High Court Rules Statutory Management Does Not Automatically Invalidate Insurance Policies

The High Court has ruled that the Insurance Regulatory Authority (IRA) cannot invalidate existing insurance policies merely because an insurer has been placed under statutory management.

The decision follows a dispute involving Trident Insurance Company Limited and Corporate Insurance Company Limited, with the court finding that the Commissioner of Insurance acted beyond the powers granted under the Insurance Act when issuing a notice purporting to nullify customers’ policies.

The judgment provides clarification on the rights of policyholders and the legal limits of regulatory intervention in Kenya’s insurance sector.

Court Clarifies Powers Under Insurance Act

At the centre of the case was the interpretation of Section 67C of the Insurance Act, which governs the appointment and functions of a statutory manager.

The court held that statutory management is intended to stabilise an insurer and protect policyholders, rather than automatically terminate existing insurance contracts.

Under the statutory framework, a manager takes control of the insurer’s affairs and assesses whether the company can be revived or should eventually be liquidated.

The court therefore found that the Commissioner could not use the initial stage of statutory management to extinguish insurance contracts that had already been lawfully entered into between insurers and their customers.

Notice Invalidated to Protect Existing Policies

Consequently, the court quashed the regulator’s notice to the extent that it purported to invalidate policies that were legally in existence when the insurers were placed under statutory management.

The ruling distinguishes statutory management from liquidation, emphasising that the appointment of a statutory manager does not, by itself, bring existing insurance agreements to an end.

Policyholders Denied Opportunity to Be Heard

The court also faulted the manner in which the directive was issued, finding that affected policyholders were not given an opportunity to be heard or provided with reasons for the decision.

The court held that this violated the constitutional guarantee of fair administrative action under Article 47 of the Constitution.

It further invoked Article 46, which provides for consumer protection, stressing the importance of safeguarding policyholders’ rights and economic interests within the insurance industry.

Court Rejects Rigid Application of Exhaustion Doctrine

The respondents had argued that the dispute should first have been presented before the Insurance Appeals Tribunal, contending that the petitioner was required to exhaust the statutory appeal mechanism before approaching the High Court.

While acknowledging the importance of the exhaustion doctrine, the court said it should not be applied rigidly where a case raises constitutional questions and has wider public implications.

In this matter, the court found that the directive affected not only the regulatory relationship between the IRA and the insurers but also the constitutional rights and economic interests of policyholders.

Trident and Corporate Insurance Policies Remain Valid

The immediate effect of the judgment is that policies issued by Trident Insurance Company Limited and Corporate Insurance Company Limited before March 10 remain valid for purposes of the applicable motor vehicle third-party insurance framework.

The court stated that the policies remain valid until a decision is made under Section 67C(7) of the Insurance Act.

The judgment reinforces the principle that statutory management does not automatically amount to liquidation or termination of existing insurance contracts, while leaving the statutory process for determining an insurer’s future intact.