THE LAW OF INSURANCE

LLB PENULTIMATE YEAR

2024
INTRODUCTION

1.1 Overview

The purpose of the Insurance Law portion of the course is to provide insight into the
nature and function of the law of insurance in South Africa. More particularly:

 To provide students with an understanding of the nature and essential

elements of a contract of insurance.
 To provide students with an understanding of how the insurance
contract differs from other forms of contract, and especially how this
area has developed and transformed under the Constitution..
 To provide students with an understanding of the legal effects of a
contract of insurance.
 To ensure that students are aware of the legal duties imposed upon
both the insurer and the insured, as well as of the consequences that
may flow if these duties are breached.
 To make students aware of the special requirements imposed by
statute that attach to certain forms of insurance contract.

1.2 Credit Value

3.5 Credits.

1.3 Assumptions of Prior Learning

In order to successfully complete this portion of the course, students need to be able
to:

 Be capable of writing and communicating in coherent English.

 Know how and where to access resources such as textbooks, law
reports and statutes in the Law Library.
 Have a working knowledge of the general principles of the law of
insurance.
 Be capable of independent learning.
 Read, analyse and extract principles from law reports and other source
material.
 Understand the system of judicial precedent, and the important role
precedent plays in private law.
 Have a developed understanding of legal problem-solving techniques.

2 OUTCOMES

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 2.1 Critical Outcomes

Students will be able to:

(a) identify and solve practical legal problems in an ethical way that
respects the rule of law and the values of our constitutional system.
(b) organise and manage themselves and their work load.
(c) collect, describe, understand, analyse and evaluate information from
the various sources of law, as well as information conveyed in the
classroom environment.
(d) communicate effectively in class debate and written assignments.
(e) use technology in legal research and learning.

2.2 Intended Specific Outcomes for Insurance

The Insurance portion of the course is designed so that students successfully

completing this portion of the course should be able to achieve the following
outcomes. The student should be able to:

(a) Understand, analyse and evaluate the essential elements of a valid

contract of insurance.
(b) Understand, analyse and evaluate some of the key legal
consequences of entering into a contract of insurance.
(c) Understand, analyse and evaluate the legal duties that are imposed
upon the insurer and the insured, as well as the consequences that
flow if these duties are breached.
(d) Understand, analyse and evaluate how certain statutes regulate
insurance law.
(e) Apply the knowledge acquired during the course to solve practical
problems with regard to insurance contracts.

3 TEACHING METHODS

The course will be presented by means of viva voce lectures. There is a handout for
the course, which the students receive, and which provides the basic structure and
material for the lectured course. In lectures, the substantive law (both common law
and statute law) will be discussed, leading precedents from the case law will be
analysed, and the views of leading academic commentators will be explained.
Occasionally, students will be expected to explain case law or statutes and consider
practical questions in class. Students are expected to assume responsibility for their
learning by reading ahead before each lecture, and consolidating afterwards.
Lectures are compulsory. The normal Faculty regulations concerning lecture
attendance and DP certificates apply (please refer to the Handbook). Students are
expected to keep their own records of the number of lectures that they have not
attended. There are no tutorials in this portion of the course.

4 COURSE CONTENT

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General Insurance Law

A. Introduction
B. Formation of the Insurance Contract
C. Insurable Interest
D. Duty to Disclose Material Facts
E. Warranties
F. Duration of the Insurance Contract
G. The Agent
H. The Risk
I. Subrogation
J. Reinstatement
K. Loss
L. Over-insurance and Under-insurance
M. Double Insurance
N. Common types of insurance clause
O. Prescription of Claims
P. Dispute Resolution

5 RESOURCES

The core reading and study material for this course are the leading judgments and
statutory or regulatory instruments on the aspects of the law of insurance to be
studied. These cases may be found in the law reports, which may be accessed in the
Law Library, both in paper and electronic form. For a full list of cases, see the course
handout. The statutes are accessible either in printed or electronic form.

As far as textbooks are concerned, the main important texts in SA are:

 Reinecke et al General Principles of Insurance Law 2 ed (2013), LexisNexis
Butterworths: Durban (this is the book reproducing the LAWSA chapter
referred to below).
 Reinecke et al ‘Insurance’ in WA Joubert (ed) The Law of South Africa Vol
12(1) and (2) 2 ed (2012), Butterworths: Durban.
 Millard Modern Insurance Law in South Africa (2014) Juta & Co Ltd: Cape
Town
 Davis Gordon and Getz: The South African Law of Insurance (1993), 4th
edition, Juta: Cape Town. (Now obviously very old and dated, but occasionally
referred to.)

6 STUDENT ASSESSMENT

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Specific Outcomes (On Assessment Criteria Assessment Tasks
completion of this course, the (What evidence must the (The evidence will be
student should be able to:) student provide to show gathered in the
that they are following way. The
competent? The student student may be
must be able to :) expected to:)
Understand, analyse and - Define and discuss the - Use all these
evaluate the essential elements essential elements of a techniques in presenting
of a valid contract of insurance. contract of insurance. written answers to
- Explain and critically authentic problem-type
analyse the requirements scenario questions.
that have to be satisfied
for these elements to
exist.
- Demonstrate a critical
understanding of the court
decisions that have
authoritatively determined
what the various elements
and requirements are.
Understand, analyse and - Define and discuss these - Use all these
evaluate some of the key legal legal consequences techniques in presenting
consequences of entering into a - Explain, analyse, written answers to
contract of insurance. compare/contrast, authentic problem-type
distinguish the scenario questions.
requirements that have to
be satisfied where these
consequences ensue.
- Demonstrate a critical
understanding of the court
decisions that have
authoritatively determined
what the consequences
are.
Understand, analyse and - Define and discuss these - Use all these
evaluate the legal duties that are duties and their remedies techniques in presenting
imposed upon the insurer and the - Explain and analyse written answers to
insured, and the consequences critically these duties and authentic problem-type
that flow if these duties are their respective remedies scenario questions.
breached. - Demonstrate a critical
understanding of the court
decisions that have
authoritatively determined
what the various elements
and requirements are.
Understand, analyse and - Explain the important or - Use all these
evaluate how certain statutes unique features of the techniques in presenting
regulate insurance law. Short-Term and Long- written answers to
Term Insurance Acts and authentic problem-type
the Insurance Act. scenario questions.

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 - Discuss the legal
requirements that attach
to contracts concluded in
terms of this legislation.
- Critically analyse how
the legislation impacts on
real-life problems
Apply the knowledge acquired - Identify the relevant legal - Write judgments or
during the course to solve problem or issue. opinions in which a
practical problems with regard to - Select and discuss the practical problem is
sale contracts. relevant law, and apply or analysed and solved on
evaluate the relevant legal the basis of the relevant
precedents with regard to law and precedents,
that issue. legal outcomes are
- Apply the law to the facts predicted, and new or
in order to come to a novel solutions are
reasoned conclusion suggested or proposed,
about the problem, and if necessary.
the legal remedies that
might flow from the
finding, or propose a new
solution to the problem.

ASSESSMENT STRATEGY

Assessment strategy

The final mark for the Insurance module is comprised of the following components:

Exam: 20 marks out of a 70-mark exam.

Course work: 15 marks out of 30.

These totals will be added to the results in the Insurance and Credit Agreement
modules and converted into a percentage.

Test

There will be one test for the Insurance component of this course. This will be out of
15 marks. The test will contain questions equivalent to that which may be found in
the November summative assessment, and will require the students to apply their
knowledge to solve a legal problem. The test is compulsory.

Examination

One two-hour examination will be done in November. This will be out of 70 marks. All
questions will be compulsory. The questions will require students to be able to
explain legal rules and principles in a theoretical sense, to explain case law on
leading precedents, as well as to apply their knowledge to solving practical problems

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in authentic contexts. An external examiner assesses the quality of both the
examination paper and the students’ answers.

7 EVALUATION

This course is evaluated as part of the global evaluation of LLB courses conducted
at the end of each semester.

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 THE GENERAL PRINCIPLES OF THE
LAW OF INSURANCE

This part of the course will consider the following matters:

A. Introduction
B. Formation of Insurance Contract
C. Insurable Interest
D. Duty to Disclose Material Facts
E. Warranties
F. Duration of Insurance Contracts
G. The Agent
H. The Risk
I. Subrogation
J. Reinstatement
K. Loss
L. Over-insurance and Under-insurance
M. Double Insurance
N. Common types of insurance clause
O. Prescription of Claims
P. Dispute Resolution

Useful texts to supplement the notes:

See page 4 above.

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A. INTRODUCTION

1. What is Insurance?

People are constantly exposed to various types of risk. In other words, there is
always the possibility that an uncertain event (or peril) will occur which will cause
harm (patrimonial or non-patrimonial) to an individual. The uncertainty of the event
may relate either to whether the event will occur at all (eg whether your car will be
damaged in an accident), or, in the case of an event which is certain to happen,
when it will happen (eg it is a certainty that every person is going to die, in this
instance, the uncertainty therefore does not relate to the death itself, but rather to the
time of death).

Risks obviously generate insecurity in people. One way of gaining security in the
face of risk is through insurance. Insurance essentially involves the transfer and
distribution of risk. It is based on the idea that financial security can be created by
spreading the risk among a large number of potential victims, each of whom
contributes relatively small amounts towards the costs of recovering any loss which
may eventuate.

This transfer and distribution of risk occurs by means of an insurance contract, which
may be defined as an agreement whereby the insurer undertakes, in return for the
payment of a premium, to confer something of value to the insured upon the
occurrence of a specified harmful contingency (the peril, measured according to its
likely risk). (see Lake v Reinsurance Corporation Ltd 1967 (3) SA 124 (W) at 127A
as qualified by Reinecke et al in LAWSA paras 93 and 94). A relationship is thus
formed between the insured and the insurance company whereby the insured pays
premiums in return for cover.

2. Sources of South African Insurance Law

After British occupation, South African insurance law was primarily influenced by
English law. In 1977, however, legislation which had introduced English insurance
law into the former colonies of the Cape and the Orange Free State was repealed
and the Roman-Dutch law of insurance was restored. The current position thus
appears to be that, whilst the principles of English insurance law will be retained
where their application has produced satisfactory results, Roman-Dutch law can be
used to develop our law of insurance where its principles will yield better results.

It should also be remembered that, since insurance is implemented through

insurance contracts, the law of insurance consists not only of the rules peculiar to
insurance, but also the general rules applicable to all contracts.

Since the turn of the century, the law of insurance has become quite heavily
regulated by statute. Since 1998, this area of law has been regulated by the Long-
Term Insurance Act 52 of 1998; the Short-Term Insurance Act 53 of 1998; and the
Financial Advisory and Intermediary Services Act 37 of 2002. All of these pieces of
legislation were supplemented by certain regulations and rules, especially the
various “Policyholder Protection Rules” attached to the STIA and LTIA. But as of 1
July 2018, a new regulatory framework was introduced by the (partial)

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commencement of the Insurance Act 18 of 2017. Note, however, that not all of the
LTIA and STIA were repealed (see GN 639 in Government Gazette 41735 of 27
June 2018), meaning that some vestiges of the old regime still remain in force.

3. Classification of Insurance

(a) Indemnity and non-indemnity insurance

The most important traditional classification is that between indemnity insurance and
non-indemnity insurance (sometimes referred to as ‘capital’ or ‘sum’ insurance).

In the case of indemnity insurance, the insurer is obliged to compensate the insured
for the actual commercial value of the loss he or she has suffered as a result of the
event insured against. As such, contracts which provide for indemnity insurance are
invariably aimed at protecting interests of a patrimonial nature. It follows that all
insurance against damage to property falls under the category of indemnity
insurance.

In the case of non-indemnity insurance, the insurer is bound to pay a specified sum
of money (in full or periodically) to the insured on the happening of the event
irrespective of the extent of the actual loss sustained. Non-indemnity insurance aims
to protect non-patrimonial interests. It thus depends on events related to the mind or
body of the insured or a third party. Very often such contracts are established for
named beneficiaries (rather than the insured him- or herself) as a form of contract for
the benefit of a third party, or stipulatio alteri.

(b) Property and liability insurance

Property insurance is concerned with assets of the insured’s estate, whereas liability
insurance concerns itself exclusively with liabilities (eg delictual liability to a third
party).

(c) Classification according to nature of event insured against

For example: marine insurance, fire insurance, personal accident insurance.

(d) Long-term and short-term insurance

This distinction is made purely for administrative purposes. Short-term insurance is

provided by engineering policies, guarantee policies, liability policies, miscellaneous
policies, motor policies, accident and health policies, property policies and
transportation policies, as well as contracts comprising a combination of any of these
policies. Long-term insurance, on the other hand, is provided by assistance policies,
disability policies, fund policies, life policies and shrinking fund policies, as well as
contracts comprising a combination of any of these policies.

(e) Life and non-life insurance

Although traditional classifications (above) will remain important, the new Insurance
Act (s 1) prefers to refer to “life” and “non-life” insurance in its classification.

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(f) Private and social insurance

The focus of this course will be on private insurance by contract, which is concerned
with individual interests. This can be contrasted with social insurance, which is
implemented by the state on a compulsory basis and acts to serve the general
interests of society and its members (eg workman’s compensation, unemployment
insurance and Road Accident Fund Insurance).

(g) Microinsurance

Microinsurance is a form of insurance now officially recognised as its own category

in the new Insurance Act. It applies to persons in a lower income bracket, who
cannot afford access to the orthodox insurance market. Previously such insurance
has been restricted to life insurance products only, in the form of funeral insurance.
But the new Act has opened up all forms of insurance to this option, meaning a
whole new insurance business model – the microinsurance business – has emerged.
Microinsurance is governed by regulations issued by the Prudential Authority (a
subsidiary of the Reserve Bank) as well as Rule 2A of the Policy Protection Rules
(PPR) under both the STIA and LTIA. Some notable features included in terms of the
PPR Micro Insurance Product Standards are:

 Benefits offered are limited to risk only and cannot have a surrender or
investment value.
 Policies are limited to R100 000 for life insurance and R300 000 for non-life
insurance.
 Rider benefits cannot be more than 20% of the total primary insurance
obligation under a policy.
 Microinsurance policies must have a term of not more than 12 months.
 Waiting period of 3 months in the case of death due to natural cause (no more
than one-quarter of the contract term). No waiting period for accidental death,
renewed or replacement policies.
 Exclusions are only permitted for non-funeral products and cannot exceed 12
months for suicide.
 Exclusions not permitted for pre-existing health considtions for funeral
policies.
 Claims must be finalised within 2 business days after all required
documentation is received.
 Commission across all microinsurance products is uncapped except for credit
life products.
 Excess cannot exceed 10% of the benefit or R1 000, whichever is lower.
 No loyalty benefits may be offered without the approval of the Prudential
Authority.

Interestingly the Prudential Standards place a (relatively) small minimum capital

requirement or R4 million or 15% of net written premiums whichever the higher.

B. THE FORMATION OF THE INSURANCE CONTRACT

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1. Essential Terms

An insurance contract is a bilateral agreement. Just like any other contract, there
must be an offer by one party and an acceptance of the terms of the offer by the
other party. In order for an insurance contract to come into existence, the parties
must be in agreement concerning all essential terms, namely:

(a) The person/property insured;

(b) The peril insured against;
(c) The amount payable on occurrence of the event insured against;
(d) The amount of the premium;
(e) The period of cover.

The premium

A valid insurance contract must contain an agreement on the part of the insured to
pay a premium to the insurer. Generally there is no obligation that the premium be
paid before the contract becomes binding; an undertaking by the insured that he or
she will pay is enough. However, as a protective measure, the insurer may:

 Refuse to issue the policy until it has received the premium.

 Issue the policy subject to the condition that the contract will only come into
effect once the premium has been paid.
 Include a clause in the policy to the effect that performance by the insurer is
subject to prior payment of the premium.

2. The Proposal (offer)

It is usually the insured who makes an offer to the insurer (which merely invites
people to do business with it). The offer is made in an application known as a
proposal form.

The proposal form consists of questions concerning the insured, the risk to be
covered and the circumstances affecting the risk. Essentially, the insured is offering
to take out insurance cover on the terms fixed by the insurer for that particular type
of insurance. The form is designed to elicit sufficient information from the potential
insured to enable the insurer to decide whether or not to grant the cover being
sought. Just as in the case of any other contract, a person will generally be bound by
the terms of the proposal that he or she has signed, whether he or she has read
them or not.

3. Acceptance

The contract is complete only when the proposal is accepted unconditionally. The
insurance company cannot add or delete anything without first consulting the
insured. Acceptance may be express or implied by conduct (eg through the receipt
and retention of premiums). Mere silence on the part of the insurer, however, does
not constitute consent. NB: in terms of s 9 of the Constitution, and especially
Schedule 5 of the Promotion of Equality and Prevention of Unfair Discrimination Act

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4 of 2000, insurance companies are prevented from practising unfair discrimination
with regard to insuring prospective clients, especially those with HIV/AIDS.

Once the insurer agrees to grant the final policy, a document setting out all the terms
and conditions of the contract of insurance (in accordance with the proposal) is
issued. This document is known as the insurance policy.

The proposal form remains an extremely important part of the insurance contract
because it forms the basis on which the insurance company agrees to grant cover.
Proper disclosure is thus essential.

4. Temporary Cover

It may be necessary to obtain temporary insurance cover until a detailed proposal

can be completed and considered by the insurer. Temporary insurance is usually
granted in the form of a cover note. A cover note is a separate insurance contract for
a limited period. There is no obligation on the insurer to grant a cover note pending a
final decision to grant cover. Likewise, the granting of temporary cover does not
mean that permanent cover will definitely be granted. (See Bushby v Guardian
Assurance Co 1915 WLD 65 at 71, affirmed in 1916 AD 488 at 493.)

Depending on the wording of the cover note, however, the insurance company may
be deemed to have waived its rights and committed itself through the cover note.
(See Bushby v Guardian Assurance Co supra.)

If the temporary cover is not expressed to be for a fixed period, it will continue until
the insurer accepts or rejects the main proposal. If a fixed period has been agreed
upon and the insurer issues the final policy before expiry of the temporary period, the
final policy takes precedence and the cover note will come to an end. If the insurer
informs the insured before expiry of the temporary period that the final policy has
been rejected, the temporary cover will only lapse if the temporary contract contains
a stipulation to that effect. If there is no such stipulation, the cover note will continue
to apply until the expiry of the temporary period.

C. INSURABLE INTEREST

A person can only insure himself or herself against the occurrence of an uncertain
event if he or she actually has an interest in the non-occurrence of the peril in
question. Enforceability of the insurance contract thus depends on whether the
insured has an insurable interest. In relation to indemnity insurance this means that
the insured must have a monetary interest in preventing the occurrence of the event
insured against. The test for the existence of an insurable interest is therefore
whether the insured will incur financial loss or fail to derive an anticipated financial
benefit if the event insured against occurs.

The test is easily satisfied in situations where the insured owns the subject matter or
bears the risk of its loss (eg where he or she has bought something but not yet
received ownership of it) or if he or she will be liable to the owner in the event of it
being damaged or destroyed (eg where he or she has hired the property). However,
the existence of an insurable interest is not limited to these scenarios. Essentially,

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an insurable interest will exist as long as the insured, due to his or her factual
circumstances, stands to lose financially if the event occurs. For examples, see
Littlejohn v Norwich Union Insurance Society 1905 TH 374; Steyn v Malmesbury
Board of Executors and Trust Assurance Co 1921 CPD 96; Phillips v General
Accident Insurance Co (SA) Ltd 1983 (4) SA 652 (W); Refrigerated Trucking (Pty)
Ltd v Zive NO (Aegis Insurance Co Ltd, Third Party) 1996 (2) SA 361 (T).

A prerequisite of an insurable interest is that the interest of the insured in the subject
matter of the insurance must be lawful. See Richards v Guardian Insurance Co 1907
TH 24.

NB: The purpose of requiring an insurable interest is to distinguish a true insurance

contract from a gambling transaction. Both types of agreements are founded on an
element of chance. In an insurance contract, there is the chance that the risk may or
may not occur, and in a gambling agreement, such as a sports bet, the chance that
team X may or may not win. In a gambling transaction, however, neither party prior
to entering the agreement has any monetary interest in the occurrence or non-
occurrence of the particular event. The parties create an interest themselves,
whereas in the case of insurance the interest exists independent of the existence of
an insurance contract. This distinction is important because many types of gambling
transactions are not legally enforceable.

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D. DUTY TO DISCLOSE MATERIAL FACTS (THE DUTY OF GOOD FAITH)

1. General

In all contracts, there is a general duty on parties not to make fraudulent

misrepresentations. In insurance contracts, however, there is a further duty on
parties to disclose all material facts. When entering into an insurance contract, the
insurer is in a precarious position because he or she is entirely reliant on the
potential insured for a complete description of the nature and extent of the risk to be
insured against. It cannot be fair to bind the insurer to a contract where the insured
has not made full and proper disclosure. As a result, there exists a duty on the
insured to disclose all material facts and circumstances of which s/he has actual or
constructive knowledge. Breach of this duty amounts to mala fides on the part of the
insured entitling the insurer to avoid liability under the contract.

The leading case on good faith is Mutual and Federal Insurance Co Ltd v
Oudtshoorn Municipality 1985 (1) SA 419 (A), which we will examine carefully in the
relevant lecture.

The purpose of the duty is twofold:

(a) To enable the insurer to determine whether or not to undertake the risk, and
(b) To assist the insurer in deciding what premium is to be paid.

2. Content of the Duty to Disclose

The duty includes:

(a) Answering all questions on the proposal form correctly; and

(b) Disclosing all material facts.

While the insurer tries to elicit as much information as possible regarding the nature
and extent of the risk by way of specific questions in the proposal form, it is well
established that an insured’s duty of disclosure is not limited to answering the
specific questions on the form. (See Fine v General Accident, Fire and Life
Assurance Corporation Ltd 1915 AD 213.)

3. Materiality

In Mutual and Federal Insurance Co Ltd v Oudtshoorn Municipality 1985 (1) SA 419
(A), the Appellate Division formulated the test for materiality as being whether,
having regard to the circumstances, the undisclosed information is reasonably
relevant to the risk or the assessment of the premium. The question is thus not
merely whether a reasonable person would regard the information as affecting the
risk but whether, in the opinion of a reasonable person, the information could affect
the insurer’s decision as to whether to accept the risk or charge a higher premium
than usual. In other words: would the reasonable person have considered that the
information should be disclosed so that the insurer could take it into account and
come to its own decision concerning the risk?

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From 1998, this matter was regulated by statute: s 59(1)(b) of the Long-Term
Insurance Act and section 53(1)(b) of the Short-Term Insurance Act, both of which
stated the following:

‘The representation or non-disclosure shall be regarded as material if a

reasonable, prudent person would consider that the particular information
constituting the representation or which was not disclosed, as the case
may be, should have been correctly disclosed to the insurer so that the
insurer could form its own view as to the effect of such information on the
assessment of the relevant risk.’

See for examples of this test in action Mutual and Federal Ins Co Ltd v Da Costa
2008 (3) SA 439 (SCA); Regent Ins Co v King 2015 (3) SA 85 (SCA) on s 53 of the
STIA; and Visser v 1 Direct 2015 (3) SA 69 (SCA) on s 59 of LTIA.

These sections did a very effective and helpful job in clarifying some obscurities in
the common law relating to material disclosure. [Of course, these provisions are, and
remain, the ruling law for all insurance matters that arose before 1 July 2018.]

However, what the ruling test is, and its source of law FROM 1 July 2018, has been
complicated by the somewhat tortuous process relating to the coming into force of
the new Insurance Act of 2017, and the fact that not all the provisions of the old
STIA and LTIA were repealed. As at the time of preparing these notes (July 2020),
the following law applies.

General policy change

In the process leading up to the introduction of a new Insurance Act, the ministry
made it clear that a policy shift was in the offing, and that it wanted to move the law
relating to misrepresentations from the Act to the Policyholder Protection Rules
attaching to the STIA and LTIA, which are passed as ministerial regulations. [Please
note that these respective NEW PPRs (2017) may be found under the Sabinet
NETLAW entries for the STIA and LTIA. See entry 4 (at the bottom) under each
of the LTIA and STIA lists of information.]

Short-Term Insurance

Rule 11.4.2 (k) of the Short-term PPRs simply says that the insured has an
“obligation to disclose material facts” and that the insurer must communicate to the
policyholder “what must be disclosed” as well as the consequences of non-
compliance with the obligation. This obviously does not set out a test of materiality.
This is currently remedied in the following way: s 53 of the STIA has not yet been
repealed, and remains in force. Hence, at this stage, any short-term related claim
remains subject to the test for materiality set out set out in s 53 of the STIA.

Long-Term Insurance

Rule 11.4.2 (k) of the Long-Term PPRs is identical to rule 11.4.2(k) of the Short-
Term PPRs. But here comes a difference. On 1 October 2018, s 59 of the LTIA was

16
repealed (see GN 1020 in GG 41947 of 28 September 2018). In its place was
inserted into the Long-Term PPRs a new rule 21.1, which takes the place of the old
s 59 of the LTIA.

Rule 21.1 reads:

“Notwithstanding anything to the contrary contained in a policy, but subject to rule

21.2—
(a) the policy must not be invalidated;
(b) the obligation of the insurer under the policy must not be excluded
or limited; and
(c) the obligations of the policyholder must not be increased, on account of
any representation made to the insurer which is not true, or failure to
disclose information, whether or not the representation or disclosure has
been warranted to be true and correct, unless a reasonable, prudent
person would consider that representation or non-disclosure as being
likely to have materially affected the insurer’s ability to assess the risk
under the policy concerned at the time of issue or time of any variation
thereof.”

Thankfully (for you!) this test is in effect the same as that in the old s 59.

So, despite all the rather confusing identity of the authoritative source of law is in
each case, it is “business-as-usual” as far as the test of materiality is concerned.

Facts that would normally be material in this sense include the following:

(1) Facts which indicate that the subject matter of the insurance is exposed to
more than the ordinary degree of danger. See Van Zyl and Maritz NNO and
Others v South African Special Risks Insurance Association and Others 1995
(2) SA 331 (SECLD); Santam Bpk v Van Schalkwyk 2002 (4) SA 193 (O).
(2) Facts which show that the liability of the insurer might be greater than would
normally be the case;
(3) Facts which suggest that the insured is likely, through his own fraudulent or
negligent conduct, to cause the risk to materialise (ie the insured is a ‘moral
hazard’). See Fransba Vervoer (Edms) Bpk v Incorporated General Insurance
Ltd 1976 (4) SA 970 (W);
(4) Financial status of the insured. See President Versekeringsmaatskaapy Bk v
Trust Bank van Afrika Bpk en ’n Ander 1989 (1) SA 208 (A); Potocnik v Mutual
and Federal Insurance Co Ltd 2003 (6) SA 559 (SE);
(5) Previous insurance record. See Fine supra.

In addition, in Pickering v Standard General Insurance Co 1980 (4) SA 326 (ZAD)

extended the duty to disclose to suspicions or opinions as well as facts.

4. Actual or Constructive Knowledge

The duty of disclosure relates only to facts of which the insured has actual or
constructive knowledge. Actual knowledge is personal knowledge. A company, or

17
other legal entity, is unable to have personal knowledge and will therefore be held to
have knowledge if its directors have actual knowledge.

Constructive knowledge (imputed or presumed knowledge) is knowledge deemed in

law to have existed, without proof, as a fact. Constructive knowledge of a fact is
imputed to an insured if:

 He or she ought to have known of it in the ordinary course of business;

 He or she would have ascertained it had he or she made such inquiries as
reasonable business prudence required her/him to make; or
 Her/his employee acquired actual knowledge of it in the course of her/his
employment and was under a duty to communicate her/his knowledge to the
insured. See for example Anderson Shipping (Pty) Ltd v Guardian National
Insurance Co Ltd 1987 (3) SA 506 (A).

5. Facts Not Necessary to be Disclosed

Apart from those facts of which the insured is unaware, in the absence of an express
inquiry the following facts do not have to be disclosed:

(1) Any circumstance that reduces the risk;

(2) Any circumstance that is known, or presumed to be known, by the insurer;
(3) A circumstance not considered “material” (Jerrier v Outsurance Insurance Co
Ltd 2015 (5) SA 433 (KZP) – controversial case)
(4) Any circumstances regarding which the insurer has waived its right to
disclosure. See for example AA Mutual Life Assurance Association Ltd v
Singh 1991 (3) SA 514 (A) and Jerrier supra.
(5) Any circumstance that is not necessary to disclose as a result of an express
or implied warranty. (See Warranties below.)

6. Time of Disclosure

The duty to disclose arises when a person first decides to take out an insurance
policy and continues until acceptance of the proposal by the insurer. In the case of
indemnity insurance, disclosure must also be made each time the policy is renewed
(as, on renewal, a new policy is concluded).

7. Effect of Non-disclosure

The effect of non-disclosure of a material fact is to render the insurance contract

voidable at the instance of the insurer after he or she has been notified of the non-
disclosure (see Bodemer NO v American Insurance Company 1961 (2) SA 662 (A)).
If the insurer indicated through her/his conduct that he or she intends to abide by the
contract notwithstanding the non-disclosure, he or she losses the right of rescission.
This would be the case where, for example, the insurer continues to accept
premiums from an insured after purporting to repudiate the claim on the basis of non-
disclosure.

8. Onus

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The contract is voidable at the instance of the insurer if the insurer can prove that:

(a) The non-disclosed fact was material;

(b) It was within the knowledge of the insured; and
(c) It was not communicated to the insurer.

The contract remains valid and binding unless and until the insurer elects to
repudiate. If the insurer wishes to reverse the above onus, it may do so by inserting
a warranty.

9. What of disclosure requirements and the insured?

Cases of misrepresentation and non-disclosure focus mainly on the insured. But

what about the insurer? The insurer (through its employees, brokers or agents) is
under similar duties. The requirements are set down in the Policyholder Protection
rules (mainly rule 11). The rules are very detailed, and so we will not investigate
them in this course. But please be aware that the PPRs are a very important source
of law if you work in insurance one day, or if you have personal issues relating to
insurance.

E. WARRANTIES

1. What is a Warranty?

A warranty is a statement of fact introduced into a contract, the falseness of which

provides a basis for immediate repudiation of liability by the insurer. Ordinarily in
order for the insurer to repudiate a claim he or she must prove that there has been a
misrepresentation or that the insured has breached the duty of good faith to disclose
all material information. This means that the insurer bears the onus of proving that
the insured was aware of the true situation or that he or she ought to have been
aware of it. In order to avoid this, insurance companies insert warranties into their
contracts.

2. Common Law Position on Warranties

An insurance warranty is by its very nature regarded as a vital or material term and it
imposes absolute (or strict) liability upon the insured. At common law, the mere
breach of a warranty therefore entitles the insurer to cancel the contract. The insurer
is so entitled even though the content of the warranty concerned a triviality and was
not material or even relevant to the risk in question, and even though the breach
occurred without any fault or bad faith or even knowledge on the part of the insured.
This bears very heavily on the insured as it amounts to a guarantee that the
information he or she gives is objectively true, even if the information is immaterial to
the risk.

3. Types of Warranties

(1) Affirmative Warranty

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 Affirmative warranties relate to an event or fact of the past or present and are
immediately determinable. For example the insured affirms that he or she is in
good health or that s/he is presently in possession of a driver’s licence. These are
further sub-divided into the following categories:

- Warranty of Fact
The insured warrants the actual existence of a particular fact. If the fact turns
out to be wrong, the contract is voidable regardless of the insured’s personal
knowledge. Example: ‘It is true that [I am in good health].’ If the insured did
not in fact know that s/he was suffering from some illness at the time, the
insurer can still repudiate liability. See also Beyers’ Estate v Southern Life
Association 1938 CPD 8.

- Warranty of Knowledge
The insured warrants the existence of knowledge on his/her part as to a
particular fact. This is a safer option for the insured. Example: ‘To the best of
my knowledge [I am in good health].’ If it turns out that the insured did not in
fact know that s/he was suffering from some illness at the time, the insurer
may not repudiate liability on this basis.

- Warranty of Opinion
The insured may be asked to state his/her opinion. In such a situation, the
insured need only give his/her opinion fairly, reasonably and honestly. This is
the safest option as it is difficult to disprove a person’s opinion. An example of
a warranty of opinion would be where a proposer for insurance states in
respect of a stack of hay that he estimates that it will yield a particular quantity
of wheat. If this statement is warranted and the insured’s estimate turns out to
be inaccurate, he will not have breached the warranty as long as his opinion
was fair and reasonable. (See Zeeman v Royal exchange Ins Co 1919 CPD
63.)

Whether one is dealing with a warranty of fact, a warranty of knowledge or a

warranty of opinion is often a question of contractual interpretation.

(2) Promissory Warranty

This is also known as a ‘continuing’ or ‘ongoing’ warranty. It relates to the future

and signifies that a stated fact or state of affairs will continue to be true or exist,
or that the insured person will do or refrain from doing certain things. This type of
warranty therefore usually relates to the conduct of the insured during the
existence of the insurance contract. An old example of a promissory warranty
which is often found in fire-insurance policies was a so-called ‘iron safe’ clause.
When such a clause is inserted into an insurance contract, the insured warrants
that s/he will keep a complete set of books showing a true and accurate record of
all business transactions and stock in hand and that the books will be locked in a
fire-proof safe or moved to another building whenever the premises is not open
for business. See also Cole v Bloom 1961 (3) SA 422 (A).

4. Advantage of Warranties

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A warranty places a duty of strict compliance on the insured. The advantage to the
insurer is that he or she avoids the difficulty of having to prove a misrepresentation
or a beach of the duty of disclosure. If the insurance contract contains a warranty
that is breached, the insurer can repudiate liability even if the breach was due to
ignorance or a mistake on the part of the insured.

Partial compliance with a warranty is still regarded as a breach. The insured will not
be entitled to partial indemnity. One must therefore pay careful attention to the exact
wording of a warranty before acceding to an insurance contract. In terms of the
common law, non-compliance may not be excused by an impossibility of compliance,
an absence of fault or an absence of a causal link between the breach and the event
insured against. The strict approach of the common law often leads to absurd
results, as was seen in Jordan v New Zealand Insurance Co 1968 (2) SA 238 (E)
and Norman Welthagen Investments (Pty) Ltd v South African Eagle Insurance
Company Ltd 1994 (2) SA 122 (A).

5. Statutory Reform

In response to the often ridiculously strict position of the common law in respect of
warranties, the legislature stepped in and attempted to alleviate the burden on the
insured by adding section 63(3) to the old Insurance Act 27 of 1943 in 1969 (NB this
is not the new Insurance Act of 2017!!). This section provided that, in order for an
insurer to be able to repudiate liability, the untrue representation in question must be
of such a nature as to have been likely to materially affect the assessment of the risk
insured against.

Whilst the Insurance Act was repealed in 1989, the provisions of section 63(3) were
re-enacted in sections 59(1) and 53(1) of the Long-Term Insurance Act and the
Short-Term Insurance Act respectively.

(1) (a) Notwithstanding anything to the contrary contained in a … policy,

whether entered into before or after the commencement of this Act, but
subject to subsection (2)-
(i) the policy shall not be invalidated;
(ii) the obligation of the short-term insurer thereunder shall not be excluded
or limited; and
(iii) the obligations of the policyholder shall not be increased,

on account of any representation made to the insurer which is not true, or failure
to disclose information, whether or not the representation or disclosure has
been warranted to be true and correct, unless that representation or non-
disclosure is such as to be likely to have materially affected the assessment of
the risk under the policy concerned at the time of its issue or at the time of any
renewal or variation thereof.

Specific provision was made for dealing with cases where incorrect ages are stated
in ss 59(2) and 53(2). But there was one tricky issue. From the wording of the
provisions, it was clear that they applied only to affirmative warranties and not to
promissory warranties. Therefore, it remained the law that if the insured breaches a
promissory warranty which was not relevant to the risk insured against, the insurer

21
would still be able to avoid liability under the contract (see Norman Welthagen
above).

Does the passing of the new Insurance Act into law do anything to this position? The
answer is NO. Section 53 of the STIA is still in force, as we discussed under
misrepresentation above. And while s 59 of the LTIA has been repealed, the wording
of its legal replacement (rule 21.1 and 2 of the LT PPRs [see above on p 14]) is
virtually identical to the old s 59.

So, according to the legislative (STIA) and regulatory (LTIA) sources, promissory
warranties are not covered by a test of materiality, and the common-law position
applies to them.

The potential silver lining is that the Supreme Court of Appeal has indicated in a
strong obiter dictum in the case of Viking Inshore Fishing (Pty) Ltd v Mutual &
Federal Insurance Co Ltd 2016 (6) SA 335 (SCA) paras 22-24 that a test of
materiality should apply to promissory warranties under the common law. However,
the matter has still not squarely been decided by a court.

If you are interested, see my article “Tyrannical Masters No More? Promissory

Insurance Warranties After Viking Inshore Fishing (Pty) Ltd V Mutual & Federal
Insurance Co Ltd” (2019) 30 Stellenbosch LR 333.

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F. DURATION OF THE INSURANCE CONTRACT

1. Termination

The parties must expressly or tacitly agree to the period for which cover is to last.
Termination of the contract may occur by:

(a) Cancellation;
(b) Payment;
(c) Breach.

2. Renewal

A life insurance contract continues at the will of the insured. There is no fresh duty of
disclosure every time the insured decides to renew the contract. However, all other
types of insurance contracts terminate at the end of the stipulated period, at which
time the insured may elect to renew the contract. If s/he so chooses (and the insurer
accepts the renewal), the contract begins anew, giving rise to a fresh duty of
disclosure at every instance of renewal.

3. Lapse

If the premium is not paid on the due date, or within a stipulated grace period, the
policy lapses. In the event of a lapse, the parties may agree to revive the contract.
As with renewal this amounts to a brand new contract with fresh duties arising.

G. THE AGENT

Where there is an agent or broker involved in the conclusion of an insurance

contract, this is where the provisions of the Financial Advisory and Intermediary
Services Act 37 of 2002 applies, in addition to the common law regarding mandate
and agency. Since we will be dong a module on Agency later in the course, only a
few points will be mentioned here to give a brief overview the agency relationship in
the context of insurance law.

1. Kinds of Agents

Insurance companies operate through agents. There are three kinds of agents:

 Employees of the insurance company.

 Independent canvassers acting for one company.
 Brokers: totally independent agents who consider portfolios from various
different companies and advise their clients on the best option. They are
usually regarded as the agents of the insured.

2. The Insurer’s Agents and the Authority Thereof

Before an agent can bind an insurance company, it must be clear that s/he has the
actual or apparent authority to do so. In order for apparent authority to exist:

23
 (i) There must be a reasonable belief on the part of the proposed insured that
the person is acting as an agent, and
(ii) The insurance company must be responsible for this belief (ie the insurer
must have represented that the agent had the necessary authority).

For an example of a case in which the agent was held to have had neither actual,
nor apparent authority, see Dicks v SA Mutual Fire & General Insurance Co Ltd 1963
(4) SA 501 (N).

NB The authority of the ordinary insurance agent who is responsible for canvassing
proposals is limited to obtaining proposals for submission to the principle insurance
company and sometimes to accepting premiums from the insured.

3. Knowledge of the Insurer’s Agents

If the insurer has knowledge of facts entitling it to repudiate but issues the policy
anyway, it will be estopped from relying on those facts later. This knowledge may be
actual or constructive.

Constructive knowledge will arise in circumstances where the knowledge of the

agent is imputed to the company. Failure of the agent to communicate the facts to
the insurance company will thus be to the detriment of the company. The knowledge
of the agent will be imputed to the company if the agent:

(i) Acquired the knowledge in the course and scope of his/her employment;
AND
(ii) Was under a duty to communicate this to the insurance company.

Problems arise because agents frequently assist people to fill in proposal forms or
do so themselves. If the information filled in is incorrect (or if material information is
not disclosed), the insured often alleges that the fault lies with the agent and that
since the agent was aware of the true set of facts, the knowledge must be imputed to
the insurance company. See for example Bawden v London, Edinburgh and
Glasgow Assurance Co 1892 2 QB 534 (CA). Note, however, that, where fraud is
involved, the knowledge of the agent cannot be imputed to the insurance company.

4. Brokers

An insurance broker acts primarily as the agent of the insured, even though s/he
receives a commission from the insurance company and may, for limited purposes,
act as an agent of the company (e.g. collecting the premium). When individuals
employ brokers to obtain insurance on their behalf, the liability of the broker in
respect of her/his conduct is governed by the ordinary rules of agency law. On the
responsibilities of brokers, see Mutual & Federal Insurance Co v Ingram NO 2009 (6)
SA 53 (E). The FIAS Act (as amended by and related to the new Financial Sector
Regulation Act 9 of 2017) and the PPRs also now impose a very detailed regulatory
framework over the actions of insurance agents and brokers. The framework is far
too detailed for us to explore in a short course like this, but it is important that you
are aware of this.

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H. THE ATTACHMENT OF THE RISK

1. General

In order to claim under an insurance policy, the claimant must show that:
(a) S/he has incurred a loss; and
(b) The loss occurred as a result of the risk insured against attaching to the
subject matter insured (or, the peril eventuates).

NB The risk must not be illegal or contrary to public policy.

2. Attachment of the Risk

Before there can be a claim, the loss must fall within the limits of the policy. This will
only happen when the risk attaches to the subject matter, or the peril occurs. See
London & Lancashire Insurance v Puzyna 1955 (3) SA 240 (C) and Sikweyiya v
Aegis Insurance Co Ltd 1995 (4) SA 143 (E).

3. Alteration of Risk

As has been discussed, an insured is under a duty, prior to the conclusion of an

insurance contract, to disclose any information which may affect the risk. At common
law, however, there is no implied term that, if the likelihood of the risk occurring
increases after the contract has been concluded, the insured has to inform the
insurer. E.g. X enters into a personal injury policy. After the contract is concluded, X
decides to take up high risk activities such as sky-diving and rock climbing. This
clearly increases the likelihood of the risk arising. Generally, there is no duty on X to
disclose this information after the contract has been concluded. The insurer will thus
have to pay out if X is injured during one of the aforementioned activities.

As a result, insurance companies usually insert clauses into the policy which require
the insured to disclose facts arising after the contract has been concluded which may
affect the risk. If this is the case, there will be a duty on the insured to disclose the
new information. This means that, if the circumstances do change in such a way that
the risk is different and the insured fails to inform the insurer, the insurer will not be
liable. See for example N & B Clothing Manufacturers (Pty) Ltd v British Traders Co
Ltd 1966 (2) SA 522 (W).

4. Onus, Limitations and Exception Causes

Generally, the onus is on the insured to prove that the risk insured against has
occurred. Complications arise when the insurance company has limited the extent of
its liability by adding certain exceptions or excepted causes. In this regard, a
distinction is made between the following two situations:

25
 (a) A promise qualified by exceptions. For example: ‘The insurance company will
cover the death of X except if the death is attributed to suicide.’ Here the onus
is on the claimant to show that the loss (death of X) has occurred, followed by
an onus on the insurance company to show the existence of the exception
(suicide).

(b) A qualification/conditional promise: For example: ‘The insurance company will

cover the death of X only if it occurs by accidental means.’ Here the onus
rests on the claimant to prove both that the loss has occurred (death of X)
AND the qualification (the death occurred by accidental means).

5. Causation

The insurance company will only accept responsibility if the loss suffered by the
insured was caused by the peril insured against. It is therefore important in each
case to establish exactly what caused the loss. The maxim causa proxima non
remota spectatur is applied, in terms of which regard is only had to the proximate (ie
dominant/direct) cause of the loss. See Mutual & Federal Insurance Co Ltd v SMD
Telecommunications Inc 2011 (1) SA 94 (SCA). In order to found a claim, a cause
and its consequence must, in other words, be sufficiently closely linked. The general
legal approach taken to the question of causation is applicable to insurance law.

6. Loss Caused as a Result of the Insured’s Own Conduct

An important link in the chain of causation is the extent to which the insured’s own
conduct caused the occurrence of the peril insured against. The question that arises
here is whether an insurance company will still be liable if the risk insured against
arises as a result of the insured’s own conduct.

In Beresford v Royal Insurance Co Ltd 1938 2 All ER 602, Lord Atkin stated the
following at 604:

‘On ordinary principles of insurance law an insured cannot by his own

deliberate act cause the event upon which the insurance money is
payable. The insurers have not agreed to pay on that happening. The
fire assured cannot recover if he intentionally burns down his house, nor
may the marine assured if he scuttles his ship, nor the life assured if he
deliberately ends his own life.’

In determining the liability of the insurer, a distinction must be drawn between the
following kinds of acts on the part of the insured:

(a) Involuntary acts

If the conduct of the insured, whilst causing the peril, is involuntary (and thus
unaccompanied by fault) the insurer remains liable unless the contract stipulates
otherwise. Where, for example, the insured commits suicide whilst suffering from
a mental illness, the insurer will still be bound.

26
 (b) Negligence

One of the main objects of an insurance contract is to cover the insured for loss
sustained due to negligence (either through his or her own conduct or that of
another). The insurer will be liable for loss sustained through negligence even if
the negligent conduct in question is a crime (eg where an accident is caused as a
result of negligent driving). See Young v Liberty Life Association 1991 (2) SA 246
(W); Van Zyl NO v Kiln Non-Marine Syndicate No 510 of Lloyds of London [2002]
4 All SA 355 (SCA).

(c) Intentional acts

Unless an insurance contract stipulates the opposite, an insurer will not be held
liable for the consequences of the insured’s deliberate conduct. See Beresford v
Royal Insurance Co Ltd supra. In the relevant lecture we shall consider
intentional acts in conjunction with the rules on criminal conduct, suicide, self-
inflicted injury, and deliberate exposure to unnecessary danger.

NB: You should also be aware that, in cases involving what one might loosely term
“reckless” conduct on the part of the insured, this may either:

(a) involve gross negligence, in which case the insurer will remain liable; or
(b) involve intention in the form of dolus eventualis in which case the insurer will
not be liable.

In National and General Insurance Co Ltd v Chick 1984 (2) NSWLR 86, the court
drew the following distinction between a person who negligently shoots himself, and
a person who shoots himself whilst playing Russian roulette:

‘In the case of ‘Russian roulette’, although the actor does not intend to
fire the weapon, he undoubtedly accepts the real and significant risk
that it will discharge. If it does, it cannot be contended that the result is
unforeseen or unexpected. Since the player accepts the risk which he
knows to exist and undertakes it, it is a willed act and cannot be
characterised as involuntary or accidental. Suppose a case where
someone does what the deceased did here, but in the belief that the
revolver was unloaded or, perhaps, having inserted in it, to impress
bystanders, a round which he believes to be blank rather than live. I
would have though that if either belief turns out to be unfounded and
the revolver is in fact loaded with a live cartridge, any injury which
ensues must be regarded as caused by accidental means because the
discharge of the weapon was unforeseen, unexpected and unintended,
although of course, the protagonist’s act in pressing the trigger was
both voluntary and deliberate. If a man, while cleaning a gun which he
believes to be unloaded, presses the trigger to test the working of the
mechanism and injures himself, such an event would be regarded as
having been caused by accidental means, the discharge of the gun
again being unforeseen, unexpected and unintended. Indeed, one

27
 would be hard put to imagine a more obvious example of any injury
caused by accidental means…What then is the distinction between
what I might call a true case of ‘Russian roulette’ and the instant
case…or a case in which the weapon is believed to be unloaded? It
must be that in the first class of case but not in the others the actor
voluntarily and deliberately accepts the risk of the occurrence of the
result which in fact ensues…he courts the risk of injury or death. In
such a case neither the injury nor the means by which it was caused
can be regarded as unforeseen or unexpected.’

See also Nicolaisen v Permanente Lewensversekeringsmaatskappy 1976 (3) SA

705 (C) in this regard.

7. Duty to Avert Happening of Risk

It is clear from the above that an insured has an implicit duty not to intentionally
cause the happening of the risk insured against. An extension of this duty is that the
insured must avert the occurrence of the peril or at least minimise its effect. A person
cannot thus rely on the fact that he or she is insured to stand by and watch while, for
example, her/his property is being destroyed if he or she is able to exercise
reasonable care in preventing or mitigating the loss.

I. SUBROGATION

Subrogation may be defined as:

‘The substitution of one person for another so that the person substituted or
subrogated succeeds to the rights of the person whose place he takes. It
expresses the insurer’s right to be placed in the insured’s position so as to be
entitled to the advantage of all the latter’s rights and remedies against third
parties.’

Effectively, this doctrine establishes the rules that allow for the reimbursement of an
insurer which has indemnified its insured under an indemnity insurance contract. The
insurer has a personal right, having indemnified its insured, to claim reimbursement
of the proceeds of any claims that the insured may have against the third party that
caused the loss. The insurer is entitled to take charge of, and to prosecute,
proceedings against the third party, as dominus litis, although the proceedings are
conducted in the name of the insured.

The purposes of subrogation are:

(a) to prevent the insured from receiving double compensation;

(b) to enable the insurer to recoup its loss, and thereby keep the cost of
insurance down.

For the rights that fall within the spectrum of the doctrine, see Castellain v Preston
(1883) 11 QBD 380 (CA); Ackerman v Loubser 1918 OPD 31; Simpson v Thomson
(1877) 3 App Cas 279.

28
The requirements for subrogation are:

1 A valid insurance contract must exist;

2 The insurer must have indemnified the insured;
3 The insured’s loss must have been fully compensated by the insurer;
4 The right must be susceptible of subrogation.

The rights of an insurer under subrogation are as follows:

 If the insured has received a benefit from the third party in respect of the loss
(either by way of agreement or process) the insurer has a right of recourse
against the insured for the profit the insured has received.
 The insurer, having fully indemnified the insured, if entitled to enforce the
rights of the insured against the third party (which remain vested in the
insured). The insurer itself does not have an independent claim – it is simply
entitled to prosecute the claim against the third party on behalf of the insured
as dominus litis. If the claim is successful, the insured will be paid out, and
then the insurer has a personal right under the insurance contract to claim the
profit from the insured (the insured has a contractual duty to ‘account for
profits’ in terms of the rules of subrogation).

Since this is a potentially protracted process, however, it is often the case that an
insurer will arrange for the insured to cede his or her rights to claim from a third party
to the insurer. This is NOT subrogation, but is properly an agreement of cession,
where the insurer acquires all the rights of the insured to proceed itself against the
third party.

J. REINSTATEMENT

Policies often provide that the insurer has the option of reinstating the object of the
risk instead of indemnifying the insured in money. In other words, the insurer has the
option of replacing/repairing the damaged property. The right of election lies with the
insurer and the insured cannot demand reinstatement instead of payment or vice
versa. The insurance company must exercise this option within a reasonable time or
within the time specified in the policy. Once the insurer has chosen to reinstate the
object and has notified the insured of this choice, it is binding and the company
cannot later change its mind.

K. LOSS

An insurance contract will usually require that when the insured suffers loss, he or
she must:

(a) Timeously notify the insurer; and

(b) Make a formal claim with full particulars of the loss.

29
If the insured fails to act timeously or provide sufficient details about the loss, the
insurer may be able to repudiate liability. However, the insurer also has certain
duties with regard to repudiating a claim. See Walker v SANTAM Ltd 2009 (6) SA
224 (SCA).

A policy will also usually include a clause entitling the insurer to repudiate liability if a
fraudulent claim is made. Common examples of fraudulent claims are: precipitating
the occurrence of the risk (arson); a deliberate over-evaluation (jewellery valued at
R500 is insured for R10 000, and a claim is made for that amount); the wilful
exaggeration of a genuine claim (a claim for R5000 for a stolen diamond worth
R500); faking a claim. Of course, it must be proved by the insurance company that
the claim was fraudulent: see Renasa Insurance Company Limited v Watson [2016]
ZASCA 13.

However not all dishonesty or discrepances in the insured’s version of events rise to
the level where an insurer can repudiate the insured’s claim. See Molefe v Miway
Insurance Company Ltd [2023] ZAGPPHC 489 (20 June 2023).

Another question is whether a partly true and partly fraudulent claim can allow the
insurer to repudiate the entire claim. The SCA in Discovery Insure Ltd v Masindi
[2023] ZASCA 101 (14 June 2023) held in the affirmative that fraud relating to any
portion of the claim allowed the insurer to repudiate the entire claim.

In this course we will not consider the claims procedure. If you are ever interested, or
end up working in the industry, see Millard Modern Insurance Law ch 8 for a helpful
short guide.

L. OVER-INSURANCE AND UNDER-INSURANCE

Over-insurance occurs when the sum insured is greater than the amount of loss that
the insured would suffer should the risk arise. Even if over-insured, a person cannot
recover more than the loss that he or she actually suffers.

Insuring a sum that is less than the value of the insured’s interest amounts to under-
insurance. A person who under-insures his or her property is generally entitled to
recover any loss that is actually suffered, up to the sum that is insured.

M. DOUBLE INSURANCE

In the absence of prohibition by an insurance policy, a person is perfectly entitled to

insure the same interest against the same risk with two or more insurers (in some
instances, this will amount to over-insurance). Where this is done, the insured may
choose to recover his or her entire loss from one insurer, or may claim a
proportionate amount from each insurer, but may not recover a greater amount than
the loss actually suffered. An insurer who pays more than its proportionate share of
the loss may claim contribution from the other insurers.

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N. COMMON TYPES OF INSURANCE CLAUSE

We shall look at a number of common types of insurance clause in the relevant

lecture. These include:

 Excess clauses
 Extension clauses
 Average clauses (see under-insurance above).
 Contribution clauses (see double insurance).
 “balance of third party” policies
 “all risks” policies.
 Business interuption

In the wake of the COVID-19 pandemic, business interruption clauses were subject
to repeated litigation. It is noteworthy that a claimant must show that the claim has a
causal connection to the interruption AIG South Africa Limited v 43 Air School
Holdings (Pty) Ltd [2024] ZASCA 97 (13 June 2024).

O. PRESCRIPTION OF CLAIMS

Many insurance contracts contain time-bar clauses. This issue was the topic of the
first contract-related case ever to get to the Constitutional Court: Barkhuizen v
Napier 2007 (5) SA 323 (CC). You are no doubt very familiar with it from Contract A!
At this stage, such bars are prima facie valid clauses, but the Barkhuizen case opens
the door for a challenge to their enforcement between an insured and an insurer in
particular unusual circumstances, if evidence is properly put before a court.

P. DISPUTE RESOLUTION

Over and above settlement with an insurance company, or litigation, the insurance
industry encourages alternative dispute resolution where problems emerge regarding
insurance contracts or disputed claims. All three of the regulatory statutes make
provision for ombuds to deal with and to settle complaints, specifically through the
offices of the Long-Term Insurance Ombud and Short-Term Insurance Ombud –
which are also still operational, despite the changes in the new Insurance Act, as a
transitional arrangement.

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