BY IAN ONDARI
It is undeniable that the whims of the insurance sector are market-driven. Claims settlement has always been a conduit for massive revenue hemorrhage. The most recent revelation by Insurance Regulatory Authority (IRA) that the sector had lost upwards of Sh300 million to fraudulent claims was disconcerting, especially since this happens to be among the most proactively supervised segment of the financial services sector.
The state went to absurd levels of protecting underwriting income by capping the maximum compensation payable to auto injury victims at Sh3 million, by amending the Insurance (Motor Vehicle Third Party Risks) Act (Cap 405), but this never went down without controversy. Insurance claims are globally acclaimed as being pointlessly drawn out. Insurers employ different delay tactics at the peril of the insured. Fault could be pegged on provision of insufficient or incorrect documentation, misrepresentation of material facts, suspicious redundant claims history, the list goes on.
The ante for a stake in the insurance business is expected to be steeper in the coming year. The minimum capital reserves for insurers were revised upwards, thus whipping underwriters are into frenzy of imminent mergers and acquisitions. It is conceivable that this could have a direct impact on how claims will be settled. To this end some insurers have assimilated technological innovations into their claims handling procedures. IRA also stepped in, and with the blessing of various industry stakeholders and state resources successfully the Insurance Investigations Fraud Unit (IIFU) was born to annihilate this malaise.
However, it has been an opinion shared by many that the fault is partly attributable to the liability element customary our insurance structure. The Kenyan adversarial system requires that before any party can be indemnified for loss or injury, it is paramount for negligence to first be established. This process is normally initiated through courts. As a result the courts are overrun with thousands of undetermined suits pitting insurers against disgruntled victims. A feat that is both time-consuming and expensive.
The amendments were realized after decades of lobbying by insurers. The capping was aimed at streamlining the injury claims, which had initially been based on judicial discretion. Insurers were concerned that courts interpretation of non-pecuniary loss resulted in conflicting settlement amounts. The push was for a more structured compensation scheme to rationalize payments and stopgap fraudulent claimants. Thus the scheduled structured compensation scheme was born; it provided for fixed fiscal compensation of injury (irrespective of the type of injury suffered).
‘No-fault’ insurance
The prominence attached to the no-fault scheme rests with the recognition that accidents/injuries are certain and unavoidable. Therefore victims should be compensated regardless of who is held liable. Another statute that personifies a similar provision is the Work Injury Benefits Act (WIBA) for workers compensation claims.
The original no-fault insurance scheme adopted by other jurisdictions deprives parties of the right to sue for recovery of non-economic damages (pain, suffering). This system was very effective because it diverted ‘small claims’ traffic away from courts by placing the obligation to compensate upon the insurer. In return, the insured benefited from expedited claims settlement (well, for the minor fender-benders anyway).
What are the benefits of a no-fault insurance scheme?
The conventional structure for handling claims relied profoundly on the tort system; it was a fault-based system. Fault-based in the sense that compensation arose after negligence had been established and pinned on one of the parties in the courts of law. Litigation in Kenyan courts is severely relaxed. The courts are evidently unconcerned with the prolonged expenses being incurred by plaintiffs; legal or otherwise. The suits would drag on for years, or even decades! Court decrees drove negligent parties to the brink of bankruptcy; in the same way insurance companies were wound up under the weight of insolvency arising from inability to meet the compensation demands.
However, these new provisions have lessened the bizarre legal representation expenses, courts are now guided by a more structured schedule of compensating third party injury. There is a level of rationality and certainty ensuing an era of sanity, for the insurers. They do not have to hire expert witnesses to testify in courts or conduct costly investigations to ascertain fault, this however is still highly contentious.
An auxiliary objective of this law was the expectation that it would reduce the number of lawsuits filed against insurers. Well did it work?
The disillusionment of insurers
Fixed compensation was intended as a magic pill. Yet, underwriters are still being dragged back to courts. Some of the conflicts relate to disputes, which could be straightforwardly settled under scheduled scheme. Most of the advantages of no-fault insurance are connected to the limitations on lawsuits. In countries that have adopted this scheme their laws restrict the victims’ right to recover non-economic damages (such as pain and suffering) from the negligent party.
The ultimate impediment to the no-fault scheme is visible from the context of this statute, fixed compensation. One argument put forward by the adversaries of the no-fault scheme is that Kenya has no framework for such a system therefore it could necessitate constitutional amendments to make it conform to the domestic laws. This goes back to the fact that our domestic tort structure is based on common law and for that reason negligence must be established through a court process.
The lingering solution remains that the current provision needs a reform. Since the laws have done very little to reduce fraudulent claims, decrease the number of suits filed in courts due to injury claims, there is no tangible outcome to show that negligent drivers are not being punished to change their behavior. But where should the reforms begin?
Reforms to the Kenyan no-fault scheme
The no-fault clause in the Kenyan legislation should have been designed to embrace the divergent opinions of the general public; it should not be just about financial stability of the financial services sector. There are different approaches that have been embraced by different countries that have adopted this scheme. At the outset, those that have implemented a strict interpretation of no-fault regime require that citizens purchase the no-fault insurance thereby restricting their ability to sue an at-fault driver.
Although others have made it optional giving the option of either opting in or out, by opting out of the no-fault scheme the insured is bound to the conventional tort liability structure whereas by opting in they have to abide to the no-fault laws; limiting right to sue and recover damages.
Finally, some jurisdictions offer no-fault as an add-on on top of the conventional liability, with the distinction being that there are no limitations concerning lawsuits but the insurer covers the injury regardless of negligence.
The push for amends has to do with the appreciation that section 5(b) of Cap 405 which sets the cap doesn’t take into account the economic realities and inflation. Granted that there seems to be no decrease in the number of suits against insurers might be an indication that its time this statute was restructured to account for the disgruntlement.
Another school of thought is that the section could be interpreted as being the insurer is to contribute towards payment of any claim up to the specified Sh3 million while the excess amount would have to be sought form the insured (negligent party). However such a trajectory would defeat the purpose of a contract of insurance since it’s meant to indemnify the insured against such unforeseen risks. The proposals are numerous as they are contentious.
