South African insurance law

Overview

Insurance in South Africa describes a mechanism in that country for the reduction or minimisation of loss, owing to the constant exposure of people and assets to risks (be they natural or financial or personal). The kinds of loss which arise if such risks eventuate may be either patrimonial or non-patrimonial. A general definition of insurance is supplied in the case of Lake v Reinsurance Corporation Ltd, which describes it as a contract between an insurer and an insured, in terms of which the insurer undertakes to render to the insured a sum of money, or its equivalent, on the occurrence of a specified uncertain event in which the insured has some interest, in return for the payment of a premium. The law of insurance in South Africa consists of

rules peculiar to insurance (like the rules on insurable interest, subrogation and double insurance); rules applicable to all contracts (like the rules on offer and acceptance, and contracts in favour of third parties); and general contractual rules that have undergone changes in the insurance context (like the rules on insurance warranties). Broadly speaking, the law of insurance in South Africa is concerned with

the conclusion and consequences of insurance contracts; general aspects of law of damages; the rules on insurance intermediaries; insurance tax law; and insurance company or supervision law.

History

Early Roman-Dutch law dealt mainly with marine insurance. In 1879, the Cape Colony passed the General Law Amendment Act, introducing English law to govern “every suit, action and cause having reference to fire, life and marine insurance” in the Cape. In the Transvaal and Natal, English law was not incorporated by legislation; Roman-Dutch law remained applicable in principle, and was never officially displaced, but the influence of English law was felt also in these regions. In 1977, the Pre-Union Statute Law Revision Act repealed the Cape General Law Amendment Act. This repeal was interpreted by the Appellate Division, in the leading case on the sources of South African insurance law, Mutual & Federal v Oudtshoorn Municipality, to mean that the Roman-Dutch law of insurance was restored. South African insurance law is governed mainly by Roman-Dutch law as its common law. Nevertheless, the courts have consistently regarded English law as having strong persuasive authority whenever Roman-Dutch authority is lacking or insufficient. In respect of contracts concluded after the Pre-Union Statute Law Revision Act took effect, English law no longer has any binding authority in any part of South Africa, but it has been argued that, "judging from trade usages prevailing in the South African insurance industry, it may be assumed that the principles of English insurance law are still being adhered to."

Legislative Framework

The following legislation is of special importance to South African insurance law:

the Long-term Insurance Act; the Short-term Insurance Act; the Insurance Laws Amendment Act; the Financial Services Board Act; and the Financial Advisory and Intermediary Services Act.

Classification of insurance

Classification is often merely a matter of convenience, but there may be compelling reasons for it; it may even reflect a difference in underlying legal principles. Various criteria may be applied in classifying contracts of insurance. The most important are

the nature of the interest insured; the nature of the event insured against; the way in which the amount recoverable under the contract is determined; and the way in which any profits of the insurer are dealt with. It is possible, and often desirable, for one and the same insurance contract to combine different classes of insurance.

Indemnity versus capital insurance

The most fundamental distinction between various insurance contracts is that between indemnity insurance and what is usually called non-indemnity insurance, but which is here referred to as "capital insurance."

Indemnity insurance

In the case of indemnity insurance, the contract between the parties provides that the insurer must indemnify the insured for patrimonial loss suffered as the proximate result of the occurrence of the event insured against. It is uncertain whether the event insured against (like fire or theft, for example) will actually occur, but it obviously must before loss can be quantified. In the context of indemnity insurance, examples of insurable interests include

real rights; personal rights; legal liability; and the factual expectation of damage. The purpose of the contract of indemnity insurance is to restore the insured to his position quo ante. Nothing more than patrimonial indemnity may be recovered, as is illustrated by the rules on over-insurance and double insurance. The insured is not entitled to make a profit out of his loss. It is accordingly said that the principle of indemnity governs indemnity insurance.

Capital insurance

In the case of capital or non-indemnity insurance, the insurer undertakes to pay to the insured a specified amount, or periodical amounts, upon the happening of the event insured against: for example, R5,000 if the insured dies or loses a limb. This is generally non-patrimonial loss. On the face of it, the contract does not purport to indemnify the insured against patrimonial loss. According to traditional perceptions, the interests amenable to capital insurance are limited in number. The best examples of insurable interests are the unlimited interest a person has

in his own life; in his health of mind; and in his health of body and limbs. A person may also have a moral or emotional interest in the life, health and body of his spouse. Capital insurance, then, depends on an event that invariably relates to the person of the insured or a third party. The types of events which are open to capital insurance are likewise limited in number. Typical events are

death, including the death of an unborn child; the continuation of life; birth; and accidents causing bodily injury. Insurance against other events must therefore take the form of indemnity insurance. A contract operating on the person of the insured or third party is not necessarily a contract of capital insurance, however, because it could have been the intention of the parties to conclude a pure contract of indemnity insurance. In the case of capital insurance, there is certainty that event insured against will occur (whereas in the case of indemnity insurance there is no such certainty), but the timing is uncertain. The amount is determined at time of the issuing of the policy, and is not related to loss suffered.

Differences and similarities

The difference between indemnity and capital insurance must be taken to lie in the nature of the interest that is the object of the insurance:

In indemnity insurance, the interest must of necessity be of a patrimonial nature; otherwise no financial loss or damage can be caused through its impairment. By contrast, the interest that serves as the object of a capital-insurance contract must be regarded as non-patrimonial in substance. The law determines which interests may be insured in terms of an indemnity-insurance contract. The same holds good for capital insurance. Important consequences are attached to the distinction between indemnity and capital insurance. Capital insurers, for example, are not entitled to claim a proportionate contribution by other insurers, or to demand subrogation of the insured's rights in respect of the loss. By the same token, the doctrine of imputation of benefits does not apply to capital insurance.

Short- and long-term insurance

A distinction between short-term and long-term insurance is embodied in the definitions under the Insurance Acts. Long-term insurance business means the business of providing policy benefits under defined long-term policies. In terms of section 1 of the Long-term Insurance Act, “long-term policy” means an assistance policy, a disability policy, a fund policy, a health policy, a life policy or a sinking fund policy, or a contract comprising a combination of any of those policies. It also includes a contract whereby any such contract is varied. (See also the definition of “Health Policy” to distinguish from short-term insurance.) Short-term insurance business refers to the business of providing policy benefits under defined short-term policies. Under the terms of section 1 of the Short-term Insurance Act, “short-term policy” means an engineering policy, a guarantee policy, a liability policy, a miscellaneous policy, a motor policy, an accident and health policy, a property policy or a transportation policy, or a contract comprising a combination of any of those policies. The definition also includes a contract whereby any such contract is renewed or varied. The division of insurance business into short- and long-term insurance business is for administrative purposes. Most short-term insurance is indemnity insurance, but short-term insurance is not restricted to indemnity insurance, since an "accident and health policy" belongs to the class of capital insurance. Long-term insurance, by the same token, is not confined to capital insurance, because "fund insurance" appears to be a case of indemnity insurance. "In the final analysis," writes Reinecke, "the real difference between long-term and short-term insurance is not clear."

Formation of the insurance contract

The basis of contractual liability, where the parties to a contract do not misunderstand each other, is consensus ad idem animo contrahendi. In those exceptional cases in which the parties misunderstand each other and only apparent consent exists, liability appears to rest on the reasonable reliance by the contracting party on the existence of consensus. This is known in contract law as the reliance theory. Such consent may be termed “constructive consent.” Of course, there is always room also for the application of the doctrine of estoppel, if a litigant can satisfy its more stringent requirements, and if he wishes to avail himself of this remedy in order to hold a party bound to the appearance of consensus he has created. For a contract as such to exist, however, actual or constructive consent must be achieved. This is brought about by offer and acceptance. These general principles of the law of contract in South Africa also hold good for contracts of insurance, and must be applied to such contracts. It is sometimes maintained that a contract of insurance comes into existence as soon as the parties have agreed upon every material term of the contract they wish to make, such as

the person or property to be insured; the event insured against; the period of insurance; and the amount of the premium. This suggests that the parties need not agree on terms other than material terms. For their contract to qualify as one of insurance, the parties must agree on the essentials of insurance. If they do not reach specific agreement, there can be no contract of insurance (although another type of contract may come into existence). For the contract to be valid, however, the parties must in fact agree on every term each of them regards as being a non-severable part of the proposed contract. This requirement is subject only to the ordinary rules creating contractual liability despite the absence of consensus. As a rule, the parties to a contract of insurance do not apply their minds to each specific term; they contract on the basis of the insurer's usual terms for the particular type of risk to be insured against. The contract of insurance comes into being only when consensus is reached. Until then, the anticipated contract does not provide cover, although the eventual contract may operate retrospectively. Pending the conclusion of their negotiations, the parties often conclude interim insurance to cover the proposer during the period prior to the final decision on the main contract. Interim-insurance cover is provided by means of a contract, and therefore also rests on consensus. Many facets of insurance business, including the conclusion of contracts, are transacted through insurance agents representing the respective parties. If, during the conclusion of the contract, a party is represented by an agent with authority to enter into the contract on behalf of his principal, the intention and acts of the agent must be taken into consideration in deciding whether a contract has come into existence.

Essential elements of an insurance contract

In British Oak Insurance v Atmore, the locus classicus, the essentialia of a contract of insurance were enumerated as follows:

the person or property insured; the risk insured against; the amount payable by the insurer on the occurrence of the event insured against; the premium; and the period of the insurance cover. No specific formalities are required, but the regulations to the Short Term Insurance Act contain certain requirements for the purposes of issuing a policy. The policy document normally contains the contract.

Proposal

In general, insurers do not make binding offers to insure; rather, they invite the public (by invoking the aid of intermediaries or otherwise) to apply for insurance. The actual offer to contract is accordingly made by the proposed insured, almost invariably on a printed form issued by the insurer and completed or signed by the proposer. As formulated by insurers, this proposal form does not usually leave much room for bargaining between the parties. What bargaining there is usually is confined to matters which cannot be settled in advance, such as the amount of the insurance, the period of insurance and special circumstances relating to the risk. Occasionally the proposed insured may request a deletion or addition: for example, by way of endorsements, to be effected in respect of the insurer's standard form of contract. The premium is not normally recorded in the proposal form. Most other terms of the proposed contract are also not expressly stated, the intention being to contract on the usual terms of the insurer. In determining the usual terms of the insurer, evidence of other policies issued by the insurer is admissible. Once a reference to the usual terms is included in the contract, the insured actually agrees to them; he cannot afterwards be heard to say that he did not have the opportunity to ascertain the exact content of the terms. The proposal form invariably contains a series of questions put by the insurer which must be answered to obtain information necessary for calculating the risk. Apart from being a formal offer, the proposal form is therefore also a written record of representations made by the proposer. Generally, the proposer is required

to warrant the truth of his answers; and to accept them as the basis of the proposed contract. There is a duty of disclosure, in other words. The proposal is normally incorporated into the formal insurance contract by reference. Although the above procedure represents the general position, consent may be achieved in any way the parties choose. For example,

an offer to take out insurance may be made by tendering a premium; or an insured may offer to renew an existing contract by paying a premium without completing a fresh proposal form. If a proposal form submitted to the insurer has not been authorised by the prospective insured, it may not serve as an offer by him. A policy issued by the insurer in response to such an unauthorised offer may, however, itself constitute an offer to be accepted by the proposed insured. It is also possible that the proposal by the prospective insured is not acceptable to the insurer as it stands, but that the insurer is willing to contract on other terms. In such a case, a counteroffer may be made by the insurer. It may also happen that the insurer makes the offer from the outset, as in the case of coupon insurance or interim insurance.