Chapter Five 4. The thing- the subject matter of contract of sale must be “things”.

Law of sales Things which have material existence and can move themselves or be
moved by themselves without losing their individual character” are said
Introduction
to be corporeal chattels. Assimilated incorporeal chattels are also
Law of sales is a branch of business law that regulates the relationship
included under things.
between the buyer and seller of goods. It is a collection of rules pertaining
5. Price- In addition to goods consideration expressed in terms of money
to the formation, performance and breach of contract of sale. It imposes
is also an essential element of the definition. The consideration for
certain duties on the buyers and sellers the breach of which gives rise to
contract of sales must be in cash. This consideration in cash is price.
remedy.
Law of sales contract, therefore, governs and helps the movement of goods
1.1. Meaning contract of sale
from the original maker to the final user to fulfill social wants.
Sale is a transaction involving goods and money. If an item called “good” is
1.2. The Subject matter of law of sales
exchanged for with “money”, the result is sale.
Principally the subject matter of sale is “goods”. Goods are generally
Art. 2266 of the civil code envisages the same conception. It states: things such as chair, desk, book which can be appropriated by human
beings. Articles 2266 and 2267 of the civil code show that it is only
A contract of sale is a contract where by one of the parties, the seller corporeal chattels which are under the ambit of contract of sale
undertakes to deliver a thing and transfer its ownership to another
party the buyer in consideration of a price expressed in money, which What are corporeal chattels?

the buyer undertakes to pay him. Corporeal chattels are things that have a material existence and can
move themselves or be moved by man without losing their individual
character. Book, table, etc. are examples of corporeal chattels.

This definitional provision of sale contains the following important

elements: However, some corporeal chattels are excluded from primarily being
subject to contract of sale. E.g. Sale of ships, airplane, car etc. these are
1. Contract- it is a special kind of contract. If it is a contract, the parties
special corporeal chattels.
should comply with the essential conditions for the validity of contracts
in general.
Immovable goods such as land and building are not corporeal chattels as
2. Parties-there must be two distinct parties to a contract of sale, as a
they cannot move by themselves or be moved without losing their
buyer cannot buy his own goods.
individual character. Therefore, they are not subject matter of contract of
3. Deliver and transfer of ownership- the owner of the thing must agree
sale. But, the sale of intrinsic parts of an immovable shall be deemed to be a
with the other person to deliver and transfer ownership of the thing.
sale of movables where such parts are, under the contract, to be separated
from the immovable and transferred as corporeal chattels to the buyer. This

1
shall apply in particular where the sale relates to crops, materials of a
building under demolition or products of a quarry.
The concepts of corporeal chattel also covers claims and other incorporeal
rights embodied in securities to bearer. Natural forces of economic value
such as electricity are also considered as corporeal chattels.
In general, the term “thing” in a contract of sale refers to:
 Tangible movables,
 Intrinsic parts of immovable,
 Claims and other incorporeal rights, and
 Natural forces of economic value.
The subject of contract of sale, according to Article 2270, could be existing
thing, future thing or things belonging to third party.
Existing goods are goods, which have physical existence and are in the
seller’s ownership or possession when the contract is concluded.
Future goods are goods which do not exist at the time of the contract or are
not in the hands of the seller. These goods are to be produced, manufactured
or acquired by the seller after the formation of the sale contract.
The seller may sell the thing that belongs to the third party at the conclusion
of the contract. An agent can be the best example of this when he agrees to
sell a thing which is under the ownership and possession of the seller. This
could be an existing thing or a future thing.
In addition goods, price is also the subject of law of sales. A contract of
sale must involve consideration in return for transfer of ownership. If there
is no consideration, it is a contract of donation not a contract of sale.
1.3. Performance of Contract of Sale
As performance of sales contract refers to carrying out of the obligations
assumed by the contracting parties, analyzing the obligations of the seller,
obligations of the buyer and common obligations of the seller and buyer
imposed on the parties by the custom, good faith and the provisions of the
law is be necessary to understand performance of sales contract.
1.3.1. Obligation of the seller
The seller assumes certain obligations under the contract of sales. These
obligations are the obligation to deliver, the obligation to transfer
ownership, the obligation to warrant the buyer against dispossession defects
and non-conformity to the contract and other obligations.
A. Obligation to deliver the thing
Delivery generally refers to transfers of possession willingly. The seller has
to hand over the thing sold to the buyer. Delivery takes place in accordance
with the contract and the default rules of the law. It consists of handing over
in not only the principal subject of the contract but also its accessories.
Under Article 1136 of the civil code, accessory is defined as “anything
which the possessor or owner of a thing has permanently destined for the
use of such thing”. When you buy a new laptop, you may be given a charger
together with the laptop.
Modes of delivery
The modes of delivery may be expressly stipulated in the contract of sale.
If a particular mode of delivery is stipulated, it becomes one of the terms of
the contract and non-compliance to an agreed mode may be taken as breach
of the term and the party failed to comply the term be liable.
Delivery of the thing sold may be effected in three ways. These are actual
delivery, constructive delivery and symbolic delivery.
I. Actual delivery
The usual method of delivery of a subject matter of sale is handing over of
the thing to a buyer. It is the physical handing over of the thing directly to
the buyer or his representative.
II. Constructive delivery
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The seller may not actually hand over the thing sold to the buyer. He may
deliver them to any person who may hold on behalf of the buyer or the thing
may remain in possession of the seller after the contract of sale. This
assumed delivery is called a constructive delivery. For example, X has hired
his horse to Y and Y is using the horse for driving a cart. If X agrees to sell
this horse to W and decides to keep the horse with Y, there is constructive
delivery made by X.
A seller may agree to deliver the thing to the agent of the buyer. Under the
law of agency, the act of the agent is the same as that of the principal.
Delivery made to the agent of the buyer releases the seller from his
obligation towards the buyer.
III. Symbolic delivery
In this mode of delivery, thing representing the thing sold or that makes
possession of the thing possible, will be delivered to the buyer. For
example, if the seller gives the key of the store to the buyer, he makes
symbolic delivery. Similarly, giving bill of lading to the buyer is a symbolic
delivery. As soon as the document of title is handed over to the buyer or his
agent, ownership passes to the buyer.
Quantity and kind of goods to be delivered
The seller has to deliver the agreed quantity of things. If the seller delivers
in excess or in short of the agreed amount, there is non-performance of
contract. The buyer may accept or reject the things delivered at his
discretion. If the buyer accepts the quantity that is less than the agreed
amount, he has to pay the agreed price for quantity delivered but he cannot
require additional delivery. In cases of excess quantity, the buyer has to pay
a contractual price of the quantity delivered.
The parties to the contract of sale, according to Article 2275, may agree on
delivery of “about certain quantity” of specified goods. In such case there is
a possibility of delivery of a thing, which is determined by gap filling
provisions, where the seller has the discretion to decide the exact quantity to
be delivered.
However, the seller has no duty to determine the exact quantity if the
stipulation about certain quantity was made for the sole interest of the
buyer. Accordingly, this benefit might be given to the buyer where ‘it
appears from the circumstances that such stipulation has been included in
the contract in the sole interest of the buyer’. For instance, imagine that
Fitsume is celebrating a graduation ceremony. He invited 50 persons to the
ceremony. Since Fitsume was not sure about the number of persons who
would show up, he ordered around 60 bottles of soft drink from Lelisa. In
this case, we understand from the circumstance that Fitsume should
determine the exact quantity.
Place and time of delivery
In principle, time of delivery may be agreed. The seller should deliver the
thing sold at agreed time. Failure to deliver at such time amounts to non-
performance of the contract. We resort to legal provisions only if the parties
have no fixed date of delivery in the contract. We resort to legal provisions
only if the parties have no fixed date of delivery in the contract. If not
agreed, the seller shall deliver the thing as soon as the buyer requires to do
so. Delivery of the thing shall be simultaneous with the payment of the
price unless there is contrary agreement. The seller may in such case retain
the thing until payment is made.
Where the parties have agreed that delivery shall take place during a given
period, it shall be for the seller to fix the exact date of delivery unless it
appears from the circumstances that it is for the buyer to do so.
For example, if the seller agreed to deliver the thing sold between July14
and August 16, he has to make delivery during this period. However, the
buyer determines the exact date where circumstances may give such power
to determine the exact date of delivery to the buyer. For example, if Y
agrees to deliver a wedding cake between June 6 and 19 to X, it is clear
from circumstances that X needed the cake on the day of his wedding. Thus,
it is X who should decide the exact date according to Article 2277 because
Y has no interest in the date of delivery and for that matter Y does not know
the date of wedding.
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As far as place of delivery is concerned, unless otherwise agreed, the seller
shall deliver the thing at the place where, at the time of the contract, he has
his place of business or, failing such, his normal residence. On the other
hand, where the sale relates to a specific thing and the parties know the
place where such thing is at the time of the contract, the seller shall deliver
the thing at such place.
B. Obligation to transfer ownership
Ownership is the widest right that may have on corporeal things. The owner
has the right to use, possession, enjoyment and the right to dispose of it.
Accordingly, transfer of ownership means transfer of all these rights.
The Ethiopian law recognizes two ways of transferring ownership title.
These are by the operation of the law and by contract. Succession is one
example of transferring ownership by the operation of the law. The cases
where ownership may pass by contract include contract of sale and
donation.
The seller must transfer ownership of the thing to the buyer. Ownership
transfers up on delivery. However, delivery alone does not transfer
ownership. The seller must be the owner of the thing sold. It is the basic
principle of property law that a person can transfer no greater right in
property than he himself possesses. For example, if Kebede steals a watch
from Degu and sells it to Mustafa, Mustafa has no greater title to the watch
than Kebede possessed. Thus the obligation to transfer ownership includes
the obligation to have a good title. This is expressed by the latin expression
“nemo dat quad non habet” (a person can’t have transfer a better title than
he has). Thus a non-owner cannot transfer ownership. If the title of the
transferor is defective, the title of the transferee also becomes defective.
The rule that holds a person can transfer no greater right than his own
suffers an exception. That is, this rule does not apply in certain cases. This
exception is possession in good faith. The principle of possession in good
faith holds that a person who in good faith enters for consideration into a
contract to acquire ownership of a corporeal chattel will become owner of
that corporeal chattel by virtue of his good faith. Good faith must exist at
the time of contract or at the time the buyer entered in to possession of the
thing.
C. Obligation to warranty title, defects, and non-conformity
Warranty is a guarantee by the sellers with respect to the goods they sale.
Warranties may be express or implied. An express warranty is an
affirmation of a fact or a promise made by the seller to the buyer concerning
the nature of goods. That is, the buyer has purchased the goods on a
reasonable assumption that the goods were as stated by the seller. It can be
made in the form of oral or written statements.
Implied warranty is imposed by law. The law requires that the seller certain
minimum standard of quality. Any seller of goods is required by law to
offer a thing that has an average quality.
Warranty against dispossession: the seller shall warrant the buyer against
any total or partial dispossession which he might suffer in consequence of a
third party exercising a right he enjoyed at the time of the contract.
(Art.2282) However, where, at the time of the contract, the buyer knows
that he risks dispossession, the seller shall not warrant the thing unless he
has expressly undertaken to do so.
Warranty against defects: the seller shall guarantee to the buyer that the
thing sold conforms to the contract and is not affected by defects in addition
to the warranty of dispossession. There are circumstances where the seller
gives an express warrant against defect. When a seller uses descriptive
terms and the buyer takes them into consideration while making the
purchase, the seller has expressly warranted that the goods he delivers will
meet that description. Express warranty can be given in a limited manner.
Where the seller has warranted during a specified period, certain qualities or
the good working condition of the thing, it shall be sufficient for the buyer
to inform the seller of the defect before the expiry of such period.
4
It must be born in mind that the fact that the seller has given express
warrant does not necessarily mean that he has the obligation to warrant. If
the seller can prove that the buyer knew of the defects at the time of the
contract, he is not liable on his warranty against defects. (Art. 2295/2)
The seller does not only warrant for what he has expressly warranted but
also for warranties he is presumed to have undertaken by implication.
Implied warranties are imposed by law and arise only under certain
circumstances and they can be excluded or restricted by the parties as they
are not absolute.
All defects are not warrantable. Certain defects are warrantable and others
are not warrantable. A warrantable defect for which warranty shall become
effective according to Article 2289 is where the thing:
 Does not possess the quality required for its normal use or
commercial exploitation;
 Does not possess the quality required for its particular use as
provided expressly or impliedly in the contract; (warranty of
fitness for particular use)or;
 Does not possess the quality or specifications provided
expressly or impliedly in the contract (warranty of fitness
specified in the contract)
Warranty against non-conformity: A seller, in addition to warranty
against dispossession and defect, has the obligation to warrant against non-
conformity of the thing. The thing is deemed not to conform to the contract
where the seller delivered to the buyer part only of the thing sold or a
greater or lesser quantity than he had undertaken in the contract to deliver or
the seller delivered to the buyer a thing different from that provided in the
contract or a thing of a different species. (Art.2288/1).
For example, if the seller agrees to deliver a Sony TV set, he breaches the
warranty against non-conformity when he delivers a tape recorder or JVC
TV.
D. Other obligations of the seller
Other obligations of the seller relate to handing over of documents and
insurance. If it is customary for the seller to hand over to the buyer
documents concerning the thing sold, the seller shall, in addition to
delivery, hand over such documents. In addition, where the seller must
know from the circumstances that carriage insurance is the custom and
where the seller is not bound to contract such insurance himself, he shall
provide the buyer with the necessary information to enable him to contract
insurance, where the buyer requires such information from him.
5.3.2. Obligation of the buyer
The main obligations of the buyer under the contract of sale are the
obligation to pay price and the obligation to take delivery of the thing sold.
A. Obligation to pay price: The obligation of the buyer to pay price
includes the obligation to take any steps provided by the contract
or by the custom to arrange for or guarantee the payment of price.
For example, the contract of sale may provide that the buyer
should pay the price in check. In this case the buyer must open
account in bank and deposit money in the bank from which he
orders payment to the seller.
There are different ways of determining price:
 It may be fixed by the contracting parties at the time of contract.
 Where, in the contract of sale, price is to be fixed by weight, the
parties shall weigh the thing and determine the price. It is the net
weight that is taken in to account.
 It is also possible to determine price based on market, the price to
be effective is the one prevailing at the time and place where
delivery takes place.
If it is difficult to ascertain the price by any of the above methods, and the
subject matter relates to a thing which a seller normally sells, then the
parties are deemed to have concluded the sale at a price normally charged
by the seller having regard to the time and place where delivery is made.
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Time and place of payment: time of payment is on delivery of goods
unless agreed otherwise.
If no place is fixed in the contract, the buyer should pay the price at the
address of the seller. However, if the contract provides that the price is paid
when the thing or documents are handed over, when the price is paid at the
place where, under the contract, such thing or documents are to be handed
over.
Obligation to take delivery of the thing: the buyer must take necessary
steps to complete the delivery
5.4. Common obligations of seller and buyer
A seller and a buyer have some obligations in common like obligation to
pay expenses, obligation to preserve the thing and obligation to bear
unpreventable risk of loss and deterioration.
5.4.1. Expenses
There are different expenses involved in sale contract which may be borne
by the seller and or buyer. The expenses of contract of sale and expenses of
payment shall be borne by the buyer. Where the seller has changed the
address of his place of business or residence after contract is made, he shall
beer any additional expenses arising from the change.
Expenses of delivery are borne by the seller. These expenses include the
cost of counting, measuring, weighing and packing.
Expenses of transport may be borne by the seller or by the buyer. Where the
thing sold is to be transported to another place than the place agreed for
delivery, the buyer shall bear the expenses of transport. If the place of
delivery is agreed by the parties or if it is fixed in the contract, the seller
shall bear the expenses of transport up to the place agreed for delivery.
5.4.2. Preservation of the thing
Both the seller and the buyer are required to ensure the preservation of the
thing. But the two may preserve the thing under different circumstances.
The obligation of the seller to preserve the thing arises when the buyer is
late in taking delivery. It is carried out at the expense of the buyer.
If the thing delivered is defective, the buyer may return the thing to the
seller. Until he returns it, he must preserve the thing at the expense of the
seller.
5.5. Transfer of risk under contract of sale
Risk is the liability of loss or deteriorations of a thing sold. Thus, the effect
of risk allocation is that the person who bears the risk is to cover the value
of the thing which has been damaged or lost. Thus, the basic principle,
which is provided regarding transfer of risks in the sale of goods, is that, the
buyer shall pay the price notwithstanding that the thing is lost or its value
altered where the risks are transferred to him. The risks shall be transferred
to the buyer from the day when the thing has been delivered to him. Thus,
risk and ownership are inseparable.
However, risk will not be transferred to the buyer even after delivery if the
thing does not conform to the contract and the buyer has cancelled the
contract, require cancellation or require replacement of the thing. Yet, even
if there is non-conformity, unless the buyer has cancelled the contract,
require cancellation or require replacement of the thing, he/she bear the risk.
Review questions
1. Discuss obligations of the seller in contract of sale?
2. Ato Degu bought a Laptop for a certain amount of money from Ato
Zerihun being informed that the Laptop is defective. How is the
obligation of warrant of Ato Zerihu against defect owing to laptop?
3. Write the vices of consent for contract of sale?
4. Do you think the contract concluded by a person who is not an owner
is a valid contract of sale?
6
 Chapter Six
Law of Insurance
Objectives
After the completion of this chapter the student will be able to:
 Know the meaning of insurance;
 Identify the different types of insurance;
 Understand the principles of insurance;
 Explain the rights and obligations of both parties; and
 Identify the requirements to carry out insurance business
1.1. Definition of Insurance
Insurance may be defined in various ways. Firstly, from the point view of
an individual it may be defined as a risk transfer mechanism or an economic
device whereby a person, called the insured/assured transfers a risk of a
possible financial loss resulting from unforeseeable events affecting
property, life or body to a person called the insurer for consideration. Thus,
it can be seen that insurance is a device by which an insured person can
protect himself from heavy loss likely to be caused by an uncertain event by
paying a comparatively much smaller sum of money as premium.
For instance, let us take a case of an owner of a motor vehicle, who always
runs the risk of suffering a financial loss resulting from the loss or
destruction of his property because of unforeseeable events such as fire,
collision, overturning or even theft. Therefore, if the person purchases a
motor insurance policy covering these risks from an insurer, it means that
he transferred this possible financial loss to the insurer.
Secondly, from the point of view of the insurer, insurance may be defined
as a mechanism through which a risk is distributed among the group of
persons who are exposed to the same type of risk, i.e., persons who bear the
risk of suffering a financial loss as a result of events affecting property, life
or body.
Question: can you illustrate the second definition through examples?
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From the definitions provided above, we can understand that insurance is a
cooperative economic device to spread the loss caused by a particular risk
over a number of persons who are exposed to it and who agree to insure
themselves against that risk. This means that insurance provides a pool to
which many persons contribute a certain amount of money called the
premium, and out of which the insurer compensates the few who suffer
losses. This is always true in the case of property and liability insurance
which cover contingencies and given for a short period of time, usually a
period of one year, but does not so fully apply to insurance of persons
particularly life insurance(see Art 692 of the commercial code) in which the
policy usually becomes a claim ultimately.
It is worth to mention at this juncture that insurance does not and cannot
prevent loss of property, incurring civil liability, death, or injury or illness;
rather it provides financial compensation for the effects of misfortune. In
other words, we can say that insurance does not protect the insured property
from loss or damage, or the insured from incurring civil liability or the
insured person from death or injury or illness, but provides a financial
compensation to the insured or the beneficiary who has suffered pecuniary
losses as a result of loss or damage to property, or because he has incurred a
civil liability or illness or death of the insured.
The party who promises to pay a certain amount of money to, or to
indemnify, the other party is called the insurer (sometimes called the
assurer- in cases of insurance of persons and the under writer in cases of
marine insurance and the party to whom such protection is given is called
the inured (or the assured). The document containing the terms and
conditions of the contract of insurance is called the policy, and the insured
is therefore, also referred to as a policyholder.
7
A contract of insurance is a type of contingent or conditional contract. As
the name indicates, a contingent or conditional contract is a contract to do
or not to do something, if some event, collateral to such contract, does or
does not happen. In other words, it is a contract in which the performance of
the obligation arising there from by the parties or one of them is dependent
upon the condition or contingency agreed upon by them. Accordingly, as
the obligation of the insurer/assurer to pay compensation or the agreed
amount to the insured or the beneficiary is dependent upon materialization
of the risk or risks specified in the policy. Thus, for instance, if X Insurance
Company agrees to pay Birr 100,000 in exchange for B paying Birr 2500 as
premium, if B's house is destroyed by fire; there will be contingent contract,
the performance of which depends upon the happening of an uncertain
event, i.e. the destruction of the house by fire. The insurance covers only
when the risk specified in the policy materializes. For instance, the owner of
the house in the above example would not be compensated if the house is
destroyed cause of flood. Therefore, it is very crucial to make sure the
insurance policy unequivocally indicates the risk to avoid ambiguity.
Finally, let us see how a contract of insurance is defined under the insurance
law of Ethiopia. Art 654 of the Commercial Code of Ethiopia defines
insurance as follows:
Insurance (policy) is a contract whereby a person, called the insurer,
undertakes, against payment of one or more premiums, to pay to a person,
called the beneficiary, a sum of money where a specified risk materializes.
According to this definition, insurance is a contract between two or more
persons in which one person called the insurer, agrees to pay the agreed
amount of money or compensation to another person, called the insured, or
the beneficiary where the insured property is lost or destroyed ( in cases of
property insurance), or where the insured person incurs civil liability (in
cases of liability insurance) or where the insured person dies or suffers
bodily injury or falls ill (in case of insurance of persons). The insurer
undertakes this obligation for consideration, called premium payable by the
insured person.
Sub Art(2) of the same article provides that a contract of insurance may be
concluded in relation to "damages" covering risks affecting property or
arising out of the insured person’s civil liability. These types of insurances
are generally referred to as indemnity insurances, in which the insurer’s
obligation is to pay compensation, which is always equal to damage.
Similarly, sub Art(3) provides that a contract of insurance may also be made
in respect of human person’s life, body or health in which the insurer’s
obligation is to pay the amount agreed upon (the sum insured). This is a
type of insurance in which the principle of indemnity or compensation is
not applicable since human life or body does not have a market value, hence
the name Non-indemnity insurance.
Thus, a contract of insurance, as a contingent contract is a perfectly valid
contract, and the general principles of the law of contract which you
discussed in chapter three (general contract) apply equally to such a
contract. Hence, to be valid, it must fulfill the following requirements: (i)
there must be an agreement between the parties (ii) the agreement must be
supported by consideration, (iii) the parties must be capable of contracting
(must have capacity), (iv) the consent of the parties to the agreement must
be free from defects, (v) the object must be precisely/sufficiently defined,
legal or the object must not be illegal and immoral, and (vi) the form
indicated by the shall be observed.
Exercise
Identify the distinct legal characteristics that make insurance contracts
different from other contracts.
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1.2. Categories/types of insurance
Insurance could be categorized into various types based on different
criterion.
1.2.1. Classification based on the nature of insurance given
A. Indemnity insurance
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In these types of insurance, the insurer’s obligation is to pay compensation,
which is always equal to damage. The main essence of these types of
insurance is reinstating the insured to the economic position where he/it had
been before the materialization of the risk. Hence, the amount recoverable
mainly depends upon the insured’s economic loss. Unlike non-indemnity
insurance; this type of insurance is easy to calculate the exact economic
value/market value of the damage.
Property and liability insurances are contracts for indemnity or
compensation, which, in principle, is equal to the actual value of the object
or the amount of economic loss or damage sustained by the insured. Hence,
in cases of insurance of objects, the liability of the insurer, if the risk
materializes, shall be to pay compensation i.e., the actual value of object on
the day of occurrence, where the object is totally destroyed or lost or the
cost of repair in cases of partial damage, provided that such compensation
cannot exceed the amount of guarantee/sum insured indicated in the policy.
(See Arts 678, 665(2) of the commercial code).
Since a property insurance contract is a personal contract, it normally
cannot be assigned to another party without the insurer’s consent.
Otherwise, the company could not be legally bound in a contract with an
individual to whom it would never have issued a policy originally, and one
in which the nature of the risk is altered substantially.
B. Non-indemnity insurance
In this type of insurance the amount recoverable is not measured by the
extent of insured’s economic loss. In this type of insurance, the insurer’s
obligation is to pay the amount agreed upon (the sum insured). The
principle of indemnity or compensation is not applicable since human life or
body does not have a market value. It is usually, if not always, an
impossible task to know exactly the economic value of the subject matter of
insurance.
It is an insurance made in respect of human person’s life, body or health.
When the insurance is related to insurance of persons, the parties freely fix
the amount of guarantee and is payable regardless of the actual damage
sustained where the risk materialized. This is mainly because it is generally
accepted that human life or limb cannot be valued in terms of money and
are irreplaceable and the insured or beneficiary who receives it cannot be
considered to have made a net profit out of the insurance. (See Art 689 of
the commercial code).
A life insurance policy can be freely assigned to anyone without the
insurer’s consent because the assignment does not usually alter the risk and
increase the probability of death.
Question: can u exactly know the market value of once, life, health, hand,
leg, eye-------?
1.2.2. Classification on the basis of Event
We may categorize insurances based on the materialization of the risks
indicated in the policy.
a) Life insurance-----applicable when the insured dies
b) Fire insurance----applicable when a fire accident happens
1.2.3. Classification on the basis of Nature of Interest affected
We may classify insurances based on the nature of that may be
jeopardized because of the materialization of the risk
A) Personal Insurance----this type of insurance is directly
connected to the personal interest of the insured. E.g. health,
life insurance
B) Property Insurance-----it is highly connected to various types
of property. Eg motor, fire insurance
C) Liability insurance----refers to the risk of liability towards
third parties, which the insured is required to pay, such
damage to property belonging to third person or injury or
death of third person or both in the case of accident.
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Exercise: which category is preferred by the Ethiopian commercial code?
1.3. Principles of insurance
Under this section we will briefly discuss the predominant principles of
insurance in any legal system.
a.Principle of Utmost Good Faith
This principle is mainly all about disclosing material facts. The duty to
make a full and true disclosure continues until the contract is concluded,
i.e., until the proposal of the insured is accepted by the insurer, whether the
policy is then issued or not and it is not a continuing obligation. Thus, any
material fact coming to his knowledge after the conclusion of the contract
need not be disclosed. However, the duty to disclose revives with every
renewal of the old policy or alterations in the existing policy.
If the principle of utmost good faith is not observed by either party, the
contract becomes void able at the option of the party not at fault,
irrespective of whether the non-disclosure was intentional or innocent. Of
course, in case of innocent misrepresentation the premium is refundable on
the avoidance of the contract. This principle is mainly applicable to the
insured. In fact the insured is obliged to disclose material facts within his
knowledge since the material facts are decisive to determine the amount of
premium.
Exercises: what would be the effect of concealing the fact that
Mr.B has diabetes in concluding a health insurance?
 What are the material facts in fire insurance?
b. Principle of Indemnity
The second fundamental principle is that all contracts of insurance are
contracts of indemnity, except those of life and personal accident insurances
where no money payment can indemnify for loss of life or bodily injury. In
case of marine and fire insurances, the insurer undertakes to indemnify the
insured for loss or damage resulting from specified perils. In case of loss,
the insured can recover from the insurer the actual amount of loss, not
exceeding the amount of policy. If there is no loss under the policy, the
insurer is under no obligation to indemnify the insured. The purpose of
indemnity is to place the insured, after a loss, in the same position he
occupied immediately before the event. Under no circumstances, is the
insured allowed to benefit more than the loss suffered by him. This is
because, if that were so, the temptation would always be present to desire
the insured event and thus to obtain the policy proceeds. As it is discussed
briefly above the main purpose of insurance is to reinstate the insured to the
position where he would have been before the materialization of the risk. It
is not mean to make profit out of the materialization of the risk. This would
obviously be contrary to public interest. This principle applies to insurance
of objects (property insurances) and liability insurances.
c. Proximate Cause
The next principle of insurance is that the insurer is liable only for those
losses which have been proximately caused by the peril insured against. In
other words, in order to make the insurer liable for a loss, the nearest,
immediate, or the last cause has to be looked into, and if it is the peril
insured against, the insured can recover.
Thus, in deciding whether the loss has arisen through any of the risks
insured against, the proximate or the last of the causes is to be looked into
and others rejected. If loss is caused by the operation of more than one peril
simultaneously and if one of the perils is excluded (uninsured) peril, the
insurer shall be liable to the extent of the effects of insured peril if it can be
separately ascertained. The insurer shall not be liable at all if the effects of
the insured peril and excepted peril cannot be separated.
d. Insurable Interest
Consistent with the concept of insurance as a means of indemnifying an
insured against a loss, is the corollary that insurance should not provide an
insured with the means of showing a net profit from the event insured
against.
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Throughout the development of the insurable interest doctrine in case and
statutory law, two primary purposes have captured the attention of law-
makers, both rooted in public policy. The first is the elimination of
insurance as a vehicle for gambling, an activity to which has been attributed
idleness, vice, a socially parasitic way of life, increase in impoverishment
and crime, and the discouragement of useful business and industry. The
second is the removal of the temptation provided by a prospect of a net
profit through insurance proceeds to deliberately bring about the event
insured against, whether it is the destruction of property or human life.
‘Insurable interest’ is an essential pre-requisite in effecting a contract of
insurance. The insured must possess an insurable interest in the subject
matter of the insurance at the time of contract. Otherwise, the contract of
insurance will be a wagering agreement which shall be void and
unenforceable.
e. Doctrine of Subrogation
The doctrine of subrogation is a corollary to the principle of indemnity and
as such, it applies only to property insurances. According to the principle of
indemnity, the insured can recover only the actual amount of loss caused by
the peril insured against and is not allowed to benefit more than the loss he
suffered. In case the loss to the property insured has arisen without any fault
on anybody’s part, the insured can make the claim against the insurer only.
In case the loss has arisen out of tort or fault of a third party, the insured
becomes entitled to proceed against both the insurer as well as the
wrongdoer. However, since a contract of insurance is a contract of
indemnity, the insured cannot be allowed to recover from both and thereby
make a profit from his insurance claim. He can make a claim against either
the insurer or the wrong doer. If the insured chooses to be indemnified by
the insurer, the doctrine of subrogation comes into play and as a result, the
insurer shall be subrogated to all the rights and remedies of the insured
against third parties in respect of the property destroyed or damaged.
f. Risk Must Attach
The next principle of insurance is that for a valid contract of insurance the
risk must attach. If the subject-matter of insurance ceases to exist (e.g. the
goods are burnt) or the insured ship has already arrived safely, at the time
the policy is effected, the risk does not attach, and as a consequence, the
premium paid can be recovered from the insurers because the consideration
for the premium has totally failed. Thus, where the risk is never run, the
consideration fails and therefore the premium is returnable. It is a general
principle of law of insurance that ‘if the insurers have never been on the
risk, they cannot be said to have earned the premium.’
g. Mitigation of Loss
When the event insured against occurs, for example, in the case of a fire
insurance policy when the fire occurs, it is the duty of the policyholder to
take steps to mitigate or minimize the loss as if he were uninsured and must
do his best for safeguarding the remaining property. Otherwise, the insurer
can avoid the payment for loss attributable to the negligence of the
policyholder. Of course, the insured is entitled to claim compensation for
the loss suffered by him in taking such steps from the insurer.
h. Doctrine of Contribution
Like the doctrine of subrogation, the doctrine of contribution also applies
only to contracts of indemnity, i.e., to property insurances. Double
insurance occurs where the same subject matter is insured against the same
risk with more than one insurer. If two different policies are taken from the
same insurer, it is not a case of double insurance. It will be termed as ‘full
insurance.’ Under double insurance, the same risk and the same subject
matter must be insured with two or more different insurers. In the event of
loss under double insurance, the assured may claim payment from the
insurers in such order as he thinks fit, but he cannot recover more than the
amount of actual loss, as the contract of property insurance is a contract of
indemnity.
Thus, the essential conditions required for the application of the doctrine of
contribution are:
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  There must be double insurance
 There must be either over-insurance or only partial loss A second form of “no action” clause provides that “No action shall lie
against the company until the amount of the insured’s obligation to pay
i. Reinsurance shall have been finally determined either by judgment against the insured
An insurer assuming larger risk from the direct insurance business may after actual trial or by written agreement of the insured, the claimant and the
arrange with another insurer to off load the excess of the undertaken risk company.”
over his retention capacity. Such arrangement between two insurers is
termed as ‘reinsurance.’ Thus, by the device of reinsurance the original A third aspect in which legislation has created rights for the third-party
insurer transfers part of the risk to the reinsurer. Payment made by the victim in the insured’s liability policy involves defenses against recovery on
ceding insurer (called original insurer or reinsured) to accepting insurer the policy. In the area of automobile liability insurance particularly,
(called reinsurer) for the assumption of the risk by the latter is termed legislatures have generally provided in financial responsibility statutes for
‘reinsurance premium.’ the protection of tort victims that defenses that would bar collection of the
proceeds by the insured, such as fraud in the application, non-cooperation in
defense of a tort action, or failure to notify the insurer of an accident, will
j. Third Party Interests in Liability Insurance
be of no effect in a direct action by the third party tort victim against the
Liability insurance originated solely as a protection for the interests of the
insurer.
insured against loss suffered through liability to third parties. It began in the
area of employers’ insurance against loss through liability to employees for
In the past, the issue of tort immunity has occupied a more important place
work related injuries. Since indemnification of the employer/insured was
in the determination of insurance issues. With the trend in the law toward
the sole function of the insurance, the injured third party could not bring a
limiting tort immunity for charitable institutions and other parties, the issue
direct action against the insurer even after obtaining a judgment against the
of tort immunity in insurance law has become less of a factor. However,
insured. Even the insured could not bring action on the policy until he had
where the tort feasor is immune from suit, the issue as it relates to liability
sustained an actual loss by payment of the judgment debt to the third-party.
insurance is generally addressed in one of three ways.
If the insured happened to be insolvent and judgment proof, no claim could
arise under the policy.
First, a policy may be silent on the issue of tort immunity. Second, the
policy might reserve to the insured the right to determine whether tort
In subsequent years, legislation has radically transformed the function of
immunity will be exercised. Third, the policy may totally forbid the
liability insurance in many areas to make the injured third-party with a
insurance company from exercising a right to tort immunity.
cause of action against the insured a quasi third-party beneficiary of the
liability policy.
Exercise
Identify the relevant provisions in the commercial code which exactly
One of the first areas under legislative attack was the inequity of allowing
match with the above principles.
an insured to pay premiums to an insurer to keep liability insurance current
1.4. The Requirements to Carry on Insurance Business
and then to allow the insurer to hide behind the shield of the insolvency of
the tortuous insured to prevent payment of the judgment debt owed to the
third-party victim.

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Art 656 of the Commercial Code provides that the law shall determine the
conditions under which physical persons or business organizations may
carry on insurance business. Therefore, we have to refer to other parts of the
commercial code and other laws to find out as to who may undertake
insurance business and the conditions under which it may be undertaken.
Accordingly, Art 513 of the code provides that banks and insurance
companies cannot be established as private limited companies, i.e., a private
limited company cannot engage in banking, insurance or any other business
of similar nature. Similarly, Art 6(1) of the Licensing and Supervision of
Insurance Business Pro No 86/1994 provides that no person may engage in
insurance business of any type unless it applies to and acquires a license
from the National Bank of Ethiopia for the particular class or classes of
insurance. Furthermore, Art 4(1) and Art 2(3) of the same proclamation
provide that such person has to be a share company as defined under Art
304 of the commercial code.
According to this article, a share company is a company whose capital is
fixed in advance and divided into shares and whose liabilities are met only
by the assets of the company( you have discusses this issue in detail in
chapter eight). The capital of the company to be established as an insurance
company must be wholly owned by Ethiopian nationals and/or business
organizations wholly owned by Ethiopian nationals, and it must be
established and registered under Ethiopian law and must have its head
office in Ethiopia.
These requirements / conditions in effect prevent foreigners from engaging
in insurance business and foreign banks from opening branches and
operating in Ethiopia. The most probable reason for this position is the need
to protect infant domestic insurance companies which do not have the
desired financial strength, knowhow and human resources to be able to
compete with foreign banks which have superior capacity in these areas.
The other condition that a person must fulfill to obtain a license relates to
the minimum capital of the company, i.e., it must have a minimum capital
of 3 million Birr if it is applying for license to undertake general insurance
business i.e., insurances other than insurance of persons, and 4 million Birr
if it is applying for a license to undertake long term insurance business, i.e.,
insurance of persons and 7 million where the application is to undertake
both classes of insurance. Such capital has to be paid up in cash and
deposited in a bank in the name of the company to be established as an
insurance company.
1.5. Significance of Insurance
Its significance could be derived from the definitions given above. Hence,
Insurance as a mechanism of transfer of risk has great economic and social
benefits to the individual insured, his family and the country in general. The
following are some of the major benefits.
I. Indemnification for Losses
Payment of compensation by the insurer for losses permits individuals and
their families to be restored to their original financial position after a loss
has occurred. As a result, they can maintain their financial security. Since
they are restored either in part or in whole after a loss occurs, they are less
likely to seek financial assistance from relatives and friends. It also allows
businesses to remain in business and employees to keep their jobs, suppliers
will continue to receive orders, and customers can still purchase the goods
and services they desire. The community also benefits because its tax base
is not eroded. Businesses and families who suffer unexpected losses are
restored or at least moved closer back to their previous economic position.
The advantage to these individuals is obvious. The society also gains
because these persons are restored to production and tax revenues are
increased. In short, the indemnification function contributes greatly to
family and business stability and therefore is one of the most important
social and economic benefits of insurance.
II. Reduction of Worry and Fear
Another benefit of insurance is that it reduces worry and fear, both before
and after loss. For instance, if family heads have life insurance for
adequate amount to cover the future needs of their families, they are less
likely to worry about the financial security of their dependents in the event
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of their premature death. Persons insured for long-term disability do not
have to worry about the loss of earnings if a serious illness or accident
occurs. Property owners who are insured enjoy greater peace of mind since
they know that they are covered (they would be compensated) if loss occurs
to their property.
III. Source of Investment Funds
The insurance industry is an important source of funds for capital
investment and accumulation. Premiums, which are collected by the insurer
in advance, usually at the time of conclusion of the contract and other funds
which are not needed to pay for immediate losses and expresses, can be
loaned to businesses or invested in manufacturing, real estate... sectors.
These investments increase the society’s stock of capital goods and promote
economic growth.
Insurance, through compensation of losses, also encourages new
investment. For instance, if an individual knows that his or her family will
be protected by life insurance in the event of premature death, his or her and
the family's financial resources are protected by various types of property
insurances, he/she may be more willing to invest savings in a long-desired
project such as a business venture, without feeling that the family is being
robbed of its basic income security. In a way a better allocation of resources
is achieved, i.e., idle funds/deposits are used for a more productive purpose.
As insurance is an efficient device to reduce risk, investors may also be
willing to enter fields they would otherwise reject as too risky, and the
society benefits from increased services and production.
IV. Means of Loss Control
Although the main function of insurance is not to reduce loss but merely to
spread/distribute losses among members of the insured group, insurers are
nevertheless vitally interested in keeping losses at a minimum. Insurers
know that if no effort is made to prevent or minimize occurrence of insured
risks, losses and hence premium would have a tendency to rise. It is human
nature to relax vigilance when they know that the loss will be fully paid by
the insurer.
The following illustrations are some of the areas in which insurance
companies play a very important role in loss prevention and control:
- Development of fire safety standards and public education
- programs
- Recovery of stolen properties
- Investigation of fraudulent insurance claims and thereby
deterring intentional destruction of property and life
- The insurance industry also finances programs aimed at
reducing premature deaths, accidents and illness.
V. Enhancing Credit
Insurance enhances a person’s credit, i.e., it makes the borrower/debtor a
better credit risk because it guarantees the value of the borrower’s
collateral/mortgage or pledge/, and gives the creditor /lender greater
assurance that the loan will be repaid. For instance, when a house is
purchased on credit provided by a lending institution, the lender normally
requires a property insurance on the house before the mortgage loan is
granted. The property insurance protects the lender’s financial interest if the
property is damaged or destroyed. Similarly, if a purchase of an automobile
is financed by bank or other lending institution motor vehicle insurance may
be required before the loan is given. It also enhances small businesses’
competitiveness. Small businesses would not be able to compete with big
businesses without an insurance to which they transfer risks to their assets.
This is true because in cases where risks occur they would be compensated
and the business remains in the market. However, in the absence of
insurance, the occurrence of a certain loss may destroy the business and put
it out of the market. Big businesses on the other hand, may safely retain
some of such losses even in the absence of insurance.
Hence, insurance through payment of compensation for losses will keep
small and medium businesses in the market and enable them to maintain
their competitiveness.
1.6. Obligations of parties
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It is obvious the effect of every contract is creating rights and obligations 1.7. Period of limitation
among contracting parties. Not being an exception to this fact, contract of
insurance creates obligations between an insured and an insurer. The Any claim arising out of a contract of insurance shall be barred after two
following are their respective obligations. years from the occurrence giving rise to the claim or from the day when the
parties knew of the occurrence. In case of concealment or false statements,
1. Obligations of an insurer the period of limitation shall run from the day when the insurer knew of the
a) It shall guarantee the insured against the risks specified in the concealment or false statement policy (see article 670 of the commercial
policy (see article 663 of the commercial code). In other words, it code.)
shall pay the agreed sum which shall not exceed the amount
specified in the policy.
b) It shall act in good faith.
As it is clearly indicated above both parties are highly expect to act Review questions
in highest standard of honesty to each other.
1. Define the term insurance.
2. Obligations of an insured 2. Clearly show the definition and nature of Contracts of
a) To pay the premium at a specified time in the policy (see
Insurance.
article 665 of the commercial code)
The amount premium and time of payment would be clearly 3. What are the significances of insurance?
indicated in the policy and the insurer shall pay the premium 4. Briefly discuss doctrine of subrogation.
accordingly.
5. Clearly discuss what principle of indemnity is.
b) To act in good faith
On making proposals for a policy, the beneficiary shall state 6. What do we mean by proximate cause in relation to
exactly all the circumstances within his knowledge and which insurance?
are likely to assist the insurer to appreciate fully the risks he
undertakes to insure policy (see article 667 of the commercial
code). We have discussed somewhere in this chapter that the
insured is only expect to disclose material facts within his
knowledge.
c) Unless he is prevented by force majeure, the beneficiary shall
inform the insurer of any occurrence likely to render the
insurer liable as soon as he knows of such occurrence or
within not more than five days (see article 670 of the
commercial code).

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