Third party insurance for banks in balance

KAMPALA– A case with grave ramifications for both the banking and insurance sectors is raging in the courts, with the key question being whether a bank can benefit from insurance cover given to a surveying company it has contracted, in circumstances where professional negligence by the surveying company is proven.

Wooden Gavel
In the case which has been adjudicated by the Insurance Regulatory Authority Tribunal and the High Court, Finance Trust Bank, which is represented by Muwema and company advocates, is pitted against AF Mpanga, represented by Sanlam General Insurance, which provided insurance cover christened as professional indemnity to Katuramu and company consulting surveyors.
Finance Trust first lodged its claim in 2023 at the Insurance Regulatory Authority Tribunal, contending that it secured the services of Katuramu consulting surveyors to provide professional advice through inspection, opening boundaries and valuation of various plots of land and properties before it could proceed to grant credit facilities to potential loan applicants.
As a prerequisite for engagement, Finance Trust Bank says that Katuramu and the company consulting surveyors were required to maintain professional indemnity insurance from a reputable insurance company.
Thus, Katuramu and company consulting surveyors secured professional indemnity insurance from San General insurance with a policy number P/ 100/5011/2019/ 001,7 effective from March 23, 2019, to March 22, 2020, before it was renewed twice in the periods from September 2020 to August 31, 2021, and from September 1, 2021, to September 2022.
Relying on the valuation reports provided by Katuramu and the company consulting surveyors, Finance Trust says that it extended credit facilities to various borrowers, who later defaulted on their loans.
Upon instituting recovery measures and commissioning a different set of valuers, the bank says that it discovered significant errors in the valuation reports prepared by Katuramu and the company’s insurance consulting surveyors. “These inaccuracies included the valuation of the wrong properties, undisclosed graveyards, and some properties were vacant, but the valuation reports indicated that they were developed. Those posed challenges for the bank in recovering the loans and foreclosing the mortgaged properties,” said the bank, which asked in excess of Shs3 billion in compensation from Sanlam, said in documents filed both at the Insurance Regulatory Authority and the High Court.
The bank’s case hinges on the letter dated October 4, 2023, addressed to the insurance authority, wherein Katuramu and Company Consulting Surveyors acknowledged their negligence, saying they sanctioned the valuation reports without verifying the contents therein, which was a breach of their professional duty. In refusing to pay the bank, Sanlam, in documents filed at the authority, turned the case on its head, saying that Katuramu and company consulting surveyors’ move to admit negligence was in bad faith. Sanlam also blamed Finance Trust for being imprudent in issuing loans, therefore liable for contributory negligence. “The bank officials extended their imprudence when they failed to do the basic legal requirements to lend and secure the loans by mortgages,” Sanlam’s legal team argued. The Authority’s tribunal threw out Sanlam’s argument.
“The bank [ Finance Trust] hired and relied on the advice of competent professionals to advise it regarding the security mortgage, rather than relying on its staff. The due diligence function has been outsourced to the insured [ Katuramu and company consulting surveyors], who had the necessary expertise,” the authority’s tribunal ruled. Consequently, the tribunal ruled that Sanlam should pay Finance Trust Bank Shs 1.9 billion after the directors of Katuramu and company insurance consulting surveyors admitted negligence. “Upon careful consideration of the evidence presented, the duty owed by the insured to the complainant during the property valuations is evident, as highlighted in the signed reports by the insured’s director.
The complainant’s reliance on the skill and knowledge of the insured in extending loans to various clients further strengthens the argument that the loss was a direct consequence of professional negligence,” the tribunal ruled. Sanlam wasn’t pleased with the Authority’s determination to take the battle to the High Court’s commercial division, mainly insisting that Finance Bank couldn’t be a beneficiary of the insurance policy issued to Katuramu and company insurance consulting surveyors.
In overturning the adjudication by the tribunal, Commercial Court’s Justice Patricia Kahigi Asiimwe ruled that the principle of privity of contract dictates that, as a general rule, a person who is not a party to a contract cannot enforce that contract. Though Justice Asiimwe said that there are exceptions to the doctrine of privity of contract, which are provided under section 64 of the Contracts Act, the case before her was different.
“In the present case, I have reviewed the policy agreement, and I have not found any clause that expressly allows the respondent [ Finance trust] to enforce the contract,” she said. Finance Trust lawyers, a clause in the agreement therein, Sanlam undertook to indemnify Katuramu and company insurance consulting surveyors against any claim for breach of professional duty.
Yet Justice Asiimwe couldn’t agree with them, interpreting that Sanlam only undertook to protect Katuramu and company insurance consulting surveyors from financial consequences of claims made against them by its clients due to negligence, errors, or omissions in their professional service. “Therefore, the beneficiary is the insured, that is, Katuramu and company. I find that the contract doesn’t confer a benefit on the respondent [ Finance bank].
Consequently, the respondent has no locus standi to bring a claim as a third party under section 64 of the Contracts Act,” Justice Asiimwe said.
Finance Trust has also taken the battle to the Court of Appeal, asserting that Justice Asiimwe’s judgment has created a public crisis. In its appeal, the Bank says that the judgment has negative ramifications because professional indemnity insurance is designed to benefit third parties who suffer loss occasioned by the negligence or errors of insured professionals.
“The judgment has raised serious concerns of great public importance regarding the enforcement of professional indemnity policies, which are essential for the provision of many professional services to the banking industry, serving a wide section of the public,” the appeal filed by Finance Trust partly reads.