RETURN OF PREMIUM ON LIFE INSURANCE POLICIES

1. Introduction This piece looks at the circumstances when an insured may be entitled to return of premiums paid under a life insurance policy. There are no provisions on return of premium in the Insurance Act 2003 and the matter is guided by the common law and the conditions of the insurance policy.

2. Judicial Authority in Nigeria 2.1 The locus classicus on the point in Nigeria is the case of Crusader Insurance Nigeria v Anunike (1975). The insured took out a life insurance policy and paid premium for three years from 1964 to 1967. War broke out in 1967 and ended in 1970 and during that period the insured did not pay premium. Condition 6 of the policy stated that the policy should be free from all restrictions as to war. Condition 2 stated that, “When the policy has a surrender value, if any premium shall not be paid within the days of grace, the amount therefore shall be advanced at compound interest upon security of the Policy, provided the balance of the surrender value, after deducting any amounts due to the company, is not less than the amount of the overdue premium, but, should it be less, the policy will remain in force for the proportionate period until the balance is exhausted.” 2.2 After the war the insured wrote to the insurer to know the amount due and payable to him as the surrender value of the policy. The insurer replied that the policy lapsed in 1970 and explained that after two years the policy acquired a surrender value against which unpaid premiums were deducted and when that amount was exhausted the policy lapsed. The insurer also informed the insured that he could continue the policy if he paid the outstanding arrears of premium but the insured rejected the offer. The insured instituted an action and claimed; (i) a declaration that the application of Condition 2 of Life Policy is void to the extent that it is harsh, unconscionable and or inequitable and contrary to the public interest; and (ii) a declaration that the inured is entitled to the surrender value acquired under the policy. The trial court held that the insurance contract was frustrated by the civil war and it would be unconscionable and inequitable to apply condition 2 of the Policy. The court ordered the insurer to retain the 1st year premium and pay back to the insured the premium for the 2nd and 3rd years which premium should be regarded as money had and received. 2.3 On appeal, the Supreme Court held that the trial judge erred when he relied upon frustration and ordered the return of part of the premiums already paid by the insured. Since condition 6 made the policy free from all restrictions of war the trial court was in error when he held that the contract had become frustrated due to the war. Delivering the judgment of the Supreme Court, Fatayi-Williams JSC quoted MacGillivray on Insurance, “The general rule applicable to claims for the return of premium is that if the insurers have never been on the risk they have not earned the premium and ought to return it. Thus, if a contract of insurance is set-aside on the ground of misrepresentation or mistake, or for some other reason the policy is held to have been void ab initio, or to have been avoided before the risk began to run, the insured is, in the absence of any express condition to the contrary, entitled to claim repayment of any premiums which he may have paid. ……… The learned author then went on to point out, again rightly in our view, that once the risk has commenced to run under a valid policy, the whole of the premium for that risk is immediately deemed to be earned, and even though the insurer should shortly afterwards be relieved of the risk for the reminder of the term, the insured is not entitled to a return of any part of the premium. Thus, if the day after a risk has attached there is a breach of warranty or the interest of the insured ceases, the whole premium is earned, and there can be no return. That is precisely what has happened in the present case. The risk had started to run as the plaintiff paid the first premium on 1st June, 1964, and if he had died in the civil war which broke out three years later, the defendant would have been liable on the policy.” 3. Academic Authorities 3.1 In Modern Nigeria Law of Insurance 1st ed, Prof Agomo wrote at Page 66 on return of premium, “In principle, premium paid is refundable where consideration has failed totally, or where the contract was entered into under a mistake of fact. Examples include where the insurer lacked the capacity to enter into the particular type of insurance contract; or where the insurer was never at risk because of the non-existence of the subject-matter of the contract at the time of the insurance which fact was not known to the parties; or where the insurance contract is illegal and the illegality was induced by the misrepresentation of the insurer’s agents, the insured being unaware of the illegality. Premium may also be refunded where there was non-disclosure from the inception of the contract in accordance with the terms of the contract. See Harse v Pearl Life Assurance (1904) 1 KB 558.” 3.2 In Modern Insurance Law 1st ed, Prof Birds wrote at page 132, on return of premium, “An insured is basically entitled to a return of premium where there has been a total failure of consideration and his action is in quasi-contact for money had and received. If the insurer has been at risk in any way or for any period, there is no entitlement at common law to a recovery of any part of the premium paid. In Wolenberg v. Royal Co-operative Collecting Society (1915) 83 L.J.K.B. 1316, the insured had effected to cover the cost of industrial assurance with different insurers to cover the cost of funeral expenses to be incurred on her mother’s death. Having recovered that cost from one insurer, she sought to recover back the premiums paid on the policy placed with the defendant. It was held that as the insurer had been at risk there could be no returns of premiums, even though, by reason of the principle of indemnity, the plaintiff had no claim on the policy. …….. There are two broad heads of case where there will or may be a total failure of consideration entitling the insured to recover his premiums. The first is where the policy is never concluded, is cancelled ab initio, or is void or voidable ab initio. The second, which is the less certain category, is where the policy is illegal.” 4. Practical Example This matter arose in a case handled by our law firm. In that case the insured had paid premium on a life insurance policy for 19 months. Thereafter, the insured abandoned the policy and failed to pay premium for the next 15 months. The insured then brought an action to claim return of the premium paid for 19 months on the policy. We argued on behalf of the insurer that; (i) the policy did not acquire a surrender value since premium was paid for less than 24 months; and (ii) the policy had lapsed since premium had not been paid for 15 months. We relied on Crusader Insurance Nigeria v Anunike and submitted that the insured was not entitled to return of premium. Furthermore, the insurer had assumed the risk and earned the premium and if the claimant had died during that time he would have been paid the benefits of the policy. The insured did not plead or argue that there had been failure of consideration or that the policy should be set-aside on the ground of misrepresentation or mistake. Surprisingly, the trial court did not consider the case of Crusader Insurance Nigeria v Anunike or the academic authorities relied upon by counsel and held that the insured was entitled to return of premium paid. The matter is currently on appeal at the Court of Appeal. 5. Conclusion The judicial and academic authorities are unanimous on the law on this matter, which is that an insured is not entitled to return of the premium paid on a life insurance policy except the insured can prove that the contract was either void or illegal. The decision of the Supreme Court in Crusader Insurance Nigeria v Anunike is still good law and represents the correct position on this matter. Jide Bodede 08035130694 Jide@lawfieldslawyers.com