Commercial Transactions

Law 2015
Dr Andrew Hutchison

Insurance
 The nature and purpose
of insurance
• Why insure?
– To protect one’s self against the
occurrence of undesirable risk.
• Insurance companies play a role in
spreading risks amongst a pool of
similarly exposed people.
– Just for rich people?
• See ‘micro-insurance’ at slides 45-47.

2
 History: common law

• Historical origins of insurance law

– No law of insurance as we know it today
in ancient Rome, but:
• ‘Maritime loans’ to underwrite risks of
maritime trade.
• Friendly societies (‘Collegia’) aimed at
providing funeral expenses.
– Modern insurance:
• Developed in commercial centres in
Northern Italy as early as 14th century as
part of the Law Merchant.
• Transportation of goods on land and sea
insured.
• Guilds (influential in Europe in medieval
times) provided an informal source of life
insurance.

3
History: common law
contd…
– Insurance law in England:
• Oldest known English policy is from
1547, written in both Italian and
English.
• 1601 – establishment of a special court
in London to hear disputes on marine
insurance.
• Life Assurance Act 1774
• Marine Insurance Act 1906
– See generally: Mutual & Federal
Insurance Co Ltd v Oudtshoorn
Municipality 1985 (1) SA 419 (A)
(majority judgment of Joubert JA).

4
 History: common law
contd…
• Brief history of insurance law in SA:
– General Law Amendment Act 8 of 1879
(C) introduced English law of insurance
as it then existed to the Cape colony.
• This was legislated to comprise fire, life &
marine insurance.
– General Law Amendment Ordinance 5
of 1902 (O) incorporated the law of
insurance of the Cape into the OFS.
– Both these laws were repealed by
statute in 1977.
• Oudtshoorn Municipality case (above)
interprets this statute as meaning that RDL
on insurance was thereby restored.

5
 History: customary law

• A customary notion of contract?

– Obligations based on group
membership.
– Caution: what follows may be
official, rather than living customary
law.
• Mafisa, sisa or nqoma customs:
– Party A loans his livestock to Party B,
who needs livestock. Party A retains
ownership of the principal stock and
progeny. Party B obtains the right to
use of the stock, usually for an
indefinite period.

6
History: customary law
contd…
– Assists needy members of the
community to acquire stock.
– Provides access to new pasturage.
– No remuneration.
– May be seen as a way of protecting
stock against threats such as disease,
by spreading them between various
kraals.
• And hence a form of insurance?

See generally:
 Himonga & Nhlapo (eds) African Customary
Law in SA (2014) @194-195.
 LAWSA, Second Edition, Vol 32 @para 241.

7
 Insurance Acts

• Short Term Insurance Act 53 of

1998
• Long Term Insurance Act 52 of
1998
– Provide for registration and control
of insurance companies in SA.
– Consumer Protection Act?
• Schedule 2, Item 10.

8
 Types of insurance

• Long-term insurance:
– 'long-term policy' means an assistance
policy, a disability policy, fund policy,
health policy, life policy or sinking fund
policy, or a contract comprising a
combination of any of those policies…
• Short-term insurance:
– 'short-term policy' means an engineering
policy, guarantee policy, liability policy,
miscellaneous policy, motor policy,
accident and health policy, property
policy or transportation policy or a
contract comprising a combination of any
of those policies…
• ‘Indemnity’ insurance.

9
 Essential elements

• Definition of insurance
– Lake v Reinsurance Corporation Ltd
1967 (3) 124 (W)
• Essential elements
– Obligation on insured to pay a premium
• “premium” – s 1(1) of LTA & STA: ‘the
consideration given or to be given in return
for an undertaking to provide policy
benefits’
– The happening of a specified uncertain
or unplanned event
• Insurer must have no control over whether
event will occur: Sydmore Engineering
Works v Fidelity Guards 1972(1) SA 478 (W)

10
 Essential elements
contd…
– The existence of an insurable
interest
• See below
– Obligation of insurer to render
compensation
• Dept Trade & Industry v St Christopher
Motorists Association [1974] 1 All ER
395
• Medical Defence Union Ltd v
Department of Trade [1980] 1 Ch 82

11
 Insurable Interest

• Distinguishes insurance from a

gaming or wagering agreement:
– Public policy renders such
agreements valid, but
unenforceable in SA (outside of
certain statutory exceptions).
• Definitions:
– Littlejohn v Norwich Union Fire
Insurance Society 1905 TH 374
@380-381.
– Refrigerated Trucking (Pty) Ltd v
Zive NO 1996 (2) SA 361 (T) @372.

12
Insurable interest contd…

• Time factor
– Capital/indemnity distinction
• Types of insurable interest
– Property rights
• Property of a spouse?
– Littlejohn (above)
– Phillips v General Accident Insurance Co
(SA) Ltd 1983 (4) SA 652 (W)
• Shareholders and company property?
– Macaura v Northern Assurance Co Ltd
[1925] AC 619 (HL)
– Lorcom Thirteen (Pty) Ltd v Zurich
Insurance Company SA Ltd 2013 (5) SA 42
(WCC)

13
Insurable interest contd…

– Life insurance
• Wainwright v Bland (1836) 1 M&W 32
• Rixom v Southern Life Association 1939
SR 70

14
Entering into an insurance
contract
• General contract principles apply
• Formalities?
• Parties
– Insurer + insured
• Offer + acceptance
– Who makes the offer?
• Kahn v African Life Assurance Society Ltd
1932 WLD 160
• Dicks v SA Mutual Fire & General
Insurance Co Ltd 1963 (4) SA 501 (N)
@504.
– What constitutes acceptance?
– Renewal?

15
 Entering a contract
contd…
• Temporary cover
– Why?
– “Cover note”
• Dicks (above) @505-506.

16
 Duty of disclosure

• Duty of good faith

– Carter v Boehm (1766) 3 Burr 1905
– (English) Marine Insurance Act 1906,
section 17.
– Mutual & Federal v Oudtshoorn
Municipality (above)
• Misrepresentation
– Positive misrepresentation vs non-
disclosure/misrepresentation by silence?
– Usually factual answers are provided by
the insured to questions in a proposal
form (‘representations’):
• S 53(1)(a) STA
• S 59(1)(a) LTA

17
Duty of disclosure contd…

• Test for materiality

– S 53(1)(b) STA
– S 59(1)(b) LTA
– Mahadeo v Dial Direct Insurance Ltd
2008 (4) SA 80 (W)
– Mutual & Federal v Oudtshoorn
Municipality (above)
‘Reasonable person’ test inserted by
statutory amendment in 2003.
– Should the consumer context be
different?
• Consumer Insurance (Disclosure and
Representations) Act 2012 [UK]
‘Reasonable consumer’ test: different from
above?

18
Duty of disclosure contd…

• Return of premium if insurer

avoids policy in absence of fraud
– Queensland Insurance Co Ltd v
Banque Commerciale Africaine 1946
AD 272

19
 Insurance intermediaries

• Insurance statutes identify two

types of intermediary:
– “Independent intermediary”
– “Representative”
• S1(1) LTA & STA
– Question to ask: is the
intermediary/representative the
employee of the insurance company?
• More usual terminology:
– Insurance broker
– Insurance agent
– (‘Canvassing agents’?)

20
 Insurance brokers

• The agent of the proposer

(insured)
– Rabinowitz & Another NNO v Ned-
Equity Insurance Co Ltd 1980 (1) SA
403 (W) @407-408.
• Has certain duties arising out of
the contract of mandate.
– Liable to insured for breach of these
duties
– Also may be liable in delict to 3Ps
(eg insurer/ beneficiaries under
policy brokered)

21
 Insurance agents

• Employee or mandatory of the

insurer
• Function
– Dicks (above) @504
– What if agent fails to transmit
material info to insurer?
• Doctrine of constructive knowledge
may apply, imputing the knowledge of
the agent to the insurer.
• Note: this is more complicated if the
agent is independent and not an
employee of the insurer.

22
 Doctrine of constructive
knowledge
• When does constructive
knowledge apply in an
employment context?
– See slides on agency:
• Town Council of Barberton v Ocean
Accident and Guarantee Corporation
Ltd 1945 TPD 306
• Anderson Shipping (Pty) Ltd v Guardian
National Insurance Co Ltd 1987 (3) SA
506 (A)

23
 Doctrine of constructive
knowledge contd…
• Insurance agents?
– UK case law:
• Bawden v The London, Edinburgh, and
Glasgow Assurance Co [1892] 2 QB 534
(CA)
• Newsholme Bros v Road Transport and
General Insurance Co Ltd [1929] 2 KB
356 (CA)
– SA case law:
• National Employers Mutual General
Insurance Association v Gany 1931 AD
187
• ‘Transfer of agency’ clauses?
– s 56 LTA & s 51 STA

24
 Risk & limitations

• ‘Risk’ v ‘peril’
– ‘Risk’ = possibility of harm occurring (or:
possibility that insurer will have to pay
on a claim).
– ‘Peril’ = cause of harm
• Eg. Theft/destruction of a vehicle; Liability
to third parties as a result of negligently
caused harm; death/disability etc.
– Transfer of risk from insured to insurer is
the purpose of insurance
• Limitation of risk by insurer?
– Def of object of risk & peril
– Agreed limitations & exceptions
– Causal link between peril & harm

25
 Def of risk & peril

• Limits exposure of insurer by

defining object of risk
– Eg: a particular house, car etc.
• Or by defining peril
– Eg: “theft and fire”; “perils of the
sea”

26
 Agreed limitations &
exceptions
• Limitations v exceptions?
– Eagle Star Insurance Co Ltd v Willey
1956 (1) SA 330 (A)
– Distinction affects burden of proof
– Reversing the onus?
• Joosub Investments v Maritime &
General Insurance 1990 (3) SA 373 (C)

27
 Limitations & exceptions
contd…
• Examples of common contractual
limitations:
– Limit of indemnity
• “Sum insured”
– Contribution clause
– Compulsory under insurance clause
– Excess clauses
– Average clauses
• All risks insurance?

28
 Causation

• Insured peril must be proximate

cause of loss
– Incorporated General Insurances Ltd
v Shooter t/a Shooter’s Fisheries
1987 (1) SA 842 (A)
– Factual v legal cause
– Important where some causes are
exceptions in policy
– Role of warranties?
• Insured = cause of loss?
– Government of RSA v Fibre Spinners
& Weavers 1977 (2) SA 324 (D)

29
 Warranties

• 2 types
– Affirmative
– Promissory
• Common law position on both
types of warranty:
– Lewis Ltd v Norwich Union Fire
Insurance Co Ltd 1916 AD 509

30
 Warranties contd…

• Affirmative warranties
– Insured warrants the truth of a
representation about a past or
present fact, usually in the proposal
form.
• ‘Basis of the contract’ clauses?
• Breach of a warranty contained in a
proposal form must be material for
insurer to avoid the policy
– S 59(1) LTA & s 53(1) STA
– Note the word used here is
‘representation’: what is the implication
of this?

31
 Warranties contd…

• Promissory warranties
– Insured warrants that a state of
affairs will continue into the future.
• Usually contained in the actual
insurance policy.
– SA Eagle Insurance Co Ltd v Norman
Welthagen Investments (Pty) Ltd
1994 (2) SA 122 (A)
• If the warranty does not constitute a
‘representation’, where does that leave
the insured?

32
 Interpretation

• Intention of parties to be
determined from language of
policy, within the context of the
policy as a whole.
• Court should prefer to uphold
policy
• Interpreted in favour of insured
(contra proferentem)

33
 Performance under the
insurance contract
• Claims
– Time bar clauses:
• Santam Insurance Ltd v Cave 1986 (2)
SA 48 (A)
• Barkhuizen v Napier 2007 (5) SA 323
(CC)
– Estoppel may preclude an insurance
co from denying liability
• Resisto Dairy (Pty) Ltd v Auto
Protection Insurance Co Ltd 1963 (1)
SA 632 (A)

34
 Fraudulent claims

• Fraud may be present in several

forms:
– Risk never materialised/deliberately
caused by insured
– Spurious/inflated claims
– Use of fraudulent means to avoid
red tape
• Most policies contain a
cancellation clause re fraud
– May be implied?
• Schoeman v Constantia Insurance Co
Ltd 2003 (6) SA 313 (SCA)

35
Fraudulent claims contd…

• Burden of proof of fraud is on

insurer
– Taljaard v Sentrale Raad vir
Koöperatiewe Assuransie Bpk 1974
(2) SA 450 (A)
• Wilful intention to defraud must
be present
– Eg Littlejohn v Norwich Union

36
 Measure of insurer’s
obligation
• Capital policies
– Extent of insurance is defined in the
policy.
• Indemnity policies
– Claim limited to actual loss, within the
limits of the policy.
– Nafte v Atlas Insurance Co Ltd 1924
WLD 239:
• What is value of object at time and place
of loss?
• What is the real/intrinsic value of the
loss?
• No consequential losses (unless policy
says otherwise).

37
 Measure of obligation
contd…
• Valuation an issue
– Possible to insure for replacement
value
– Value may also be fixed in policy

38
 Reinstatement

• At election of insurer may

reinstate article rather than pay
money
• Insured will have a damages claim
for any loss of value
• Insurer may not rely on average
clause here

39
Insolvency & Prescription

• The claim of an insolvent may be

enforced by her trustee.
• A third party claim against
insolvent insured may be settled
directly against insurance co
(Insolvency Act, s 156).
• An insurance claim prescribes in 3
years
– S 11(d) of Prescription Act 68/1969

40
 Subrogation

• The doctrine has its origins in

English insurance law.
– Adopted into SA law in Ackerman v
Loubser 1918 OPD 31.
– Retained despite English law
becoming only persuasive in the
field of SA insurance law in 1977.
• Confirmed recently by the SCA in
Commercial Union Insurance Co of SA
Ltd v Lotter 1999 (2) SA 147 (SCA).
• See also: Rand Mutual Assurance Co
Ltd v Road Accident Fund 2008 (6) SA
511 (SCA).

41
 Subrogation contd…

• 2 rights:
– Insurer may take charge of legal
proceedings of insured v 3Ps
– Insurer may be compensated from
damages owed to insured by 3Ps
• Justification?
• Applies only to indemnity
insurance.
• Insurer must first compensate
insured fully (unless contract says
otherwise).

42
 Subrogation contd…

• Insured’s right to compensation

may be in contract, delict or
otherwise.
– Manley van Niekerk (Pty) Ltd v Assegai
Safaris & Film Productions (Pty) Ltd
1977 (2) SA 416 (A)
• Proceedings (usually) in insured’s
name.
• Does not effect a transfer of rights
to insurer.
• Defences available against insured
may be raised by 3P against insurer.

43
 Subrogation contd…

• 3P may not argue that insured has

been compensated and thus no
loss.
• Right of recourse limited to
benefit paid by insurer to insured.

44
 Micro insurance?

• A phenomenon in developing countries

to fill the gap between conventional
insurance schemes and government
social protection schemes.
• Distinguish the following:
– Social assistance
• Eg: government grants paid in SA to
beneficiaries
– Social insurance
• Typically for formal sector employees, such as
UIF and Worker’s Compensation.
– Private insurance
• A voluntary system for those who can afford
it, as dealt with in the bulk of these slides.

45
 Micro insurance contd…

• Micro insurance may cover a variety

of risks:
– Eg: illness, invalidity, old age (long-
term); or: crop failure, loss of livestock,
loss of income-generating assets (short-
term).
• Who may underwrite such risks?
– Individuals, families, communities
• Eg: informal burial societies.
– The State
• Eg: social security.
– Private insurers
• Yet these are profit driven – how do we
incentivise the growth of such a market?

46
 Micro insurance contd…

• Perhaps by allowing a deduction of

insurance premiums from social
grants?
– Mpedi & Millard (2010) 31 Obiter 497
@515-517.
– Compare: Social Assistance Act 13 of
2004, s 20(4) & Reg 26A:
• One deduction from a grant permitted for
a funeral policy, may not exceed 10 per
cent of the grant.
• See further:
– SA National Treasury Policy Document
on the ‘Microinsurance Regulatory
Framework’ (July 2011).

47