts to become contracts of adhesion or rather prendre au a’ laisser which means deal or no deal or take it or leave it in commercial language as held in Cole V Holloway (1896) US.
The contracts of insurance have standard terms and conditions which protects the insurer and the insured cannot bargain to flex the terms for instance exclusion clauses of liability.
In Instone V A. Schroeder Music Publishing Company Limited (1974) 1 W.L.R, it was held that where there is a standard contract, there is superior bargaining power of one of the parties to the contract.
In Photo Production Limited V Securicor Transport Limited (1980) ALL ER 556, it was held that in commercial matters where parties are of unequal bargaining power and when the risk is born by insurance, there is judicial intervention to ensure that parties apportion the risk as they think fit and for respecting their decisions at contracting.
3. INSURANCE BUSINESS IS OFFERED BY CORPORATE ENTITIES.
Insurance services are offered by a corporate body incorporated under company law. The corporation can enter into a contract with an individual as the insured. Thus Section 7(1) of the Insurance Act 2017 allows only companies to offer insurance business. This is not withstanding the fact that companies are represented by individuals in transactions, there is an inherent agency problem which precludes the parties from engaging in equal bargaining. This is illustrated in the Enron Accounting scandal of the United States of America where the board of directors and management had board capture thereby by contravening corporate governance practices (Brandy, 2014). This led the enactment of the Sarbanes-Oxley Act 2002 in the United States of America. The inequality between individuals and corporates limits the free bargain in contracts.
The corporate legal personality of entities makes management and ownership of corporates separate as held in Salomon V Salomon and Company Limited (1897) AC 22.
The advice given by agents of companies to individuals in transactions like insurance is only reasonable not absolute making the bargain subject to inequality. In Hedley Byrne and Company Limited V Heller and Partners Limited (1964) AC 465, it was held that the duty of care arises in relation to advise given in a professional or business context. The insurance service providers being companies can give adverse information to the insured due to the principle of agency.
4. REGULATIONS.
The insurance business is regulated under the Insurance Act 2017 which mandates the Insurance Regulatory Authority to make regulations under Section 11(1)(d).
The regulations for instance provide for the payment of annual fees to the Insurance Regulatory Authority by the Insurance companies. These fees are factored when assessing the level of risk undertaken by the insurance while insuring the insured. The Insurance (Fees) Regulations 2020 prescribe the annual fees. Alternatively, Section 63(1) of the Insurance Act mandates the insured to pay premiums in full before the inception of an insurance policy or policy renewal. The regulations limit the bargaining process between the insurer and the insured hence affecting the doctrine of freedom of contract. The insured can for instance not negotiate for a premium which below the sum set by the Regulatory Authority.
5. STATUTORY INSURANCE.
There are insurance services which are mandatory as prescribed by the law. This means that the insured cannot bargain on their terms in deviation of what is provided in the law for instance reduction of the premium or tenure of the insurance policy.
These include, the motor vehicle third party as provided under, The Motor Vehicle Insurance (Third Party Risks) Act –Cap 214, Section 2(1) which provides that motor vehicles must have a policy of insurance in respect of third party, and this does not apply to vehicles owned by the Government of Uganda under Section 2(2).
Under motor third party insurance, the owner of the vehicle is the first party, the insurance company is the second party and the beneficiary of the insurance is the third party who benefits from the insurance when he or she suffers loss.The third party can be a pedestrian, passenger or a person with property in the motor vehicle who is involved in the accident.
The Workers Compensation Act –Cap 225, Section 18(1) requires every employer to insure workers against liability which can be sustained under as provided in the Law and the insurance service provider must be prequalified or rather licensed by the Insurance Regulatory Authority under Section 18(2). The insured cannot negotiate with the insurer where a statutory insurance cover is required.
6. INSURANCE AS A BUSINESS.
The insurance companies are in the business of making profit and they thus engage in the evaluation of risk and return associated with any customer prior to the issuance of the insurance policy which establishes the contractual relationship.
The insured includes exclusion, exemption and limitation clauses in contracts to deter moral hazards where the insured becomes reckless in causing the risk insured to materialize into a loss (Fredrick, 2023). Thus where the insured causes the risk, the insurer is excluded from indemnity.
The insurer gets the right of indemnity from the third party after indemnifying the insured under the principle of subrogation. This enables the insurer to remain in business and control operating losses. In Castellain V Preston (1883) 11 Q B D 380, it was held that the insurers right to subrogation cannot be exercised until he has made payments under the insurance policy.
In Housing Finance Bank Limited and Liberty Life Assurance Uganda Limited V Igeme Nathan Nabeta, High Court Civil Suit 228 of 2012, it was held that an insurance policy can be used as security to secure a loan under the Finance Institutions Act 2004 hence the insurance company could not claim indemnity from the insured who had lost an election, the recourse was to use the insurance policy.
The insurance company being in business excludes indemnity to the insured who deviates from business norms for the purpose of benefiting from insurance at the detriment of the insurer.
7. DISCRIMINATION AND HUMAN RIGHTS.
The Constitution of the Republic of Uganda 1995 as Amended forbids discrimination based on sex, race, colour, ethnic origin, tribe, birth, creed or religion, social or economic standing, political opinions or disability Article 21(3).
The Insurance Companies subject individual to medical health checks prior to concluding certain insurance products for instance loan guarantee insurance policy for a loan exceeding Uganda shillings three hundred million in a Bank. In an Interview with a manager from Sanlam(U) Limited he held that subjecting borrowers of loans from Banks exceeding three hundred million to medical checkup before the insurance policy cover is issued aims to minimize the risk of adverse selection, information asymmetry and moral hazard but also to aid in computing the amount of the premium.
Adverse Selection is a market situation where buyers and sellers have different information that the party with more information benefits from the contractual relationship at the detriment of another party (Fredrick, 2023). Thus even though the insurance policy is completed between the insured and the insurer under a situation where the insured has been subjected to medical checks, there is no freedom of contract.
Financial Inclusion, This means that individuals and businesses have access to useful and affordable financial products and services to meet their needs, transactions, payments, savings and insurance delivered in a responsible and sustainable way (OECD, 2023).
Financial Inclusion has been admitted by the World Bank as an enabler for the seven out of seventeen sustainable development goals and relevant in reducing extreme poverty and boost shared responsibility. Financial Inclusion is part of the National Financial Inclusion Strategy of 2023-2028 (Kassaija, 2023).
The insurance businesses in Uganda cannot insure individuals in the age bracket of seventy years and above (CIC, 2023). This puts duress to the insured who contracts with the insurance company for a policy which cannot be renewed when the policy holder reaches seventy years. This is a limitation on the freedom of contract even when the policy has been issued by the Insurer to the Insured. The insurance companies therefore exclude particular individuals for financial services thereby contravening the principle of financial inclusion.
HOWEVER, there exists an illustration of freedom of contract by the behaviors of the insured before signing the contract, which is an ex-ante contractual arrangement.
8. THE INSURANCE COMPANIES AND INSURANCE PRODUCTS.
The Insurance Act 2017, Section 34(1) is to the effect that a person carries out insurance with a valid license issued by the Insurance Regulatory Authority of Uganda, and Section 11(3) is that insurance products issued by the insurance service provider are supervised by the Authority to ensure an inclusive insurance sector.
The customer of an insurance service is free to choose services from any insurance company with a license under the Act, and with freedom to choose any of the products issued by the insurance service provide. The act of choosing one insurance company from the others and choosing a particular product among the available insurance products demonstrates the freedom of contract in terms of choice of a contract partner to the Insurance policy contract.
The Insurance products range from life to non-life, or property to non-property (IRA, 2023). The consumers of life insurance contracts can negotiate with the insurance company to pay premium in installments as opposed to the lump sum provided under Section 63(1) of the Insurance Act 2017. The lump sum payments allow negotiation between the parties.
The consumer of insurance services like an organization can insure against liability from third parties as occupier of premises pursuant to Section 23(1) of the Occupational Safety and Health Act 2006. This is not mandatory but a choice. In the case of Wheat V Elacon and Company Limited (1966) AC 552, it was held that an occupier is a party who exercises an element of control over premises. Therefore, the insured has a choice of products among products issued by the insure.
9. SPECIAL CONTRACT OF INSURANCE
The Contract of Insurance is a special contract where the Insured and Insurance Company have particular requirements to full fil for instance utmost good faith or rather Uberrimae Fidei which literally means the disclosure of information with at most good faith. This limits the parties from benefiting from the contract at the detriment of another party because of moral hazard and information asymmetry.
In the suit of National Insurance Corporation V Span International Limited Court of Appeal Civil Appeal 13 of 2002, it was held that it is incumbent upon the insurer to require the disclosure beyond merely disclosing the possible questions to which answers could be given in the claim. The Insurer should be satisfied with the disclosures before issuing the policy.
In Regent Insurance Company Limited V Kings Property Development(PTY) Limited, Supreme Court of South Africa Civil Number 50014, The Insured did not disclose that one of the tenants’ business involved dealing in highly flammable materials which caused fire as a peril which was insured against. It was held that the non-disclosure made the claim to be rejected.
The fact that Insurance Contract between the Insured and the Insurer obliges that each party refrains from the adverse behaviors of information asymmetry and Moral hazard which leads to adverse selection (Mark, 2018).
Information asymmetry denotes a contractual situation where one of the party possesses material knowledge than the other party so that the non-disclosure of such information at contracting leads to an information imbalance. This makes the transaction inefficient causing market failure or the failure of contractual performance.
Thus in insurance business the non-disclosure of information either by the insured or insurer leads to non-enforcement of the contract during the claim for indemnity on the part of the insured or the insurer paying damages for breach of contract and non-disclosure of material information.
In Salin Construttori S.P.A V Jubilee Insurance Company of Uganda High Court Civil Suit 109 of 2006, the plaintiff insured the building materials in transit and obtained an insurance cover titled “All Risks” The materials were not delivered hence a claim for indemnity which the Insurer denied contending that it was a draft policy. It was held that there was a valid policy and the defendant was liable for damages. The court further sighted the case of Kibimba Rice Limited V Umar Salim Supreme Court Civil Appeal 17 of 1992 to the effect that a plaintiff who suffers damage due to the wrongful act of the defendant must be put in a position he or she would have been in had he or she not suffered the wrong and when assessing the quantum of damages, the court is guided by the value of the subject matter, the economic inconveniences that the party may have been put through and the nature and extent of the breach.
10. EQUALITY BEFORE THE LAW FOR BREACH OF A CONTRACT OF INDEMNITY.
The insured and the insurer are equal before the law and any party which derogates the contract is liable for damages. In Hon Okupa Elijah and 2020 Others V Attorney General and Others High Court Miscellaneous Cause No 14 of 2005, it was held that all persons are equal before the law.
The doctrine of equality before the law implies that when there is a dispute between the Insured and Insurance service provider, the court intervenes to enforce the contract. The parties to the contract have an obligation to fulfil all the requirements of the contract before, during and in case of materialization of the Insured risk to indemnify the insured. These obligations include, declaration of material information, reporting and submission of a claim when the insured peril has occurred and the Insurer investigating the cause and making a decision either to pay or not to pay.
In Tight Securities Limited V Chartis Uganda Insurance Company Limited and BrazAfrica Enterprises Limited High Court Civil Appeal 895 of 2011, The insured sustained loss of theft of goods which was caused by the Appellants security guards. The Insurer compensated the Insured-Second responded and sued the third Party-Appellant for compensation. The Court held that the appellant was liable to compensate the insured under the principle of subrogation. That Subrogation is the right of an insurer who has paid for loss to receive the benefit of all the rights and remedies for the insured against a third party which caused the loss and where it is satisfied it extinguishes the loss sustained.
CONCLUSION.
In a nutshell, there is freedom of contract in an insurance contract between the insured and insurance service provider. This freedom entail obligations of ultimate disclosure of material facts before contracting and indemnity whenever the risk insured materializes into a loss which is detrimental to the insured.
The two parties to the insurance contract have the discretion to determine the terms and conditions, the choice of the contracting party, that is the consumer has a choice to determine the insurance company by selecting an insurance company from a list of service providers licensed by the Insurance Regulatory Authority and the insurance company has the choice of either accepting the offer or declining the offer based on the assessment of risk as well as sanctity of a contract which involves the performance of the contractual obligations.
However, this freedom is curtailed due to standard form contracts where the insured cannot negotiate on the terms of a contract which is on the basis of give and take, the existence of the law and regulations requiring particular terms and conditions inter-alia.
The breach of the contract-insurance policy entitles a party to a claim for damages and losses which is filed in court using an ordinary plaint.
The court intervenes by establishing the intention of parties to establish a cause of action and award of damages accordingly.
References
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Fredrick, C (2023). Behaviors Under Risk and Uncertainty. Journal of Economics 10(3) 220-270.
Insurance Regulatory Authority (2023). The Insurance Strategic Management Plan 2023-2025.
CIC Insurance Uganda (2023). Insurance Products and Services at Glance.
Kassaija, M (2023). National Financial Inclusion Strategy of 2023-2028 Presented by the Minster
of Finance Planning and Economic Development. Stakeholder Forum Engagement.
Mark, L (2018). The Contract of Insurance Between the Insured and the Insurer as Special
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OECD, (2023). The Financial Inclusiveness and Poverty Eradication in Low Developed Countries.
AUTHOR TO THE ARTICLE
Mulumba Joseph