LEGAL ASPECTS OF A BUSINESS

INSURANCE

▪ Insurance is a promise for financial compensation for a risk that may or may not occur
such as accidents, theft, fire. Unexpected events may occur at times when individuals
cannot afford to restore themselves.

Insurable and Uninsurable Risks

▪ Insurable risks are events that the insurance company will be able to calculate and charge
customers a premium. e.g. fire

▪ Uninsurable risks are events that the insurance company will not be able to calculate and
charge customers a premium e.g. you cannot insure if a business will be successful or not.

The Insurance Contract

▪ An insurance policy is a document sent by the insurer to the insured which states what
has been agreed between the two parties.
▪ Insurance policies may be obtained through an agent working for a particular company
or through brokers selling insurance for a number of different companies.
▪ Insurance can be provided by insurance companies, underwriters and the government.

POOLING OF RISK

▪ The pooling of risk is where people faced by the same events come together to protect
themselves.
▪ Every person or business faced with a risk pays a small amount of money called a
premium to the insurance company, to compensate for losses suffered by themselves
and others.
▪ If a home-owner loses his house due to the risk of fire, instead of one person bearing
the loss, it is shared by several persons of a large group.

VALUE OF INSURANCE IN LOWERING RISK ASSOCIATED WITH BUSINESS

1. It provides financial protection and compensation if a risk occur e.g. fire

2. It provides business confidence and peace of mind, that is, people will invest their money
in a business without the fear of losing it
3. It is an invisible export, which brings revenue/foreign exchange to a country, this helps to
improve the country’s balance of payment position

THE PRINCIPLES OF INSURANCE

The principles of insurance include:

 1. Indemnity 2. Utmost good faith 3. Insurable interest 4. Proximate cause

5. Pooling of risks- main principle of insurance 6. Subrogation 7. Contribution

INDEMNITY

▪ This means to restore the insured to where he or she was before the loss or damage
occurred. This principle does not apply to life assurance since no money can
compensate death
▪ The principle of indemnity is not to make a profit from a loss, but you receiving a fair
compensation

Rules Governing Indemnity

(i) Subrogation

▪ This is where the insurer after being compensated, surrenders the right of ownership
to the insurance company

▪ E.g. If your car was completely wrecked in an accident, the insurance company would
compensate you, but they would take the wreck to ensure that you do not sell the
wreck and make a profit.

(ii) Contribution
▪ This occurs when more than one insurance company is liable for the loss, the amount
of loss is shared in proportion by different insurance companies

▪ E.g. If you have insured your car with two different insurance companies and your car
was stolen, the two insurance companies would contribute half the value of your
stolen car and buy you a new car, so you are fully compensated. You cannot get a
car from each insurance company

UTMOST GOOD FAITH

▪ This principle states that the insured must give all relevant information about the thing
or person being insured, he/she must be truthful. Failure to give accurate information
may mean the insurance company may refuse to pay on the claim

▪ Note: The insurance company must also give all relevant facts about the policy

INSURABLE INTEREST

▪ A person cannot take out an insurance policy to protect property in which they do not
have insurable interest
 ▪ E.g. you cannot insure your neighbour’s house, it is not yours and you will lose
nothing

PROXIMATE CAUSE

▪ The insurance company can only pay out compensation if the loss suffered was
caused by the risk covered in the policy

▪ E.g. if a person insures his house against fire but it was destroyed by flood, then he
cannot expect to get compensation from the insurance company

TYPES OF INSURANCE POLICIES

(i) Life Assurance
(ii) Non – life (Business Insurance)

LIFE ASSURANCE POLICIES

▪ Life assurance is a promise of financial compensation for events that must happen such
as death. Life assurance is the insurance of people’s life or health. It is a form of
savings plan which benefits the dependents of the assured.

▪ The principle of indemnity cannot be applied under this coverage as no amount of

money can restore a person back to life.

(i) Whole Life Policy

▪ Provides payment after the death of the insured, the spouse or dependents should
benefit from this policy.

(ii) Endowment Policy

▪ Allows a sum of money to be paid, payable at a certain age or on death of the policy
holder, whichever comes first.
▪ Upon maturity, if the insured survives the period covered by the policy, then he
receives a lump sum of money.

(iii) Term Policy

▪ This is used by persons who need a mortgage on their home, in the event of
death, the policy is used to pay off the mortgage.

BUSINESS INSURANCE POLICIES

1. Fire Insurance

▪ Covers both domestic and business premises and their contents. It also includes
explosions, flood, burglary
 ▪ Premiums paid depend on the type of building, its layout, nature of the contents
[flammable]

2. Liability Insurance

(i) Public Liability: provides coverage for firms which may have to pay claims
for injury to persons caused by their negligence.

(ii) Employer’s Liability: provides coverage for employees having accidents

on the job, all businesses are required by law to have such a policy.

(iii) Fidelity Bond: this is where insurance companies will compensate against
theft by employees.

(iv) Product liability: it provides coverage to a business if a customer takes

legal action as a result of unsafe goods being supplied by the business.

3. Motor Vehicle Insurance Policies

(i) Third Party Policy: covers death or injury caused to other road users apart from the
insured on the road, plus damage to other people’s property.

(ii) Third party, theft and fire insurance: this covers the damage to other people’s
property plus the owners’ car through fire or theft.

(iii) Comprehensive Policy: this includes third party, fire and theft, damage to the insured
vehicle, personal injury to the driver and loss of possessions in the vehicle

4. Consequential Loss: covers loss of profit as a business would have earned if the business
was still operating.

1. Goods in transit or goods out of transit-coverage for loss/theft of goods or cash being
transported.

2. Personal accidents: covers injuries to a person that prevents you from working

7. Marine insurance: covers damage to the vessel, the cargo (damaged goods) and
the ship owner’s liability, that is, coverage for injury of passengers/crew or
collision with another vessel.

8. Aviation insurance - covers aircraft against damage or death of passengers or

crew.
THE IMPORTANCE OF RECORD KEEPING

▪ Business documents are the official documents used in a business to help keep track
of all official and unofficial business transactions.

Business documents are important because:

▪ they make the communication process possible and are used for reference purposes
e.g. if a customer queries a bill the field copy can be used in clarifying any queries
▪ governments require proper documentation for taxation and auditing purposes
▪ they provide a written record between a firm and its customers e.g. receipts, invoices
▪ it prevents business persons from forgetting important information to be used in the
performance of their various task
▪ it saves time since relevant information can be located easily and can be extracted if
needed

PREPARING COMMON BUSINESS DOCUMENTS

Pro-forma Invoice

▪ A Pro-forma Invoice is a bill sent to the buyer when the supplier requires payment in
advance of delivery when the buyer is not well known by the seller. It is sent when
✔ the buyer is not well- known by the seller
✔ when certain goods are sold on a trial basis to the customer who has the option to
return the goods if they do not wish to purchase them
✔ used in import/export trade to assist in the calculation of customs duties and other
fees
The Invoice

▪ The invoice lists the goods purchased and informs the buyer of the amount owed to
the seller
▪ It contains the: quantity supplied, price per unit, total amount owed, invoice number,
buyer’s order number, terms of sales (n/10, n/30, n/60), E & OE [errors and
omissions excepted] means the supplier has the right to correct any errors at a later
date

Statement of Account

▪ Is a summary of all transactions made between the buyer and the seller during the
month and it reminds the customer that payment is due.
▪ It enables the customer to compare the records kept by the seller with his own
▪ It contains: balance owing at the beginning of the month, the amount of invoice
issued, debit or credit notes issued, the net amount owing at the end of the month
Purchase Requisition Forms

▪ This is a business document that is used within an organization when goods are
needed from the stockroom.
▪ The purpose of the document - it helps to control the movement of stock it
informs the firm on how stocks are used and by whom, it gives information on
what persons need and the quantity

Stock Card

▪ Document that keeps information about the stock such as records of stock received
and issued and the balance at any given time
▪ It contains: minimum and maximum levels of stock, amount if stock received, amount
of stock issued, re-order levels

Credit Note

▪ A document sent to a buyer if he has been overcharged due to: faulty or damaged
goods that have been returned, goods are supplied in smaller quantities than shown in
the invoice, discounts were left off the invoice, too much charged for transport

Debit Note

▪ A document sent to the buyer if he/she is undercharged due to: some delivered items
are not on the invoice, pricing errors made on the invoice, the buyer has kept samples
that were sent by the seller, transport cost omitted