SECTION 1: INTRODUCTION

CONCEPT OF INSURANCE

Sydmore Engineering v Fidelity

Facts
o Conveyance of money contract
o Clause: should there be a shortfall of money at the destination, Fidelity accepts risk for
compensation
o A shortfall occurs and F does not compensate
o F argues they are not an insurance company.
Court Held
o Defined an insurance contract as a contract between an insurer and an insured (must
be an insurance Co in SA) in terms of which in return for a small amount of money
(premium), the insurer will pay the insured a lump sum or an equivalent should the
uncertain event occur in his or her interest

THE INCIDENCE OF RISKS

There are two incidents of risk that people may be exposed to

o An owner of property interests and rights may be exposed to patrimonial loss
Example: his vehicle might be damaged thus leading to a decrease in his
patrimony
o A persons rights and interest may be exposed to non-patrimonial loss
Example: loss of life or disability. Loss or impairment of non-patrimonial rights
and interests likewise leads to undesirable consequences which may be termed
non patrimonial or sentimental loss
Risk: denotes the chance that an uncertain event or peril may occur (Lourens v Colonial Mutual
Life Assurance Society)
o However, one can only speak of risk if the person allegedly at risk has an interest in the
non-occurrence of the peril in question
o Risk is the possibility of harm
o Materialization of risk results in a loss in interest
o Risk is characterized by the uncertainty of peril
Interest: patrimonial or non-patrimonial
Peril: is the eventual cause of harm

MANAGING RISK

A person that is exposed to risk will wish to take measures to protect himself
o Preventative and mitigating measures
The obvious way of managing risk is to take direct precautionary measures

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 Once the risk materialises, measures may be taken to mitigate the
ensuing harmful consequences
However, such measures are not available for all types of risk. Moreover such
preventive and mitigating measures will most unlikely be successful and create
meaningful security in the long run
Self-insurance
o Indirect measures are applied to provide the required degree of security.
o Systematic building up of a savings fund out of ones own resources
Shortcomings:
The fund may have insufficient capital available to cover the loss
If the loss does not materialize, a considerable amount of capital was set aside
to no avail
The creation of a savings fund does not do away with the potential victims
responsibility for eventual undesirable consequences
Third part insurance
o Provides a sense of real security as the potential victim is relieved of the responsibility
o Shifting the risk of harm wholly or partially to a third party
o The third party is required to provide the potential victim directly with the means of
covering a loss
o The risk is shifted by a promise of cover if the risk materializes
o This is the only satisfactory way of dealing with risk
o Risk is spread among a large number of potential victims who each contribute towards
the cost of covering any eventual loss

THE IDEA OF INSURANCE

General method of creating financial security is by spreading risk among a number of persons all
exposed to the same risk and all prepared to make a relatively negligible contribution towards
neutralizing the detrimental effects of the risk which may materialize for anyone or more of their
members
This precautionary measure has its advantages:
o The greater part of the risk is shifted from the exposed person to others
o Relatively small contributions for real security
o Insurance is applicable to a wide variety of situations

Insurance companies collect the members contributions or premiums and they compensate those
members who have fallen victim to the perils concerned

INSURANCE IN A LEGAL SENSE

Insurance is implemented by the conclusion of a contract

o This can either be a voluntary or a compulsory contract
o In terms of the contract the insurer agrees to take over the risk to which the insured is
exposed and the insured in return agrees to pay a premium

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 o The amount of the premium is determined in light of the nature and the extent of risk to
be spread
Modern definitions of a contract of insurance make no mention of any undertaking relating to
the spreading of risk
o The insurer is simply expected to shoulder the risk in exchange for a premium
Nevertheless it informs the system of supervision
o It means that a person must register to carry on insurance business which implies that
insurance cover can only be obtained from persons that make it their business to spread
risk

PRELIMINARY DEFINITION OF AN INSURANCE CONTRACT

Lake v Reinsurance Corporation

The court adopted the following definition of a contract of insurance:

o A contract between an insurer and an insured, whereby the insurer undertakes in return
for the payment of a price or premium to render to the insured a sum of money, or its
equivalent, on the happening of a specified uncertain event in which the insured has
some interest
o Although it is vague it bridges the gap between indemnity and non-indemnity or capital
insurance
o At the same time it purports to demarcate wagers from insurance contracts by requiring
the existence of an interest in the case of a proper insurance contract
o It thus serves as a starting point

SOCIAL FUNCTION OF INSURANCE AND CONSUMER PROTECTION FOR INSURED

Insurance is a business, but that insurance is also a service to those who are in distress
o Plays an important social role in that it sells safety
Governed by the Long term Insurance Act 52 of 1998 and the Short Term Insurance Act 53 of
1998

DEFINITION AND NATURE OF INSURANCE LAW

The law of insurance is concerned with the conclusion and consequences of insurance contracts
but it also comprises general aspects of the law of damages, the rules on insurance
intermediaries, insurance tax law and insurance company law
o Distinction made between private and public law
The law of insurance consists of rules peculiar to insurance and the rules that apply to all
contracts
The law of insurance is not an independent discipline of law
o Rather it is a collection of rules and principles drawn from various existing disciplines

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THE ORIGIN AND HISTORICAL DEVELOPMENT

The modern contract of insurance has its roots in two distinct lines of development:
o Practice of mutual financial assistance which gave rise to mutual insurance
o Contract of risk spreading for consideration which developed into the contract of
insurance for profit or premium insurance
These two insurance contracts have gradually approached each other in form, in so far that both
contain the same basic terms
o Accordingly, the rules governing insurance contracts apply in principle to contracts
concluded by both mutual insurers and profit insurers

MUTUAL INSURANCE

In antiquity
o Amongst the Romans and perhaps the Greeks and Egyptians, societies existed that
afforded members certain rights
o Example: Burial rights or financial contribution towards burial expenses. In exchange
members paid a regular contribution towards the society
Middle ages
o The idea of mutual insurance came to the fore in the guilds and similar associations and
societies which existed in England and Europe during the middle ages
o These associations afforded there members assistance in case of loss cause by perils
such as fire, shipwreck, theft, sickness and death
Conclusion
o Communities formed expressly to spread specific risk among members exposed to those
risks
o This was done by granting each members of the group a legal right to assistance if a
particular risk materialized
o In exchange for this right, members undertook to pay regular contributions or premiums
Insurance for profit in antiquity
o Insurance for profit must of necessity be both profitable and marketable
In order to achieve these aims an insurer must be able to make an accurate and
reliable calculation of the nature of the risk which is being shifted and the
probability of its materialization, as well as of the premium to be charged
The factors clearly come from the history of contracts of profit or premium
insurance as they were developed in mercantile transactions
o Examples
Babylon: Contract of loan of trading capital to travelling merchants. The contract
contained a clause that the risk of loss due to robbery on transit was borne by
the party providing the loan. In the consideration of bearing risk, the lender
calculated interest on the loan at an exceptionally high rate
Greece: a form of maritime loan existed in terms of which capitalists provided a
ship owner or a merchant with capital to be employed for the purposes of
overseas trade. Since the capital was exposed to maritime risk, the lender

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 agreed that the loan was repayable only upon the safe arrival of the ship or
goods concerned. This loan formed the basis of the foenus nauticim or pecunia
traiectiia. It also contained a risk clause relating to the safe arrival of ships or
goods for exchange for higher interest. This was often used by the romans
These contracts contained elements of insurance. However, they were hardly
insurance contracts in the true sense. Although the transfer of risk forms the
very essence of a contract of insurance, these early contracts primarily
constituted a creditor debtor relationship. There central object was the granting
of credit and the transfer of risk was ancillary
Insurance for Profit in the Middle Ages
o The Foenus Nauticim played an important economic role
o Merchants also made use of contracts such as the Commenda for the purpose of
providing credit and bearing risk
Conclusion
o Insurance for profit in the form that it is known today eventually developed from risk
clauses contained in maritime loans, commenda and certain contracts of purchase and
sale
o The central theme was the transfer of risk in exchange for monetary consideration

CLASSIFICATION OF INSURANCE CONTRACTS

PURPOSE OF AND CRITERIA FOR CLASSIFICATION

Purpose of criteria for classification: classified as a matter of convenience. However, it may

reflect a difference in underlying legal principles
Various criteria may be applied in classifying contracts of insurance
o Important criteria: nature of the interest insured; 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
o Possible and desirable for the same insurance contract to combine different classes of
insurance

INDEMNITY INSURANCE

The contract between the parties provides that the insurer will indemnify the insured for
patrimonial loss or damage suffered as the proximate result of the happening of an event
insured against
o Only covers the extent of the loss, hence the value of your financial loss
o Nature: patrimonial interest (incident of risk exposed to)
The purpose is to restore the insured to his position quo ante and the insured is not entitled to
make a profit out of his loss
Anything can be insured in property insurance e.g. GIT, household etc
o Positive assets of insureds estate e.g. insureds house or potential

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 o Liability insurance: covering liability arising out of anothers negligence e.g. profession
(like doctors), company (public) liability
o Negative elements e.g. insurance against medical expenses, contractual liability,
delictual liability to 3rd party
Is further classified according to the nature of the insured interest
o Property or asset insurance- concerned with positive elements (assets) of the insured
such as ownership of a house or the expectation of a benefit
o Liability insurance- concerned with the negative elements (liabilities) which come into
being as part of the insured patrimony (medical expenses or delictual liability)

CAPITAL OR NON-INDEMNITY INSURANCE

The insurer undertakes to pay a specified amount or periodical amounts to the insured on the
happening of an event insured against
o Depends on an event that invariably relates to the person of the insured or a third party
(body or mind)
o Thus loss is non-patrimonial in nature
o The basis for this insurance is that a person has a unlimited interest in their own life,
health, body, mind, limbs and the moral and interests a person has in his in the life and
body of his spouse.
o Example: life insurance where a premium paid against death of insured, to be paid out
to beneficiaries, can be taken out on another person e.g. spousal
Value paid out: determined contractually at inception of policy i.e. stipulate at the conclusion of
the contract what is to be paid out
o The cover relates not to loss but to a contractual obligation
o Insurer pays specific amount (or periodically) to insured on happening of risk occurring

INDEMNITY INSURANCE VERSUS CAPITAL INSURANCE

Difference
o Lies in the nature of the interest that is the object of the insurance
o 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
o In Capital insurance the interest must be regarded as non-patrimonial in substance
Consequence of Distinction
o Capital insurers are not entitled to claim a proportionate contribution by other insurers, or
to demand subrogation of the insured rights in respect of the loss

PROPERTY AND LIABILITY INSURANCE

Indemnity insurance contracts are divided according to the nature of the insured interest
o Property or asset insurance

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 Concerned with the positive elements (assets) of the insured such as ownership
of a house or the expectation of a future benefit
o Liability insurance
Concerned with the negative elements (liabilities) which come into being as part
of the insured patrimony. Example- medical expenses or delictual liability
towards a third party
Classification according to the nature of the event insured against
o Example: marine insurance, fire insurance and personal accident insurance

SHORT TERM AND LONG TERM INSURANCE

Distinction between short term and long term insurance is embodied in the definitions under
the insurance acts
Short Term Insurance
o The business of providing policy benefits under defined short term policies
o Most insistences of indemnity insurance
Long Term Insurance
o The business of providing policy benefits under defined long term polices
o Most instances of Capital insurance
o The division is based on administrative purposes

VALUED AND UNVALUED POLICIES

Valued policies
o Historically customary in marine insurance policies but rare in other branches of
insurance but it is now gaining ground elsewhere
o Specify the value for the object of the insurance
o The main purpose of a valuation is to avoid the difficulty of providing the exact value of
the object of the insurance in so far as it determines the extent of the insured loss
Unvalued policies
o Contain no valuation and the insured must prove his loss and its extent in the usual way

MUTUAL AND PROFIT INSURANCE

Mutual insurance: group insurance, not allowed to make a profit

o It was defined in the old Insurance Act but not in present legislation
o An insurer of whom all members or whose profits are distributable on only to owners of
policies issued by the insurer, in accordance with the instruments under which he as
constituted and carries on business
o The business of the insurer is not aimed at making any profit
If more premiums are collected than the amount required to cover all losses, the
balance must be returned to the insured

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 Usually premiums are collected ex post facto
Profit insurance: makes a profit to be distributed amongst insurers shareholders
Both are used to spread a risk over a community of exposed persons

PRIVATE AND SOCIAL INSURANCE

Private insurance is concerned with individual interests

Public insurance schemes serve the general interests of organised society and provide for the
basic needs of its members
Social insurance is implemented by the state on a compulsory basis
o Ordinary rules of the law of insurance generally cannot be applied to social insurance
schemes
o Difficult to distinguish between private and social insurance

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SECTION 2: SOURCES OF INSURANCE LAW
THE COMMON LAW

A dispute arising from an insurance contract can be a matter peculiar to insurance or a matter
of general import
o If not peculiar to insurance, the ordinary rules of SA law take precedent
o If it is peculiar, the law of insurance governs it
There is insurance company law that deals with the regulation of insurers by way of legislation,
as well as common law relating to companies
o There is also insurance contract law
SA law of contract originated in Roman-Dutch insurance law when there was settlement in the
Cape of Good Hope
o When the British came, the courts gradually relied on English precedent in the Cape
Province and the Orange Free State
o This was repelled in 1977 and Roman-Dutch law took precedent once again
o In Natal and the Transvaal, Roman-Dutch law remained central but was somewhat
influenced by English precedent

ROMAN-DUTCH INSURANCE LAW

Roman Dutch Law is always the point of departure

o Followed the basis of South African law
o It is rich in principle and recent research into these sources has proved its value as a
supplementary source of insurance law

Mutual and Federal Insurance Co Ltd v Oudtshoorn Municipality (1985) NB

Facts
o There was an airfield outsold the Municipality that used to be controlled by the Military.
This area was used in WW11
o After this the Municipality wanted to use area for air traffic. Just outside of this area a
pole was erected for the purposes electrical
o To make it more visible the pole was painted white
Nothing was done to make it visible at night
At this stage the airport was not taking night flights
A flight came in at night and crashed into in to the pole. The municipality was
sued for damages
The Municipality then claims from insurance for public liability insurance
Insurance company: did not want to pay as they said that the Municipality did
not disclose certain facts. It was a contract of Uberrima Fides (utmost good
faith)
They would have to then disclose certain information and failed to do so

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 As they did not disclose this information; refused to pay and repudiate the claim
Minority Held
o Relied on English law and concluded that there was an obligation on the Municipality to
disclose and as such they could repudiate
Majority Held
o Also agreed with minority, however looked at history and sources of SA law
o He refers this contract to the Lex mercatoria- can read the sources not only of Roman
Dutch but also the France and Spain
o Lex mercatoria- based on trade usage (the law of merchants)- provides the principles for
international trade
o Refers to the English Marine Insurance Act that this refers to Uberrima Fides- he then
goes to investigate whether there is such a principle in Roman Dutch law
o Then looks at the position of the Roman Dutch law- looks at whether not disclosing such
would be material, when it would be material
Court Held
o If you have high poles just outside from the airport and you apply for public liability
insurance then such facts should be disclosed
o Confirmed that Roman Dutch law is the common law for insurance law

Steyn v AA Onderlinge Assuransie Bpk (1985)

Facts
o Whether an insurance company could repudiate a claim as the insured had no insurable
interest
o A fire broke out and burnt down a house- the house did not own the house, did not pay
rent etc, and as such did not have an insurable interest
o Further the insured did not disclose that he was an un-rehabilitated insolvent
Question
o The court has to decide on whether there insurance interest is a concept for SA
insurance law
Court Held
o Roman Dutch law-the requirement for insurable interest in not part of SA law as it is a
part of English law
o The insurance company looks at insurance interest to see whether the person has a
claim depending on whether or not it was a wagering agreement or not- if it is a
wagering agreement then you would want the incident to happen then you get the
money- if it was not then you would not want the house to burn down- like betting on
horses
o Note that insurable interest is not part of our law, it is not part of the validity of an
insurance contract, but it determines whether the contract can be enforced
o Based on the principle that there must be something that is capable of being insured
That there will be patrimonial loss
o Held that it was important that he mention that he was an un-rehabilitated insolvent

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 The inured did disclose this to the person that he initial contacted, but such a
person failed to disclose it to the company
It is important that insurance companies are award of this fact

ENGLISH INSURANCE LAW

We were previously bound by English precedent

In 1879: the Cape legislature legislated that the English precedent would be followed
o This was followed in 1902 by the Orange Free State
In 1977: all the ordinances of the Cape and Orange Free State were repealed and Roman Dutch
Law became the law that we followed
o The courts were then expected to interpret the law with Roman Dutch Law
o However, not all the courts followed this as judges found it easier to apply principles
that were already in existence
o It must be noted that in the old days, English insurance law was influenced by Roman
Dutch law and as such you will find that the sources are similar
This had the effect of principles of English law was transplanted into SA law
o But this does not mean that existing English principles were simply overridden, it meant
that it was integrated into SA insurance law alongside Roman Dutch Law

FOREIGN INSURANCE LAW

There are other systems that may look at such as Dutch, German and Anglo American
The contract of insurance was developed as part of the lex mercatoria observed in Europe
o Absorbed in the laws of different countries thus principles are the same worldwide
Similar in nature and content
South African law heavily influenced by English and American authorities even though they do
not apply by force of law
o Comparison is a valuable tool in developing the law of insurance provided a sufficiently
wide spectrum of countries included in the exercise

GENERAL PRINCIPLES OF SOUTH AFRICAN LAW

Accepted as trite that matters not peculiar to insurance should be governed by ordinary
principles of law
o At times it can be difficult to decide whether or not a certain mater is really peculiar to
insurance
o Borne out by the problems courts encountered in the past when deciding on the
applicability of English law to insurance disputes
o There may be a need in particular cases to adapt general principles for the purposes of
insurance law and that an exception to the general principles may then be justified

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CONCLUSION

English law has been dominant in the development of insurance law in SA

o It is not foreseeable that this will be uprooted merely for the sake of change
Legislature has taken the opportunity to develop and improve insurance law
o English law will be retained as its application leads to satisfactory and harmonious
results
o Where Roman-Dutch principles will yield better results, these should be favoured
South African courts are expected to take a more cautious approach towards English law
especially where it has not been applied in the past
o More readily turn to comparative approach
o Reference to Anglo-American and other civil law systems

LEGISLATION

SHORT-TERM INSURANCE

The Short Term Insurance act applies to short term insurance business
o Business of providing or undertaking to provide policy benefits under short-term policies
o Short-term policy is a business of providing policy benefits under various policies
Engineering, guarantee, liability, miscellaneous, motor, accident and health,
property or transport policy
Also includes a contract comprising a combination of any of these policies
o Policy benefit means one or more sums of money, other than an annuity, or services or
other benefits
The STIA regulates short-term insurance business
o Insurance is undefined in the Act
o Opened the door to include contracts other than insurance ones
o Submitted it should be afforded the ordinary common law meaning
o Policy is also undefined but should be said to mean a contract of insurance
o Various types of short-term policies must be taken to be contracts of insurance in the
ordinary sense of the word unless a different meaning is evident
Policy can be taken to be concerned only with written instruments since the word means a
document embodying a contract of insurance
o STIA refers to contracts which is not confined to only written contracts
o Thus, policies can include written and oral contracts
The STIA refers to a premium as being in return for the undertaking by the insurer
o Premium is defined as the consideration given or to be given in return for an
undertaking to provide policy benefits
o Intention for contract to be reciprocal
o Not always a bilateral, reciprocal contract

LONG TERM INSURANCE

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 The Long-Term Insurance Act regulates insurance business
o Business is defined as a business providing or an undertaking to provide policy benefits
under long-tern policies
Assistance, disability, fund, health, life or sinking fund policy
Also includes a contract comprising a combination of any of these policies
o Policy benefit means one or more sums of money services of other benefits, including an
annuity
Insurance is not defined in the Act thus adopts the ordinary common law meaning unless a
different meaning is evident
o Policy said to include oral and written as is the same in the STIA
o Premium is not always a bilateral, reciprocal contract (same in STIA)

THE PURPOSE AND NATURE OF THE SUPERVISION OF INSURANCE BUSINESS

Need for supervisory measures to regulate insurers and insurance business

o Were introduced in the Middle Ages
o In Pre-Union SA, various enactments were adopted to control insurance business
The Insurance Acts of 1923 and 1943
o Now, we have the LTIA and the STIA alongside the Policy Board for Financial Services and
Regulation Act, the Inspection of Financial Institutions Act and Financial Institutions Act
Insurance business attracts vast sums of money from the public
o Investments are usually on a long-term basis and insurers deal with trust monies
o Insurance is a hazardous business and disaster may strike if the insurer does not adhere
to sound business principles
o There is not often equal bargaining power between the insured and the insurer, there is
dependence on good faith
o Public needs protection in respect of unfair contract terms and undesirable trade
practices

ADMINISTRATION OF ACTS

Supervision is affected by means of state control (the Minister of Finance)

o Empowered to make regulations on all matters which are required or permitted by the
Acts
o Given certain functions or the consent or approval of the minister is required for
administrative action but most of the work done is by the Registrar of Insurance
Registrar must report to the Minister annually and a copy of the report must be tabled in
parliament
o Duties and powers derived from the Acts
Cannot be taken away or contemplated by the courts
o Public officer exercising strict surveillance over insurance companies for the benefit of
policyholders and the general public

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 o If a person with an interest in the matter is aggrieved by the registrars conduct, he can
appeal to the board of appeal established in terms of the Financial Services Board Act
The approach followed by the STIA and LTIA is to prohibit persons from carrying on any kind of
insurance business unless it is registered
o Registrar is concerned with the registration of insurers
o Important duty is to receive information about insurers and their business in the form
of returns which must be submitted to him
o Entitled to demand information in relation to any matter connected with the business of
the insurer
Accurate information is essential for good supervision
Once necessary information is received, he has far-reaching powers to take
action to protect policyholders and the public
o Also has the powers of inspection
Provision is made for the appointment of advisory committees to investigate and report and to
advise on matters relating to long-term and short-term insurance

STATUTORY SUPERVISORY MEASURES

Variety of measures employed to achieve the purposes of the LTIA and the STIA
o Implementation of the Acts is entrusted to state officials and the Registrar of Insurance
Prohibitions on unregistered persons carrying on insurance business
o No person may carry on a business unless registered for that kind of business
o Certain requirements are set for registration
o These requirements are intended to ensure that only competent persons enter the
insurance market
Statutory duties of registered insurers
o Once registration is attained, there are subject to various duties to safeguard the
interests of policyholders
o Main duty is to hold sufficient assets to cover its net liabilities
Statutory duties or persons other than registered insurer
o The persons so affected are auditors, actuaries and insurance intermediaries
Supervisory powers of registrar
o Achieving the purposes of the STIA and the LTIA
o Discretionary power of the Registrar who may prohibit insurers from carrying on
business
Remuneration for services
o Connected with effecting, maintaining or servicing a policy subject to regulation
o Ensures that no exorbitant fees are paid to agents and brokers to the detriment of
policyholders
Use of the word insure to describe business
o To prevent the misleading of the public, no person who is not a registered insurer may
use any description in which the words insure, assure or underwrite occurs
Contents of policies

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 o In the interest of policyholders, there are provisions concerning business practices, the
contents of policies and policyholder protection measures
Right to information
o Right of the public to be informed of the financial and business situation of insurers and
provide that a person may inspect only those documents prescribed by the registrar
after consultation with the advisory committee
o Right to information in terms of the BOR and Promotion of Access to Information Act
Undesirable business practices
o Such practices may after consultation with the advisory committee and in concurrence
with the minister be declared undesirable
Compromise, arrangement, amalgamation, demutualisation or transfer of insurance
o Where an insurer intends to enter into an agreement in terms of which its business is
transferred to another or demutualised, it requires approval by the registrar or the court
o Agreement must be concluded subject to a suspensive condition which is approval
o Once the transaction is confirmed, it is binding on all parties
o Certain cessions are made in respect of transfer and stamp duties and other fees which
would otherwise be payable in the circumstances
Limitation on control and certain shareholding or other interest in insurers
o No person may without the approval of the registrar, acquire or hold shares or any other
interest in an insurer which results in that person exercising control over the insurer
(directly or indirectly)
o If aggregate nominal value of the shares amount to 25 cents or more, the approval of
the registrar must be obtained
o Registrar in giving approval will keep public policy and the interests of (prospective)
shareholders paramount
Regulations
o The minister is empowered to make regulations in order to achieve the objects of the
Acts
Liquidation and judicial management
o Happens to insurers which inure to the benefit of policyholders
Insurance by members of Lloyds
o Specifically dealt with in the STIA
Offences
o Contraventions of the Acts amount to offences
Can be insurers, other persons other than insurer
o Penalties for failure to provide registrar with returns, information or documents as
provided in the Act
o To protect the public, the Acts provide that a policy is not invalid merely because a
person who issued it contravened or failed to comply with any law in connection with
that policy

THE CONSTITUTION

Barkhuizen v Napier (2007) (CC)

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CUSTOM AND TRADE USAGE

The Constitution is the supreme law of SA and any law or contract inconsistent with it is invalid
o Democratic values of dignity, equality and freedom
The BOR is important
o When a court, tribunal or forum interprets any legislation and develops the common
law, it must promote the spirit, purport and objects of the BOR
o Insurance law is subject to this
Contracts contrary to the BOR
o They will be deemed to be invalid
o The equality clause: no person may unfairly discriminate against another on one or more
grounds including race, gender, sex, pregnancy, marital status, ethnic or social origin,
colour, sexual orientation, age, disability, religion, conscience, belief, culture, language
or birth
None of these grounds can be taken into account when assessing risk unless it
can be limited in terms of the BOR
Terms of the contract must be interpreted taking into account the spirit of the
BOR
o The spirit of the BOR is found in the Promotion of Equality and Prevention of Unfair
Discrimination Act
A person may not be unfairly discrimination against on prohibited grounds
List of unfair practices in certain sectors which are unfair and widespread and
need to be addressed, which include:
Unfair discrimination in the provision of benefits, facilities and services
related to insurance
Unfairly refusing on a prohibited ground to make an insurance policy
available
Unfair disadvantaging a person on the basis of their HIV status
Unfair practices include
Excluding a person from membership of a retirement fund
Unfairly discriminating against members or beneficiaries of a retirement
fund

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SECTION 3: NATURE AND CHARACTERISTICS OF THE INSURANCE CONTRACT
The principle of patrimonial indemnity has been emphasised in South African case law, especially in
the early decisions dealing with insurance

Lake v Reinsurance Corporation

The court adopted the following definition of a contract of insurance:

A contract between an insurer (or assurer) and an insured (or assured), whereby the insurer
undertakes in return for the payment of a price or premium to render to the insured a sum of
money, or its equivalent, on the happening of a specified uncertain event in which the insured
has some interest

ESSENTIALIA

If a particular contract possesses the essential of a certain type of contract, it will qualify as a
contract of that type
o Make reference to its express and tacit terms
o Looking at the purpose of one of the parties not expressed in the terms of the contract
If not, then the contract is not of that type but possibly another type or even a contract sui
generis
The essentials should not be confused with the requirements laid down by law for the validity of
all contracts

Importance of the Definition of Contract of Insurance

Necessary to distinguish between insurance and wagering because wagers are still
unenforceable as a general rule while contracts are prima facie valid and enforceable
o Distinction is difficult because they both belong to the category of contracts known as
aleatory contracts
o Blatant wagering by insurers does not take on large proportions in modern times but
outright wagers do occur
o Insurers include elements of wagering in their insurance contracts
o The legality of a contract foes not depend on the category to which it belongs but on
consideration of public policy
o Legality is decided on the background of a contracts terms, purpose and effect rather
than with regard to the class of contract to which it belongs
o The views on public policy affecting wagers are changing and that wagers are changing
and that wagers will in future become enforceable
o It will remain important for purposes other than the legality and enforceability of the
contract
Determine whether a rule of insurance law applies to the contract in question

17
 o Necessary to draw distinction between insurance contracts and contracts of suretyship
o Distinguish contracts guaranteeing products and maintenance contracts from contracts
of insurance
The common law concept of insurance could be of importance for the purposes of insurance
legislation
o Acts prohibit any persons from carrying on any kind of insurance business unless
registered as an insurer for the purpose of carrying on that kind of insurance business
o Insurance business is defined but insurance is not but kinds of business are excluded
o Legislature was not concerned with the concept of insurance as such but rather with
concepts defined in the Acts which cover insurance contracts but are not restricted to
them
o The final analysis a court will have to fall back on the common law concept of insurance
and the principles of the law of insurance when confronted with the application of these
provisions

Defining a contract of insurance

Following the example of the English common law, the principle of patrimonial indemnity has
been emphasised in SA by case law especially in the early decisions dealing with insurance (Lake
v Reinsurance Corporation Ltd)
A definition of insurance contract is necessary to determine whether a particular rule of
insurance law applies to the contract in question such as the question whether the doctrine of
subrogation can be invoked
Common law definition of insurance
o Is important as the Acts (Long Terms Insurance Act and Short Term Insurance Act) only
prohibit any person from carry on any kind of insurance business
o Insurance business is defined but the term insurance in not
o Thus the common law concept of insurance will be used to fill this gap left by the Acts
The definition of a contract of insurance is complicated by the fact that insurance comprises of
two apparently diverging phenomena, namely indemnity insurance and capital insurance
o A definition of insurance can succeed only if it isolates the contractual terms peculiar to
insurance though common to both forms of insurance
The basic purpose of insurance is to transfer to the insurer a risk burdening the insured
o The transfer of risk takes place by the insurer undertaking to provide the insured with a
financial substitute should the risk materialize
o The only real difference between indemnity insurance and capital insurance has been
found to lie in the nature of the object of the insurance
An insurance contract may be defined either as a contract to compensate the insured for
patrimonial loss proximately caused by the uncertain event insured against, or as a contract to
satisfy the insured for a non-patrimonial loss consequent upon the uncertain event insured
against
o In return the insurer undertakes to compensate or satisfy the insured for a loss, the
insured may undertake to pay a premium

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 o Payment of a premium is by agreement by the parties made a formal requirement for
the validity of the contract or else a condition governing the operation of the contract
A typical insurance contract has the following expressed terms:
o A term that the insurer will compensate or satisfy the insured for either patrimonial or
non-patrimonial loss;
o A term that the insured will pay a premium or else a term making the contract
dependant on the payment of a premium; and
o A term making the insurers obligation dependant on the occurrence of an uncertain or
unplanned event
The definition of a contract of insurance as referred to in Lake v Reinsurance Corporation refers
to an interest in a specified event
o This is reference to the doctrine of insurable interest
o It has been explained the interest in the broad sense of the word is a pre-requisite for
either patrimonial or non-patrimonial loss and that interest could be used as a generic
term to describe the asset, liability or other item that serves as the object of insurance

Doctrine of Insurable Interest in Relation to the Essentials of a Contract of Insurance

According to the doctrine of insurable interest, one of the essentials of a contract of insurance is
that the insured be in possession of an interest in the non-occurrence of the uncertain event
qualifying the insurers performance
o This insurance must exist at the time of loss (indemnity insurance) or at the time of the
conclusion of the contract (capital insurance)
o If the insured lacks the interest at the time then the contract is considered a wager
o Thus the focus is not so much on the terms of the contract but rather on the question
whether the insured in fact has an interest

Application of the Doctrine of Insurable Interest

The doctrine of insurable interest is applied to determine whether the insured has suffered a
loss upon the occurrence of the event insured against
o BUT it has not been decided that the factual existence of an insurable interest is an
essential of a contract of insurance
In Phillips v General Accident and Insurance Co,
o The court took the view that insurable interest is a foreign doctrine and that there is no
justification for applying it in preference to the principles of Roman Dutch Law
o Rather be decided according to the intention of the parties
The characterization of the contract of insurance in South Africa therefore seems to be res nova
and an issue which should be decided according to the general principles of SA law
o This is in light of the serious shortcomings of the doctrine
o A suitable alternative can be found in the principle of indemnity for which there is ample
support in Roman Dutch Law

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A Term that the Insurer will Compensate or Satisfy the Insured for a Loss as an Essential of
Insurance: Content of Insurers Performance

Indemnity Clause as an Essential of Indemnity Insurance

A contract of indemnity can only qualify as such if it contains a genuine indemnity clause
o The indemnity theory provides the test for indemnity insurance namely; whether one of
the terms of the contract is that that the insurer will indemnify the insured on the
occurrence of an uncertain event
o The performance of the insurer must therefore be conditional on a loss suffered by the
insured
If the insured wants to succeed with a claim in accordance with the provisions of an indemnity
clause, he will have to prove that he suffered loss in accordance with the peril
o According to English law this means that the insured must prove the existence of an
insurable interest at the time of the loss (the insureds interest is seen as the object of
the insurance)
o An investigation into the insurable interest upon the occurrence of the insured event is
therefore required in order to establish whether the insured has suffered a loss for
which he can claim
The absence of an insurable interest affects the enforcement of the contract and not the status
of the contract
Where payment is incorrectly made in the absence of an insurable interest, such payment can
be recovered from the insured on the basis that it was undue payment under a contract of
insurance
A contract that dispenses with the necessity to prove interest is contrary to the nature of
insurance
o In such instances the insurance contract is unenforceable, even where the insured
subsequently acquires an interest
o However, if the real intention of the parties when they included such a term was to
facilitate the proof of an interest by requiring the insurer to prove the absence of an
interest, the contract is perfectly enforceable
o A court cannot raise the issue of lack of insurable interest mero motu

Tenor and Contents of an Indemnity Insurers Undertaking

An indemnity clause found in a true contract of indemnity insurance is an express or tacit

undertaking to make good the insureds patrimonial loss proximately caused by the peril insured
against
Indemnification need not be in full but may be partial
The law of damages defines the concept of the loss of damages but there is room for the parties
to extend the boundaries

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The Difference between the Terms of a Contract of Indemnity Insurance and the Terms of Wager

A contract of insurance contains a tacit or express indemnity clause whilst a wager is enforceable
irrespective of any loss suffered

Undertakings to Satisfy Insured for Non-Patrimonial Loss as Essential of Capital Insurance

With capital insurance payment by the insurer will serve as solatium or substitute for the ideal or
abstract interest the insured has upon the occurrence of an insured event
The actual existence of an insurable interest is a question of whether the terms of the contract
are such that the sum insured becomes payable upon the happening of a non-patrimonial loss
o The terms and conditions of the insurance contract must be scrutinized for the payment
of the insured event

Contents of Capital Insurers Undertaking

A capital insurer undertakes to pay a defined sum or sums of money by way of substitute or
consolation for the loss of non-patrimonial interest caused by the occurrence of the event
insured against
o The interest may be an existing or future interest and it may be ascertained or
ascertainable
o However, capital insurance normally deals with an interest that has been ascertained
and that is in existence

Difference between the Terms of a Contract of Capital Insurance and the Terms of Wager

Capital insurance provides for satisfaction of non-patrimonial loss (payment is conditional on the
existence of an insurable interest) whereas payment in the case of wager is made irrespective of
any loss

Nature of Insurers Performance

An Undertaking to Deliver

Indemnity insurance
o The insurers performance to compensate the insured is subject to the occurrence of an
uncertain event
This uncertain event is nothing more than a suspensive condition
o Prior to the fulfilment of the condition no performance is due by the insurer
o Upon fulfilment of the condition the insurer must compensate the insured for the loss
that he has suffered
This is the only performance that is due by the insurer
o If the suspensive condition fails the insurer doesnt have to render any performance

21
 Capital insurance
o To render performance upon the occurrence of a defined event about which there is
some uncertainty
o This uncertainty may take the form of a suspensive condition but it may also be
interwoven with a dies certus an incerus quando
o The payment of the sum of money is to console the insured for the loss of non-
patrimonial interest caused by the event insured against
It is argued that the insurer bears the risk of the insured event taking place. The risk is a once off
performance and not a continuing one.

Direct and Indirect Compensation

In indemnity insurance the insurer undertakes to indemnify the insured by a payment in money,
that is indirect compensation
o The insurer may agree to direct or physical compensation
o In terms of such a clause the insurer is granted the option of restoring the property
affected by the peril to the condition in which it was before the loss for
Example, repairing the damaged building
A contract which confers on a person a benefit not sounding in money cannot qualify as a
contract of insurance for example a benefit that a claim to compensate will be considered at the
sole discretion of the other party to the contract
In an indemnity contract compensation involves a ascertainable performance which means that
the amount is determined by calculating upon the occurrence of the insured event against with
reference to damages suffered
o There is normally a limitation on the amount that is claimed and this is known as the
sum insured- this is the position regarding unvalued policies

Forms of Satisfaction by Capital Insurer

Insurer can undertake to pay a sum of money but it can undertake to perform something other
than money such as provide a funeral service
The sum insured may be a specified amount or periodical payments of specified amounts

A Term that the Insured will Pay a Premium or a Term Making the Contract Dependant on
Payment of a Premium as Essential of Insurance

A Term that the Insured will Pay a Premium as Essential in Case of Bilateral Insurance

A undertaking to pay a premium is not a requirement for a valid insurance contract

The traditional perception is that an insurance contract is a bilateral, reciprocal contract
o The insurer undertakes to compensate the insured for a loss in exchange the proposer
for insurance undertakes to pay a premium
o This is characteristic of insurance contracts

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 o Both of the Acts adhere to this view
A term that the insured will pay a premium or else a term making the contract dependant on the
payment on the payment of a premium
o The insurance contract is a bilateral, reciprocal contract.
o Payment of the premium is the insureds proportionate share of the costs of spreading
the risk over the community of exposed persons
o It is a monetary performance
Must be payment sounding in money. By cheque, debit order, stop order
(Penderis and Gitman v Liquidators, AA Mutual insurance association)
Debit order- Agreement with a third party. The insurer gives the instructions to
the bank to pay. The insured then loses control. Disadvantage- cannot stop, and
the insurer may increase amounts unilaterally and makes the instructions to
increase the amounts.
Stop Order-Agreement with the bank to automatically debit an amount off the
insured account. The bank acts as the insured agent- the insured instructs the
bank to pay the insurer. There is more control for the insured. Disadvantage- if
the money is not paid, the insurer sees this as non-payment despite fault or lack
thereof, the insurer will then cancel the contract.

Penderis and Gitman v Liquidators, AA Mutual Insurance Association

This case highlights the problems with debit orders and it highlights that you must go to the
wording of the agreement
A term stated that
o If any bank debit order be dishonoured by a lack of funds the policy will terminate on
the last day for the insurance cover
o The insured had an overdraft facility that would of covered the premium- the lack
payment was the banks account
o For lapse, there had to be non-payment and the insured had to not have the funds
o Thus the policy did not terminate and the insured simply had to catch up the payment
Example: can a party that has a financial interest pay the premium on behalf of the insured
o There does not seem to be a problem in the scenario- such as when you purchase a car
on hire purchase, the bank may then pay the premiums of the insurance where the
insured stops paying
o Contracts of insurance will constitute contracts where:
There is an undertaking to pay a premium
Where there is no undertaking but
The contract contains a term making the insurers obligations subject to
payment of a premium or
If the payment of a premium is made a formality for the validity of the
contract.
o A premium should not be understood to mean a counter performance undertaken by
the insured but rather the insured proportionate share of the total costs of spreading
the risk over the community of exposed persons

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 o Note: where a premium is not charged, it will not mean that the contract is enforceable.
If the contract meets the requirements of a valid contract in general, then it may be
enforceable as different kind of contract, such as a contract of donation

General principles
o There needs to be an undertaking to pay
o Therefore there is a problem
If a contract is not paid is there no longer a contract?
o The payment of the premium must be paid to the insurer, even though it may be paid to
the intermediary or broker
o The insurer undertakes to compensate the insured for a loss in exchange the proposer
for insurance undertakes to pay a premium
o However, insurance contracts do not make provision for an undertaking by the insured
to pay a premium, but various other techniques are employed to ensure the insured
does pay the premium
Cover is made subject to the payment of the premium
Payment of the premium is made a suspensive condition/condition
precedent. Need to look at the wording of the contract
Problem with a suspensive condition is that it does not force the insured
to pay the premium
No agreement will come into being until the premium is paid is a formality
The contract may contain a provision that if the premium is not paid the
contract will come to an end without the insurer having to make an election
whether or not to cancel the agreement (resolutive condition)
o This ensures that the insurer will not be on risk for any time when there is no payment

Parsons

Facts
o A fleet of vehicles were insured. The insurer went on risk and then the premium was not
paid
o Parsons, the insurer argued that this amounted to a suspensive condition and you
cannot sue for breach for a suspensive condition as the contract did not come into being
o Term: subjects to the terms, exceptions and conditions and in consideration of, and
conditional upon, the prior payment of the premium; the company agrees to indemnify
or compensate the insured
Court Held
o This did not amount to a suspensive condition and this failure of payment amounted to
a breach

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A Term Making the Contract Dependant on Payment of a Premium in Case of Unilateral Insurance
Contracts

Insurance contracts generally do not make a provision for an undertaking by the insured to pay a
premium, but various other techniques are employed to ensure that the insurer does receive a
premium
Firstly, cover is made subject to the payment of a premium
o Thus payment of the premium is a suspensive condition to the liability of the insurer
o The contract comes into being when the parties reach consensus but no counter
obligation to pay a premium if created for the insured
o Thus the insurer has no right to claim this premium
o Thus if the insured does not pay the premium there is no breach.
o But the insured cannot claim compensation without paying the premium
o This constitutes a unilateral contract
Secondly, the agreement may provide that no contract will come into being until the premium is
paid
o The insured will by virtue of the contractual provisions not be entitled to claim
compensation unless he has paid the premium, but this is the insured election
Thirdly, the contract will contain a provision that if the premium (especially the second and
subsequent premiums) is not paid the contract will come to an end without the insurer having to
make any election whether or not to cancel the agreement
o The contract may come into operation on condition that the first premium is paid but it
is possible that credit could be given for the first premium
o This constitutes a negative resolutive condition attached to a continuous contract and
dissolving the contract if the premium is not paid
o There is no duty on the insured to pay the premium but where he fails to do so it will
not constitute a breach of contract
Unilateral contract
o A contract of life insurance constitutes a unilateral contract involving no obligation to
pay a premium
o Contracts of insurance will constitute such contracts where:
There is an undertaking to pay a premium
Where there is no undertaking but
The contract contains a term making the insurers obligations subject to
payment of a premium OR
If payment of a premium is made a formality for the validity of the
contract

Rational for Premium

The reason why a premium is a characteristic of insurance relates to the insurance as a method
of spreading the risk over the community of similarly exposed persons
o This implies that ever person at risk within the community should contribute his
proportionate share of the costs of spreading the risks over the community

25
 In light of the above, premium should not be understood to mean the counter performance
undertaken by the insured BUT rather the insured proportionate share of the total costs of
spreading the risk over the community of exposed persons
Where a premium is not charged, it will not mean that such a contract is not enforceable
o If the contract meets the requirements of a valid contract in general, then it may be
enforceable as a different kind of contract, such as a contract of donation
It has been suggested that there can be no contract of insurance where a premium is to be paid
by a person other than the insured without there being any obligation on the insured himself to
pay the premium
o Example: UIF
It is uncertain whether temporary insurance can exist without there being any undertaking to
pay a premium or a term subjecting the contract to payment of a premium by way of a condition
or formality for its validity

Nature of a Premium

This is primarily a sum of money

o However, there has been Roman Dutch Authority that a premium may consist of
something other than money
o Further, it has been suggested that the definition be widen to encompass something
other than money
o Although there is no objection to this it is doubtful whether there is a need to
implement such a definition
Lastly, it should be notes that the legislative definition of premium does not shed any light on its
nature

A Term Making the Insurers Obligation Subject to Uncertain Event as an Essential of Insurance

Quality of Uncertainty

Every contract of insurance depends on an element of uncertainty or contingency in that the

contract provides that the insurer will be liable to perform only if a specified but uncertain event
occurs
o The event is dependent upon a peril or hazard
o The possibility that the peril will cause harm is the risk
Indemnity insurance
o Insurance is dependent on an event in respect of which there is uncertainty whether or
to what extent it will happen
Fire
o Stipulations involving uncertainty of this kind are in fact suspensive conditions qualifying
the insurers duty to perform
o The duty to pay premiums is usually not affected by such conditions although the
happening of the event may discharge the insurer where there is a total loss
Capital insurance

26
 o The event insured against may be a suspensive condition
Accident causing injury or death
o The explanation of whole life insurance
Although the event of death is uncertain, it is not certain when it will happen
and that such uncertainty is sufficient to constitute life insurance
On the surface the contract is subject to a suspensive time clause, but as far as
the element of insurance goes, it really makes provision for dying too soon

Insurance Lost or Not Lost

The element of uncertainty or risk may be introduced to an indemnity insurance contract by

making the insurance subject to the clause lost and not lost
o This covers a loss which has, unknown to the parties, already occurred
o The uncertainty related to the knowledge of the parties
o The effect of such clause is to antedate the contract

Insurance against Events that are Certain

Events that are certain to happen such as wear and tear may be protected against by means of
insurance, but such cover is pro tanto not insurance
o This is because the essence of an insurance contract is to protect the insured against the
undesirable consequences of an uncertain event
However, uncertainty may be satisfied by the uncertainty of whether the wear and tear will
occur during the duration of the insurance contract

Absence of Control by Insurer over Event

In true insurance the insured has no control over the events insured against
o Thus it cannot be insurance if the manufacturer of a machine undertakes to repair any
fault arising from defective manufacture
o This rational is questionable as there is no proper historical basis for it

Object of Risk

This refers to the tangible object of the risk

o The insureds interests may be embodied in the object. Such as a house owners interest
in the house
Forms part of property and personal insurance
Liability ensues for the insurer only if the object of the risk has been effect by
the peril insured against
In case of capital insurance the risk object is the particular person
o The insureds interest may not be embodied in the object
Such as not incurring a liability

27
 o Any risk object described in the contract plays an instrumental role in the insureds
eventual loss
Encounter liability insurance where the insured undertakes to indemnify the
insured if he becomes liable to third parties as a result of his use of the object of
the risk
Driving the motor vehicle that causes harm
Indemnify the building owner if any person gets harmed in the building
Description of the risk specifically with reference to the object of the risk is not essential for an
object to qualify as a contract of insurance
o Such description is merely a technique by means of which the insurer may limit its
liability in terms of the contract
o This should not be confused with the object of insurance

Bearing of Risk for the Purpose of Contract of Insurance

The main purpose of a contract of insurance is to relieve the insured of the risk of a loss or
impairment of an interest he has or may acquire before the occurrence of a peril insured against
o This is done by making the insurers performance subject to an uncertainty
A contract can only qualify as an insurance contract only if transfer of the risk to the insurer is
the main purpose of the contract

Good Faith

The Emerging Doctrine of Good Faith

All contracts are contracts of good faith

Only in the last decade has the attention of the courts been focused on this feature of
contractual obligations
The Bank of Lisbon, where the court decided that the exceptio doli generalis, a doctrine of good
faith, was in the process of being formulated and developed by the courts
o This is a project that hasnt yet been worked out in final detail:
At this stage the doctrine is being worked out on the basis of public policy and
public interest which involve the constitutional values
It will introduce concepts of fairness and its scope and application will
not be static, so that the doctrine may in future give rise to new rules of
law

Utmost Good Faith

Insurance contracts have been classified as contracts of the utmost good faith
o This must be exercised during the negations of the contract and less so during the
existence of the contract

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 This principle is appears in case law in connection with contracts which are typified by a
relationship of close trust between the contracting parties
The duty governs fiduciary relationships
o It places a duty of good faith on both parties to the contract, although in some instances
it may operate more strenuously for one party than the other

Mutual and Federal Insurance v Oudtshoorn Muncipality

Court Held
o Rejected the notion that that insurance contracts or any other contract for that matter
were contracts of utmost good faith
The court held that the concept was alien and vague and had no meaning in our
law
It was inconceivable that there could be little more or most than good faith
Despite this, some contract still refer to insurance being a contract of the utmost good faith
o This is because the principle is still dying out the system
o Insurance contracts are therefore contracts of good faith although it is not an essential
or distinguishing feature of the contract.
o As the court in Mutual and Federal failed to set out the content of good faith, past
authority that dealt with this notion must be consulted for guidance

Good faith and the Insurance Contract

The duty of good faith is prevalent in the negations stages of an insurance contract, especially
with regards to disclosure
o However, it also relates to the parties conduct during the existence of the contract
o The duty of good faith applies to all parties in the insurance contract

ALEATORY CONTRACTS

There are several reasons why a proper definition of a contract of insurance is important
o It is necessary to distinguish between insurance and wagering as wagering agreements
as a general rule are unenforceable
Certain wagers are enforceable in terms of recent legislation
Insurance contracts are prima facie valid and enforceable
o Both of these contracts belong to a category of contracts called Aleatory contracts
It thus may be difficult to distinguish between the two
Blatant wagering by professional insurers does not take on a large portion in
modern times, but outright wagering does occur
What is more common is that insurers include elements of wagering in their
insurance contracts

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 The legality of a contract does not in the final anaylsis depend on the category to
which it belongs to but on considerations of public policy
o The question whether a contract is illegal must be decided against the background of its
terms, purpose and effect rather than with regard to the class of contract to which it
belongs
It may be the view on public policy affecting wagers are changing and wagers
may become generally enforceable
This will not means that the distinction between wagers and insurance contracts
will fade away

Aleatory Nature of Insurance

Both wagering and insurance contracts belong to a classification of contracts called Aleotory
contracts
o This is a contract of chance
o Bilateral contract in terms of which either of the obligations of both parties are subject
to opposite conditions,
o Or only one partys obligations is subject to a condition
This is analogous to the typical insurance position where the insured pays a
premium and the obligation of the insured is subject to uncertainty
If both obligations are subject to the same suspensive condition, the contract is
not a contract of chance at all but simply a conditional contract
Traditional position regarding wagering and gambling contracts
o Were frowned on as they tempted people to squander away their possessions
A person could get an advantage without having earned it through hard work
and this discouraged people from earning a living
This type of activity did not add anything to society
They were thought to be against the interest of the community as they gave rise
to objectionable consequences
Insurance contracts as contracts of chance
o An element of contingency is incorporated into the terms of all contracts purporting to
be contracts of insurance
o If the insured event does take place- the insurer will be the party who is worse off and
the insured will gain from the contract
o If the insured event does not materialize during the currency of the policy, the insured
will be on the losing end in terms of the contract while the insurer will profit from
receiving the premium
An element of contingency is incorporated into the terms of all contracts of insurance
Insurance is regarded as an acceptable method of spreading the risk in contracts and are
therefore prima facie enforceable.
o In order for an insurance contract to be enforceable risk has to be calculated on a
scientific rather than arbitrary basis- this entails that the insured disclose all the
materials risks relating to the object of insurance before the conclusion of the contract.

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 A contract of insurance contains a tacit or express indemnity clause whilst a wager is
unenforceable irrespective of the loss that is suffered.
NOTE: wagering agreements are generally unenforceable unless permitted under certain
legislation

Public Policy and Insurance as a Contract of Chance

The element of contingency in insurance contract made it suspect

o In modern law, insurance contracts are distinguished from undesirable wagers on the
ground of the differences in their respective bases
o Insurance is regarded as an acceptable method to spread the risk and contracts of
insurance are therefore prima facie enforceable
Specific objections on account of insurance being a contract of chance are surmounted through
various measures
o To enable insurers to compute the risk on a scientific rather than arbitrary basis, a duty
is imposed on the insured to disclose all material facts before the conclusion of the
contract
In deciding whether or not a particular contract is lawful, the fundamental question always is
whether the purpose and effect of the contract are inimical (Unfavourable) to the interests of
the community or whether the contract runs counter to social and economic expendience
o To this end, the category to which the contract belongs is not decisive and in particular
circumstances even a true contract of insurance may be against may be against public
policy

Phillips v General Accident (1983)

Facts
o Applicant married OCOP; small estate agency; false palm-reader
o Became friends with Mrs P and supported Ls church
o Given valuable items
o Resulted in a sham and P claimed from insurance company
Court Held
o Has two defences of repudiation
Items = voluntarily discarded not stolen (in terms of the policy)
Mr Philips have insurable interest
o Insurable interest in SA law required to distinguish an insurance from gambling contract
Therefore, necessary to look at the intention of the parties. As insurable interest
cannot be deciding factor
o Judge found a moral obligation to suffice as insurable interest
o Insurable interest in that the jewellery could be sold in hard times
o Judge was also concerned with people paying premiums for their claims to just be
repudiated in the end

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 Criticism: the test may be stretching too far

PRINCIPAL CONTRACT

Similarities between Insurance and Suretyship

Payment of a sum of money, completion of a contract or the fidelity of an employee may be

secured by a contract of suretyship
o Since non-payment, non-completion and dishonesty involve the creditor in a loss,
insurance can be concluded to indemnify the insured against loss caused by such an
event
o Suretyship and insurance are dependent upon an uncertain event and both aim at
providing a mere indemnity to the exclusion of profit; thus related contracts
o Certain legal rules applicable to insurance have counterparts in the law of suretyship
o The right of an insurer who has made good a loss to proceed against the party who has
caused loss the loss, has led courts to equate an insure with a surety

Purpose of Distinguishing between Insurance and Suretyship

Practical reasons: a contract of suretyship must be in writing and a surety who has paid the
creditor is entitled to sue the debtor in his own name
o Insurer is only entitled to make use of the name of the insured in actions against third
parties unless it has obtained a cession of the insureds rights
In terms of current insurance legislation, a person may not carry on any kind of insurance
business unless he is registered to carry on the kind of business concerned
o Short-term insurance business as defined includes the business of providing benefits
under a guarantee policy
o A guarantee policy also covers contracts of suretyship and insurance is not of
significance
An insurer may not without the approval of the registrar, give security in relation to obligations
between other persons
o Prohibition coves suretyship as well as any other form of personal security, whether
under a primary or accessory obligation
o Registrar may allow an insurer to stand surety but has no power to allow an insurer who
is not registered for guarantee business to issue a guarantee policy

An insurer undertakes a principal and not an accessory debt

A contract of insurance is a principal contract in that an insurers undertaking to compensate

(indemnity insurance) or to console (capital insurance) its insured on the occurrence of an
uncertainty is an undertaking to fulfil its own obligation and not that of another

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o Contracts distinguished as a contract of suretyship is an accessory contract because a
surety undertakes to fulfil the debt of another
o Thus, if performance in terms of a contract is in effect subject to the condition that a
specific person does not perform his contract, it can only be insurance if it is the
intention of the parties that the insurer will indemnity the insured for any loss caused by
the event concerned (the non-fulfilment of the contract)
o However, if it is the intention of the parties that upon non-fulfilment of an obligation
that obligation must be fulfilled by the other party, the contract will amount to
suretyship

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SECTION 4: REQUIREMENTS FOR VALID INSURANCE CONTRACT
CONSENSUS

Conclude a contract to be bound

Based on normal contract law principles
What happens if you think there is consensus but what you think are the terms are not
o There is no consensus
o The reliance theory will play a role when there is a mistake
o Apparent consensus will depend on where the mistake lies and whether it goes to the
route of the contract or is something that can be rectified
o You can have one party who acts as a representative of the insurance company that
represents that the person has authority but he does not- if the insurance company tries
to escape the contract the person can rely on estoppel
o Misunderstanding regarding a term of the agreement- how do we determine the
content of the insurance contract
o Try to severe part of the contract? If the part can be served and what is left is
substantially an insurance contract then it will be valid
o Lost or not lost- consensus need not exist when the insured was a risk but when agreed
to conclude the contract
The premium need not be set out- all that is needed is an undertaking to pay the premium
o That it can be ascertainable

Offer
Made by whom?
o Advertising is an invitation to business
Same with representative coming to visit
o If the representative gives you a proposal form to complete
The insurance intermediary goes back
o Offer all the elements that we want consensus on
In essence the filling in the form is not considered an offer as the material terms
are not set out
o Consensus does not require that the premium be set out, all that is required is an
undertaking to pay the premium
The purchase price need not be certain at that time- all that it needs is that it be
ascertainable
o As such the filling in the form is considered an offer and the acceptance is in the form of
the company sending you on the insurance contract with the premium
o There is a difference if you call the insurance company and ask for a quote then the
company is making an offer
o The contract only comes into being when the first premium is paid
o The offer itself can be viewed as separate from the pricing of the premium and as such it
can be viewed as an essential term that there isnt consensus on
Proposal form
o Most misrepresentations made in this form

34
 The offer to renew the insurance will take the form of simply paying the
premium
Counter offer?

Blumenau v Neethling
Facts
o B wanted to insurance himself and his wife
o The insurance company did not want to insure his wife
o This was a counter offer that he was not prepared to accept. As such when he received
the contract in the mail he returned it un-opened
Court Held
o The fact that he did not open the envelope and returned was good enough to show that
he did not accept

Acceptance

Notification
o How is a person notified of acceptance
o Contract comes into acceptance only when the acceptance is communicated
o Cannot bargain on terms and conditions of the insurance contract
o Either directly on the phone or indirectly- postal theory- when it is posted the contract
comes into being
o In most circumstances the person wants to be insured immediately
Renewal of instance contracts
o When the company does not inform you that the contract is coming to an end
o By paying the premium the acceptance of the same terms and conditions as before. If
refrain from paying then this constitutes as a rejection

Smeiman v Volvkersz

Obiter: if no alternative method agreed upon, on arrival of acceptance at offerors address

o No alternative method such as post or email etc.

CAPACITY TO ACT

LTIA and STIA refers to instances where a minor can conclude contract, but since the Childs Act
came into existence and made the age of majority 18, made those sections obsolete
o Persons above the age of 18 may enter, vary or deal with long-term and short-term
policies
o Power to deal includes the power to cede or to surrender such a policy
o Such a person can also pay the premiums due under the policy with money which he
has earned or which is at his disposal

35
 o Policy benefits must be delivered to the minor who may deal with is as he thinks fir
without the consent of his guardian
Whether a minor upon coming of age is entitled to restitutio in intergrum is respect of an
insurance contract lawfully entered into, depends on the circumstances of each particular case
o Where a minor has concluded a contract by virtue of the provisions in the LTIA or STIA,
the availability of the restitutio in integrum seems doubtful since both Acts provide that
a minor may enter into the contract as if he has attained majority

LEGALITY OR LAWFULNESS

Normal principles of the law of contract apply

o Look at whether the contract is lawful and whether it against public policy
o Where a term that excludes an act will be unlawful
Applies object of insurance illegal is not lawful
Example: what if we insurance a house that is used as a brothel or a car being used for criminal
activity
o General rule: if the purpose of the insurance is unlawful then the contract is
unenforceable
o Always look at the terms of the contract
o The fact that you did not know that the thing being insurance was not lawful is irrelevant
o The question of unlawfulness arises at the time of the conclusion of the contract
Object
o Look at the terms and conditions of the contract and look at the purpose for which the
contract was concluded
o Such was the purpose to insure criminal activities; not enforceable
o Sometimes legality depends on the common or legislation
o Acts: that a company must be registered before it can conduct business as an insurer

Time when Unlawfulness must be Determined

Validity look at the time the insurance contract was concluded

o Post-contractual developments are not taken into account
o With regard to a special instance of contracts against public policy, namely contracts in
restraint of trade, the courts take the view that the question whether the contract is
contrary to public policy is best decided at the time of enforcement of the contract
o Question is not whether the contract is void ab initio but rather whether it is
enforceable
o This approach is appropriate in cases of contracts against public policy because the
conviction on public policy are constantly being reviewed
o The circumstances affecting the propriety of an agreement may radically change after
the conclusion of the contract
In leading cases, such contracts have been declared invalid or void ab initio creating the
impression that legality must decided at the time of conclusion of the contract

36
Severance

Only certain aspects of a contract are reprehensible, the contract may be saved from total
invalidity by severing the reprehensible parts
o Depends on divisibility of the contract
o Even if not divisible, severance can still be possible if the objectionable elements could
grammatically and notionally be separated provided the parties would have concluded
the contract without the omitted parts
o Test: whether the purified contract still fulfils the purpose the parties had in mind with
their contract
o If severance is possible, the objectionable part is regarded as pro non scripto

Consequences of Illegality

It is not a contract
o Sometimes the legislature prohibits a contract without rendering the contract invalid
o Thus the conclusion of the contract may be a punishable offence and this serves as the
only sanction
o Validity depends on the intention of the legislature
o A special type of sanction is attached to wagers
Declared unlawful but not totally devoid of effect in that they create natural
obligations
o Most common sanction is total invalidity
Contract does not create any rights and obligations
Unenforceable
Allows no exceptions even if the parties were unaware of illegality
If people have performed, it can be recovered by way of the condictio ob turpem vel iniustam
causam
o Use this condictio to claim money back- part of unjustified enrichment
o This right to recovery is subject to the par delictum rule which bars recovery if the
parties acted in a shameful way
o Public policy however may dictate that the performance be paid back, relaxing the
above rule
o Absence of knowledge that the contract was illegal is relevant where a claim is being
considered not for the enforcement of an unlawful agreement, but for recovery of what
has been performed
Wagers
o Common law does not say it is illegal, merely unenforceable
o Contrary to statute or BOR
o Depends on what the statute provides
o Such as Section 60 LTIA
o Performance must be possible and ascertainable

37
 Impossibility of a condition precedent
It is impossible that any performance in money be impossible- thus premiums
must be paid and payout when claimed must be paid
Example: condition that the company will pay
o Condition in the contract that is not possible and will be void

Aleatory Nature of Insurance

This is a bilateral contract in terms of which wither the obligations of both parties are subject to
opposite conditions or only one partys obligation is subject to a condition
Most legal systems frowned upon aleatory contracts (contract of chance)
o Such contracts tempted people to squander away all their possessions
o The contracting party and those dependant on him suffered
o A person could gain an advantage without earning it through hard labour and this
discouraged persons from working for a living
Does not add any value to society
Against the interests of the community at large
These contracts were branded as wagers or gambling contracts
o Condemned for being contrary to public policy
o Unenforceable but not totally devoid of any effect
o Freedom of contract had to give way to the interests of the community
Element of contingency is incorporated into the terms of all contracts purporting to be contracts
of insurance
o Each party stands the chance of losing or gaining depending on the outcome of events
o If the event occurs, the insurer will be in a worse off position and the insured will gain
through compensation of that loss
o If not, the insurer will profit from receiving premiums

Public policy and Insurance as a Contract of Chance

Made such contracts suspect in the eyes of the public, the church and the law
o It might tempt the insured to being about the insured event in order to obtain the
insurance money
Insurance contracts are distinguished from undesirable wagers on the ground of differences in
their respective bases
o Insurance is an acceptable method to spread risk and such contracts are prima facie
enforceable
o To enable insurer to compute the risk on a scientific rather than an arbitrary basis, a
duty is imposed on the insured to disclose all material facts before concluding contract
o Such contracts gained status and importance to such an extent that the law protects the
rights under certain types of insurance
o Some insurances have been made compulsory

38
 In deciding the legality, the fundamental question is whether the purpose and effect of the
contract are inimical to the interests of the community or whether the contract runs counter to
social and economic expenditure
o Even a true contract of insurance may be against public policy
o Proper contracts are enforceable because by virtue of their contents, they are not within
the purview of the norms prohibiting contracts of chance as being against public policy

Effect on Insurance if Wagers Become Enforceable

Public policy is a changing concept

o Disapproval of wagers is waning
o Common law rule has been judicially challenged and the legislature has validated certain
instances of erstwhile undesirable contracts
o Impression that there are no longer objections on public policy grounds unless special
circumstances exist
o Eventually wagers will be enforceable
If wagers become enforceable, it will have direct implications for insurance law
o Difference between insurance and wagers will not fade away for purposes other than
the legality of the contract
o Performance by an insurer becomes due only upon a loss whether of a patrimonial or
non-patrimonial nature while performance under a wager is not in any way linked to a
loss
If wagers become enforceable, it would probably mean that the parties to a genuine contract of
indemnity insurance could be allowed more freedom than before in defining what they mean by
loss or damage for the purpose of the insurers undertaking to compensate the insured for a loss
o Reason: there will be no fear that the contract may be against public policy and
therefore illegal because it deviated from the strict principle of indemnity
o If parties wanted to adopt a wide concept of loss, it would be incumbent on them to
define the performance required clearly for certainty
o Freedom cannot strip the basis of a contract of indemnity
o Therefore be treated as an enforceable wager and should not give rise to a right to
subrogation not lead to the other normal consequences attached to insurance proper
Contracts relating to capital insurance will be affected if wagers become enforceable is
complicated
o Capital contract is intended to be enforceable on condition that a proper interest is
present at the time of loss
o It will not be insurance if the cover is extended to the loss of an interest not within the
ordinary scope of insurance
o Suggested that such a contract will remain contrary to public policy and thus
unenforceable

Unlawful Purpose

39
 If the event insured against is a criminal or civil wrong, the purpose of the agreement is unlawful
o The law cannot countenance an agreement of insurance that tends to facilitate or
encourage a heinous crime or civil wrong
o Only illegal if both parties harbour the same purpose and unlawfulness will follow even if
the parties did not realise that their purpose was contrary to law
Where the insured suffers loss as a result of the crime or civil wrong, it must be determined if
the loss is covered by the contract
o Close scrutiny must establish this if phrased widely
o Involves an interpretation of the whole contract including express and tacit terms
o If it is proved that the event is not covered, the illegal activity does not affect the validity
of the contract and the insurer is entitled to the premiums
o Insured cannot claim indemnification for a loss caused
If the contract does cover the insured against event, it needs to be determined whether such
coverage is against public policy
o If it is, the contract will be unlawful because of its wrongful purpose
o An insured should not be made to suffer if the conduct is no more than a technical
transgression
An agreement making provision for coverage if the insured incurred liability or a penalty for
fraud is unlawful
o Where damage is not covered because the clause was phrased too narrowly,
compensation can be recovered
o Criminal or undesirable conduct which can or cannot be covered must be decided on the
facts of each case on public policy and good morals
o Nature and gravity of the offence plays an important role

Contracts Contrary to Statute: Insurance Legislation

STIA and LTIA prohibit the conclusion of certain contracts either expressly or impliedly
o Prohibition on persons concluding insurance business unless they have been registered
for the kind of business in question
o Limitation on the policy benefits an insurer may provide under a life policy in the event
of the death of an unborn child or a minor below the age of 14
o The maximum amount that can be claimed is R10k if minor is below 6 years and R30k if
minor is between 6 and 14 years

Validity of Contracts Contrary to Insurance Legislation

The sections merely lay down prohibitions without expressly providing that an offending
contract is invalid although contravention dos constitute a crime
o Acts contain general provisions that a policy will not be void merely because a provision
of law has been contravened or not complied with
o Sections make provision for the cancellation of a policy issued by a person who was not
entitled to conclude insurance

40
 o This is to the advantage of the insurance public
o Offending policies are prima facie valid despite being in conflict with the provisions of
the Ac concerned
The validating provision could not have intended to mean that policies in contravention of law
must be regarded as valid no matter how serious a matter of public policy
o Prohibition is in the interests of young children whose lives are to be insured
o Designed to exclude speculation on the lives of defenceless children

Invalidity of Certain Contractual Terms

Validity of the whole contract is not affected but the invalid clauses must be regarded as pro non
scripto

Contracts Contrary to the BOR

Contracts must conform to the values enshrined in the BOR otherwise they will be invalid
o Equality clause is of particular importance
o No person may unfairly discriminate directly or indirectly on the listed grounds
o These grounds may not be taken into account when assessing the risk unless justly
limited
o Contract must be interpreted taking into account the spirit of the BOR
The spirit of the BOR is echoed in the Promotion of Equality and Prevention of Unfair
Discrimination Act

PEFORMANCE MUST BE POSSIBLE

It is impossible that any performance in money be impossible- thus if the premiums are paid
then when the claim arises the insurer must pay out
o Insurers performance is to make payment of a sum of money and not to bear a risk, the
general requirement that the performances must be possible does not play an important
role in the insurance context
o Obligation to pay money is a generic obligation which cannot become impossible
o Where there is an alternative to monetary compensation, the insurer agrees to reinstate
the object of the risk, the requirement that performance must be possible can attach as
this may be impossible
o Effect of impossibility is that the insurer will have to render the agreed alternative
performance, namely compensation in money
Impossibility of a condition precedent
o There is a potential that that the performance will be not be possible due to a condition
in the contract

41
 Example: object of the risk is destroyed prior to the conclusion of the contract or
destroyed after the conclusion of the contract by a cause not covered by the
policy
o Initial impossibility of a positive condition precedent qualifying an obligation is created
o Subsequent impossibility will mean that the affected obligation comes to a premature
end

Performance must be Certain and Ascertainable

The performance of the parties must be certain or at least ascertainable

o May be able to fix the amount of the premium at the time of the contract but
sometimes it is not practical or possible
o If the precise amount is not determined at time of conclusion, a proper standard of
determination must be agreed upon
o If not, the agreement is inchoate
A proper standard of determination could be in the insurers usual rate where the insurer has a
fixed tariff and there is no doubt as to how the risk should be classed
o A premium of the market rate will satisfy the requirement of certainty
o If parties agree to a reasonable premium
Not decided but has effect in English case law
Parties can agree that a third party must determine the premium
o Traditional perceptions are against this but is allowed today
o The exercise of such a discretion must be arbitrio boni viri meaning in accordance with
the norms of good faith
o Opponent can ask the court to revise an unreasonable determination
The premium must be paid in instalments provided there is certainty about the instalments
o May also consist of periodical payments until the occurrence of a certain event
o Premium can be revised at a later stage on condition that the parties have agreed on the
method of revision
The amount of the premium is a matter of contract and depends on the insurers actuarial
estimate of the risk involved
Certainty of insurers performance
o Undertaking to compensate for patrimonial loss is sufficiently ascertained
o Same holds good where the insurer undertakes to pay monthly amounts until the
insured dies

FORMALITIES

Contracts to be in writing is not required by the common law for the validity of such contracts
o Short-term policy issued must comply with certain prescriptions contained in the
regulations
These contracts are purely consensual in nature
Prior payment of a premium is not a formal requirement for validity

42
 Once the contract has been concluded by either party, on tendering
performance of any duty incumbent on him, can compel performance from the
other party
o In terms of the LTIA, the undertaking to provide benefits will be suspended until the first
or only premium has been paid or satisfactory arrangements for payment have been
made

Formalities Imposed by Parties

Parties to the contract may lay down what formalities they desire for the validity of their
contract
o In the case of a continuing contract, it is possible that pre-payment of the premium
applies to the first premium only
Where the parties intended payment of a premium as a formality for the coming into being of
the contract, no contract will be concluded prior to the payment of the premium
o Reminiscent of the Roman contractus re
o Either the offer or acceptance by the prospective insured must take place by way of
payment of the premium
o If the offer takes place by payment of the premium, the contract will come into being at
a later stage when acceptance is effected
o If the acceptance is by payment of a premium, the contract comes into existence upon
the payment of the premium
o Prior to payment there is no contract but it is possible that a person could have been
granted an option to conclude the insurance by paying the premium
Renewal of a short-term insurance contract
o Customary to set a time limit within which the premium must be paid in order to renew
the contract
o Provision for a statutory period of grace in the case of long-term and short-terms
contracts
o If the premium remains unpaid, the negotiations simply fail
o Once the premium is duly paid, the contract comes alive with the result that the insurer
may incur liability for any losses occurring after the payment of the premium
Where the payment of a premium is set as a formal requirement must be distinguished from a
situation where the parties simply agree that the premium must be paid in advance
o In the latter case there is a valid contract but by virtue of the terms of the contract the
insured is bound to pay the premium in advance of the period of insurance or else there
will be a breach of contract
The parties may also regard payment as a suspensive condition of potestative nature qualifying
the insurers obligation
o Difficult to determine whether the parties meant payment to be a requirement or as a
condition
o The consequences differ materially and therefore the two situations must be kept
separately

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THE INSURANCE POLICY

The Parol Evidence Rule

Contracts of insurance need not be in writing to be valid but the standard practice if to reduce
these contracts to writing
o Document expressing the terms of a contract is called a policy
o Where parties entrust all the terms to a document(s), it becomes the sole record of the
transaction between the parties
This is the parol evidence rule
o No evidence outside the document may be led to prove that certain words form part of
the contract
o Rule does not exclude evidence in support of tacit or implied terms
Only applicable if it was the intention of the parties that the document be the sole memorial of
the transaction
o Usually indicated by a signature by the insured
o In practice, it is not signed by the insured but only by a representative of the insurer
o Thus the document must of at least been delivered to the insured but this in itself may
not be conclusive
o The document will be the sole memorial if it has been imported expressly or by
implication
o Documents which have not been accepted by both parties do not form part of the
contract even though there may be a close relationship with the contract
A contract may be partially integrated
o Nothing prevents parties from validly expressing part of their agreement collaterally in
writing or in oral form
If no document has been adopted, the parol evidence rule is not applicable
o Cannot produce a document purporting to be their contract and to expect the other
party to be bound
o If a faulty policy is produced, a defence may be based on the real agreement without
having to prove that a common mistake occurred when the document was drafted
o Person relying on this document will need to prove he took reasonable steps to bring it
to the attention of the other
o Where no document has been accepted, the parties intention must be looked at
Neither party has the power to unilaterally amend the contract
o Needs express or tacit concurrence
o Once an endorsement is issued by an insurer and is brought to the attention of the
insured, there is a duty on the insured to notify the insurer if he does not intend to be
bound
Where a document has been accepted, no other document may contradict, vary or add to that
document
o Courts have said that extrinsic evidence in aid of interpreting the words of the contract
are only allowed in exceptional circumstances

44
 o The parol evidence rue does not stand in the way of rectifying a document which does
not correctly record the intention of the parties

Copy of a Policy

A long-term insurer must within a certain time period a summary of certain particulars
o A policyholder must request a free copy of his policy
Short-term insurers must within a certain time provide a person who has entered into or varied
certain short-term policies with a copy of the document that embodies the contract
o May be requested after payment of a fee
Where a policy cannot be produced, it is conceivable that a third party could have acquired an
interest in the policy
o A court may require an indemnity from a claimant and the court may issue a rule nisi
calling upon all concerned to show cause why the insurer should not be ordered to pay
out on the policy

The Meaning of Short-Term Insurance

The Short Term Insurance act applies to short term insurance business
o Business of providing or undertaking to provide policy benefits under short-term policies
o Short-term policy is a business of providing policy benefits under various policies
Engineering, guarantee, liability, miscellaneous, motor, accident and health,
property or transport policy
Also includes a contract comprising a combination of any of these policies
o Policy benefit means one or more sums of money, other than an annuity, or services or
other benefits
The STIA regulates short-term insurance business
o Insurance is undefined in the Act
o Opened the door to include contracts other than insurance ones
o Submitted it should be afforded the ordinary common law meaning
o Policy is also undefined but should be said to mean a contract of insurance
o Various types of short-term policies must be taken to be contracts of insurance in the
ordinary sense of the word unless a different meaning is evident
Policy can be taken to be concerned only with written instruments since the word means a
document embodying a contract of insurance
o STIA refers to contracts which is not confined to only written contracts
o Thus, policies can include written and oral contracts
The STIA refers to a premium as being in return for the undertaking by the insurer
o Premium is defined as the consideration given or to be given in return for an
undertaking to provide policy benefits
o Intention for contract to be reciprocal
o Not always a bilateral, reciprocal contract

45
The Meaning of Long-Term Insurance

The Long-Term Insurance Act regulates insurance business

o Business is defined as a business providing or an undertaking to provide policy benefits
under long-tern policies
Assistance, disability, fund, health, life or sinking fund policy
Also includes a contract comprising a combination of any of these policies
o Policy benefit means one or more sums of money services of other benefits, including an
annuity
Insurance is not defined in the Act thus adopts the ordinary common law meaning unless a
different meaning is evident
o Policy said to include oral and written as is the same in the STIA
o Premium is not always a bilateral, reciprocal contract (same in STIA)

COVER NOTES OR INTERIM INSURANCE

Purpose
o It sometimes takes considerable time to finalise the preliminaries for the conclusion of a
contract of insurance
To protect the proposed insured during the interval before the issue of a final
policy, the parties frequently resort temporary insurance to cover the proposer
immediately but for a limited time
This is common practice in short-term policies but can be invoked in all aspects
of insurance law

Nature

It is a contract of insurance despite its limited duration

o The proposed insurer must observe the usual duty of good faith towards his insurer
o The contract must comply with all the requirements of contract law
The contract of interim insurance is separate from and independent of the final contract on
insurance
o May share some of the same terms
o If a claim arises during the interim contract, it must be considered in terms of the
interim contract and not the final contract
o Important where only the final contract is void because of misrepresentation or other
unlawful conduct
Granting insurance cover by way of interim insurance by no means obliges the insurer to provide
permanent cover
o The person enjoying interim cover is not compelled to accept permanent cover from the
insurer merely because he has accepted interim cover

46
 Interim insurance contract is usually embodies in a document which is known as a cover note
o Temporary insurance is granted in terms of a remainder to renew an existing insurance
contract
o Whether it can serve as a sole memorial of a contract depends on the intention of the
parties
A cover note may not normally be regarded as a policy in the ordinary sense of the word
o The definitions in the Act are wide enough to include cover notes and all other
documents regarding insurance cover

Formation of Contract

Interim insurance usually comes into existence by the issuing of a cover note
o This document can serve as an offer by the insurer to the proposed insured or
acceptance made by the proposed insured
o If it is an offer, acceptance is usually in the form of conduct
o Interim cover can also be granted in an informal way without a cover note being issued
and may even be granted verbally
Interim cover is granted by insurance brokers or agents
o To bind the insurer, an agent must have actual or ostensible authority to conclude
interim insurance

Premium

Proposed insured is usually required to pay the full amount if the premium for the final
insurance or part of it by deposit
o If final cover is granted, the amount paid is applied towards the premium for the final
contract of insurance
o If final cover is refused, the deposit made by the proposer is usually returned subject to
a deduction at the customary short-period rate for the period during which the insured
enjoyed protection in terms of the cover note
o Sometimes the deposit is refunded without any deduction for the interim cover
o Possible that the insurer has an ordinary rate for interim cover which applies in the
absence of a contrary agreement on the amount of the premium
Whether coverage free of charge amounts to insurance is problematic
o Perhaps an offer to take out permanent insurance should be regarded as a sufficient
premium for the granting of temporary cover

Contents and Duration of Contract

Terms of these contracts are established in the same way as the terms of a final insurance
contract
o As a rule, the terms are recorded in a document such as a cover note

47
 o Merely incorporates the usual terms of the insurer for the risk in question
o Where the usual terms have not been expressly incorporated, they may have been
tacitly adopted since an applicant is unlikely to expect interim cover on more favourable
terms than those regulating the final contract
o Existence of tacit terms is a question of fact
Cover note usually makes express provision for the period of interim cover
o Usually subject to an express condition that it will end upon refusal of the proposal by
the insurer or that the insurer can cancel at will
o Upon expiry of the time period, the insurance cover lapses automatically unless the
period is extended by consensus of both parties
o This results even if insurer fails to indicate acceptance or refusal of the application for
final insurance
o If refusal is indicated before expiry of the period, the refusal can only terminate the
interim insurance prematurely if a term in the interim contract so provides
o If a final policy is issues, it does not supersede the cover note
o As regard to the future, the policy is decisive
If no express provision is made for the duration of the interim cover, the insured is held covered
in terms of the interim insurance until the insurer decides to either refuse the policy or accept it

48
SECTION 5: PARTIES TO THE INSURANCE CONTRACT
THREE PARTIES

Insured
o The person who enjoys protection in terms of the policy and is the first holder of the
policy
Holder of insurance policy
o Subsequent holder called a cessionary- that person wants to claim- must prove that the
first holder suffered loss. Cede the same rights that the 1st holder had.
Insurer
o Always a body corporate that has to be register in terms of the act
o Underwriter at Lloyds
rd
3 parties
o Either a beneficiary for a contract in favour of contract for a third party
Life cover
The life insured, persons whose life is being insured
Insure life of another person- such as husband and wide- life insurance
for third party
Take out car insurance for another person
o If there is a second holder of the insurance policy, this person is called a cessionary.
The cessionary must prove that the first policy holder suffered loss
The cessionary has the same rights that the first holder of the policy had
Acquire rights through cession
Stipulation in favour of a third party

NOTE: parties to a contract of insurance may be represented by intermediaries

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SECTION 6: INSURABLE INTEREST
Insurance cannot prevent the occurrence of a particular peril to which the insured is exposed
but it can provide a substitute for the prejudice caused by the materialisation of the peril
o Patrimonial of non-patrimonial substitute
o The object of insurance is that which the insured wishes to protect against threatening
perils
There can be no claim for compensation or satisfaction under contract of insurance without
there being an object insured
o Object must be in existence at the time of the occurrence of the peril insured against

Exam Tip: Identify whether you are dealing with a valid insurance contract, discuss whether
insurable interest pays a valuable role, the Zimbabwean case: something price, compared to SA
cases

Insurable Interest s Object of Insurance

The doctrine of insurable interest is applied to determine whether the insured has suffered a
loss upon the occurrence of the event insured against
o There has to be an interest in the insurance and otherwise no loss would occur
o The liability that the insurer incurs is limited to the value of the interest

Castellain v Preston

An insured insurable interest is the object of the insurance and only those who have an interest
can recover
o Only to the extent that the insurable interest has been impaired by the insured peril may
be recovered

On the assumption that the basis of insurance is to safeguard an insured against a patrimonial or
non-patrimonial loss, one would have expected that the object of insurance must be sought in
the endangered asset or liability or non-patrimonial right or interest
o The description of the object is not very precise
o If the insured has no interest at the time the event occurred, he cannot suffer any loss or
damage
o If the insured suffered loss as a result of the peril, he must have some pecuniary interest
o In capital insurance where an insured seeks protection in respect of non-patrimonial
interest like companionship, the term interest as object of the insurance seems even
nearer to the mark
o The concept insurable interest appears to be a generic term covering the divergent
concepts that can serve as the object of insurance

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 To decide the nature and scope of insurable interest, the precise relationship between loss and
insurable interest will have to be determined

Insurable Interest must be Distinguished from the Object of the Risk

The object of insurance is not a physical object but an interest that the insured wants to protect
by the insurance
o When insurance is concluded with reference to a physical object, this is the object of the
risk
o The interest of the insured may be embodied in this object or the object may be
instrumental in causing the insured loss- such as liability insurance.
o In the case of indemnity insurance the object of the risk is a physical or non-human
object
o In the case of capital insurance the object of the risk relates to a person
o Thus a person does not insure the object, but their interest in the object
It is unfortunately common practice to refer indiscriminately to the object of risk as the object
insured
o This could lead to confusion where various persons take out insurance in respect of one
and the same object of risk
o It essential to have clarity on the meaning of the expression object of insurance

Relation Between Patrimonial Loss or Damage and Insurable Interest

Suggested that insurable interest of insurance law is nothing other than the id quod interest of
the theory of difference
o Insurable interest is a yardstick to measure loss or damages
o An insured cannot prove a loss where there is an absence of an insurable interest
This illustrates that insurance does fully cover the insured id quod interest but merely aspects of
the total loss (Insurable interest)
o Insurable interest is not seen as the difference between two patrimonial positions but
rather as a relation of value between the insured and the object of his interest which
existed even before the happening of the event insured against (in other words an asset
for insurance purposes)
o Forms part of the law of general damages
The alternative view opens the door for the development of a concept of loss or damage
peculiar to the law of insurance
o Loss and damage can be limited or extended for insurance purposes
o Definition tends to be strict in English law, but more liberal in America, Australia and
Canada
o In SA, it is not in dispute that insurable interest exists whenever a particular event
involves a person in loss or damage in the ordinary sense
o Thus insurable interest is informed by loss and damage
o It is not clear whether an insurable interest is recognised beyond these limits

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Historical Development of the Concept of Insurable Interest

Originally, insurance was only concerned with corporeal objects and ownership was the best
example of insurable interest
o Soon became clear that persons other than owners could have an interest in the object
To limit interest to a tangible object is too narrow for modern conditions
o Can be described as an interest in the non-occurrence of an event rather than as an
interest in a particular object of risk

Rights and Liabilities as Insurable Interests

An insurable interest will exist in all circumstances where an insured suffers loss or damage
through loss of a proprietary right or where he incurs a legal liability
o Thus ownership will provide an excellent basis for insurable interest
o This is also true for other real rights, rights of immaterial property and personal rights
with a monetary value
o The existence of an interest based on a personal right is not affected by the fact that the
right is of a reversionary nature (subject to a condition) or that the contract giving rise to
the right may be cancelled
o Such burdens detract from the insurable value of the interest
o There can be no doubt that any legal liability can be the basis of an insurable interest

Steyn v Malmesbury Board of Executors and Trust

The court found that the insured had an interest in a stack of chaff that did not belong to him
o This was a personal right that he had

Steyn v AA Onderlinge Assuransie

Where a person was allowed to occupy a house free of charge

o The interest insured was the personal right he had to occupy the property

Legal Basis if Insurable Interest in English Law

Can an expectancy to acquire patrimonial rights constitute an insurable interest?

o Lord Mansfield believe so
o However in a House of Lords decision, it was said that interest will only be recognised as
insurable if the peril insured against involves the insured in the loss of a right recognised
by law of in legal liability

52
 Positive expectancies cannot be insured, some exceptions exist
o May insure profits to be realised from the sale of property
o May insure the profits which he expects from expected commission or profits which he
expects from carrying on a business
Insurable interest stops short of covering all loss inasmuch as positive expectancies cannot be
insured
o Negative expectancies (expected liabilities) may freely be insured

Liberalisation of Insurable Interest

Requirement in English law that an insurable interest must be in the nature of legal right or
liability has not been followed in SA

Littlejohn v Norwich Union Fire insurance Society

First attempt at defining insurable interest

If the insured can show that he stands to lose something of an appreciable commercial value by
the destruction of the thing insured, then even though he has neither a jus in re nor a jus ad rem
to the thing insured his interest will be an insurable one.

It appeared that this decision was not well received because it did not require insurable interest
to have a legal basis, but in the Phillips judgment the court moved further away from this
requirement

Phillips v General Accident Insurance

The court took the view that insurable interest is a foreign doctrine and that there is no
justification for applying it in preference to the principles of Roman Dutch Law
It must rather be decided accordance to the intention of the parties
Here the court found that a husband had an insurable interest in his wifes jewellery as he felt
under a moral obligation to replace it

Refrigerated Trucking (Pty) Ltd v Zive

Court found that the owner of a vehicle had an insurable interest in the contingent liability of his
authorised driver
o Based on considerations of convenience
o Court denied legal basis for insurable interest and took a wide view of its scope
o

53
 In Australia and New Zealand, it was deemed necessary for the legislature to free insurable
interest from its legal basis
o This is not necessary to the facilitate the insurance of expectancies in SA law
o There is no objection to treating frustration of an expectancy as loss or damage
o Insurability of a positive expectancy should not be regarded as an exception to a general
rule but as a consequence of the fact that the law accepts certain expectancies as part of
a persons patrimony
o Insurability of expectancies based on legal rights or liabilities is recognised worldwide
and our courts should not be hampered by outdated considerations

Boundaries of Insurable Interest

Purpose of insurance is to provide security in the face of real dangers confronting the insured
o In order to ground a claim for damages, an expectancy must be recognised as forming
part of the insureds patrimony
o Only to this limited extent must an insurable interest have a legal basis
o Thus if a genuine contract of insurance is intended, a person who has insured goods
belonging to another should not be allowed to recover on the basis that he expected to
inherit those goods
o An expectancy must be capable of being valued
Real commercial value
o Insured can in principle insure only up to the extent that he has been harmed by the
event and his insurable interest should not be acknowledged beyond that
The door must not be opened too widely so as to enable an insured to claim compensation even
if the event did not affect him personally
o If compensation for illusionary expectancies would not be in accordance with the
intention of parties who have expressed the serious intention to indemnify the insured
against the loss, neither would compensation for nebulous interests based on moral
liabilities or interests based on convenience
o Insurable interest must be seen as being inextricably interwoven with loss or damage
o Thus, the concept if insurable interest should be interpreted to coincide with loss or
damage as generally understood in the law of damages unless the parties choose to give
a more restricted or extensive meaning

Contractual Extension and Limitation of Interest

Insurable interest is in principle limited to the concept of loss or damage as defined in law
o There appears to be no objection to allowing the parties some freedom to define exactly
what they mean by loss, damage, compensation or damages
o May either extend or limit the insureds insurable interest

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Usefulness of the Concept of Insurable Interest

As far as indemnity insurance is concerned, there should be no difference between loss or

damage in terms of the concrete approach of the law of damages and loss or damage in the law
of insurance unless parties choose to give another meaning
o If approached in way of theory of difference, the concept of an insurable interest will be
superfluous and that it can be abandoned in favour of the ordinary rules governing loss
or damage
The object of indemnity insurance should be defined with reference to the asset or liability that
the insurance is intended to protect or guard against
o A distinction should be drawn between property insurance and liability insurance
o Property: object refers to an ascertained or ascertainable assed such as a real or
personal right
Guards against loss or impairment of a particular asset
o Liability: object insured cannot be an asset as he insured may have no asset that could
be endangered by the occurrence of the peril insured against
Liability itself it the object of the insurance
Provides for cover against the coming into being of the liability
Even if the consequences of these are accepted, it is foreseeable that the term insurable
interest will be retained for historical reasons as a useful generic term to describe the divergent
of assets and liabilities and non-patrimonial interests that may for the object of the insurance
o Insurable interest should bear this narrow and specialised meaning
If insurable interest went beyond the above, the concept would be of decisive importance in
defining the object
o Technically, it would not be a generic term for diverse objects but the object of
insurance in its own right
o Would not be possible to do away with the concept of insurable interest
o It would denote a type of asset or involvement which is peculiar to the law of insurance
o Loss or damage would mean a loss or impairment of an interest as defined in the law of
insurance
o Loss or damage would have a wider import

Time When Interest if Required

Function of insurable interest is to determine whether the insured has suffered a loss, the
insureds interest must be by virtue of the terms of the contract exist at the time of the
materialisation of the peril insured against
o If no interest at that crucial time, there is no object secured by the insurance
o Insured can bring no claim under the contract for loss suffered

Insuring Specific Existing Interests

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 A clear distinction can be drawn between insurance of a specific or ascertained interest and
insurance of an ascertainable interest
o If an existing interest, insurance goes hand in hand with a tacit or express supposition
that the insured interest is in existence
o Contract can serve no useful purpose as the insurance is of no force or effect
o The insurer was never at risk and any premium received must be repaid

Loss of Interest Prior to Occurrence of Peril where Specific Interest is Insured

If a specific interest has been insured, the obligations from the contract arise if the interest in
fact existed at the time of contract but should his interest fall away or b transferred before
occurrence of the peril, obligations will lapse
o Contract will have no further purpose as it is not intended to cover any interest
o Contract relating to an existing interest is closely tied up with the fate of the interest it is
intended to protect
o Failure of the contract is attributable to a tacit resolutive condition making the
continued existence of obligations dependent on the continued existence of the interest
involved
o It is not a case of subsequent impossibility of the insurers performance

Insuring a Specific Future Interest

Parties wishing to insure a particular interest may find it difficult

o There is a precise legal nature and scope of the interest they expect to acquire
o Insured may be aware that the interest may undergo a change, lapse or be replaced by
another interest
Must insure the interest en nomine
o Any interest subsisting at the time of loss will suffice
o In some cases, it is unnecessary to disclose the interest
o All parties must conclude an agreement of indemnity without any specific reference to
any particular interest in the object of risk
o The object itself need not be ascertainable
o The intention of the parties is to cover an interest that the insured may have at the time
of loss
It is an ascertainable interest, not an ascertained one (matter for evidence and interpretation)
o Contract is not subject to a suspensive or resolutive condition
o If insured has an interest at the time of loss, he will have a claim
o If no interest comes into existence, the insurer incurs no liability but the insured must
still render the payment of premiums
o Hence, a speculative contract

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Loss or Interest Prior to Occurrence of Peril where an Ascertainable Interest is Insured

Where an ascertainable interest has been insured, loss of such interest prior to the peril will
mean the insured cannot claim indemnification
o Contract does not dissolve as it is not subject to any conditions
Ascertainable contracts are preferred as it affords the insured more protection

Change of Interest

Interest may undergo changes after the conclusion of the insurance contract
o This may be an increase of decrease of interest
o Unless there is a clause that prevents protection over a change of interest, a change
should not exclude the insurer from liability as long as the nature of the interest is not
affected
o Change of nature will bring the contract to an end if the object was a specific interest
o If the interest is ascertainable, the insured still has a claim despite the change in nature

Transfer of Interest

A contract of insurance is a personal contract

o As such a transfer of interest does not extend to the right to claim indemnity under an
insurance contract
o However, this must be distinguished from certain situations- where the insured interest
is brought about by death, sequestration and presumably marriage in community of
property the rights under the contract of insurance vest automatically with the trustee,
executor and spouses jointly.
The rights under the insurance contract cannot be ceded from an old owner to a new one
o This is because the cessionary can only claim the rights that the cedent could have, and
as the cedent has lost those rights, the cessionary can claim nothing
Normally transfer of insurance cover to the transferee of the insured interest can only be
accomplished through a novation of the insurance contract
o Requires agreement between the insured, the transferee of the insured interest and the
insurer

Lake v Reinsurance Corporation Ltd

South Africa does not look at the doctrine of insurable interest directly, but looks to see whether
there is an interest to insure

Examples of Interests Insurable Under Indemnity Insurance

Interest of a Buyer in Property Bought

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 Insurable interest despite him not being owner yet (tenuous)
o Buyer is in a better position than an ordinary unsecured creditor as he has a persona;
right to claim delivery
If property damaged or destroyed resulting from event insured against, insured suffers loss
because the value of his right to claim delivery of that property is reduced or destroyed
o This is the position where the buyer bears the risk and where the risk remains with the
seller
o If the risk lies with the seller, damage may excuse the insured buyer from paying the
purchase price (favourable consequence)
Saving must be deducted from the purchase price
Buyer may also have a possessory interest
o Important in instances of instalment payment
o Any consequential loss represents an insurable interest
It is of no moment who the bearer of the risk is
Interests of the buyer and seller may overlap
o If this is allowed, the doctrine of subrogation comes to the assistance of an insured to
prevent double compensation

Interest of a Creditor in the Property of his Debtor

An unsecured creditor whose personal right against his debtor is not directly linked to specific
property of the debtor, cannot effectively insure the property of his debtor
o Absence of a causal connection between the damage to the debtors property and loss
sustained by creditor
o No certainty that proceeds would anyway have been available to creditor to satisfy the
debt
o Even so, other property can be attached in its place
A person should be allowed freedom should be given to insure debtors property
o If insured recovers compensation, insurer can use subrogation to claim from the debtor
for unpaid balance of debt

Interest of an Insolvent in the Sequestrated Property

Debtor is divested of his estate, he retains an insurable interest where property has been
concealed from creditors
o Trustee also has an insurable interest
o Proceeds of insurance contracts fall into the insolvent estate

Interest of a Lessee in the Leased Property

Can insure property leased to him

o Contingent liability (lessee) for damage will yield an interest to the full property value

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 o In some lease agreement, there is a clause for repair or replacement for any damage
caused, thus liability is not based on fault
o Lessee entitled to take out insurance to cover himself
Contract of lease gives rise to a personal right
o May acquire a real right to possession
o If exercise of this is restricted by a peril, he may suffer loss
If property is used for business purposes, infringement of the right to occupation is an insurable
interest
o Such insurance must be en nomine
Many leases have a clause requiring insurance
o Doubtful that a lease can derive a personal right
o If the clause does not require property to be in either partys name, the lessee is insured
in his own name and the lessor has no claim to indemnity
o If in the lessors name, he becomes a creditor of the insurer
o Can jointly insure both parties

Interest of a Mortgagee and Pledgee in the Encumbered Property

Has a real right to immovable property (mortgage) or movable property (pledge) which will
support an insurable interest
o Interest extends to the full value of the secured debt subject to the value of the security

Interest of Owner of Car and Liability of Authorised Driver

Refrigerator Trucking v Zive

Effect of exclusion clause in a motor vehicle policy means the insurer indemnifies insured owner
and authorised driver for liability incurred whilst driving that vehicle
o Found that owner had insurable interest in the future possible liability of the authorised
driver
o Those rights accrued at the instance of the owner and therefore the driver does not have
locus standi to enforce them
o Interest of owner is based on convenience considerations thus radical change to
insurance law since insurable interest required to be pecuniary in nature

Interest of Partner in a Partnership

Partner is entitled to insure the partnership property for his benefit

o Partners are co-owners of partnership property
o Interest is limited to the value of undivided share in the property at the time of loss
An interest of a more indirect nature is the expectancy of profits or may be found on
contingency liability for partnership debts upon dissolution and assets prove to the insufficient

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Interest of a Possessor in the Property he Possesses

Possession may give rise to interests of a varying nature

o Can be divided into a proprietary or full interest, a contingent interest and a possessory
interest
o Proprietary or full interest: enjoyed by the owner but can be conferred to a bona fide
possessor
Can insure the full value if the property and against any eventuality which may
befall it
o Contingent interest: enjoyed by someone who is subject to a liability in respect of the
property
Lessee, usufructuary, borrower, bailee, seller and pledgee
o Possessory interest: use and enjoyment of property
Interest is limited and does not extend to the full value of the property
If property has been damaged due to a peril, ,this produces a loss for the person
in possession if his limited interest is lost or diminished of value

Interest of Seller in Property Sold

An insured who has sold property does not lose his insurable interest at the conclusion of the
sale
o Once all parties have performed, the possibility of loss from destruction of the merx is
remote
o Must be determined whether his patrimony has been diminished
Interest is usually represented by his right to the outstanding balance of the purchase price
o If ownership has already been transferred without receiving the purchase price, the
seller is in a tenuous position of an unsecured creditor with no special insurable interest
If ownership has not been transferred, one must determine where the risk lies to decide the
nature and extent of the sellers interest
o If risk has not been transferred, seller has interest in the full value of the merx
o Interest is dissolve if merx is destroyed and losses right to claim the price
o Can treat the loss of the right to the price as an alternative source of loss
If the risk is with the buyer, the sale will not dissolve by the destruction of the merx
o Seller retains the merx as security for the payment of the purchase price
o Value of the interest is the market value of the property up to the amount of the
purchase price
o Interest is limited to the value of the merx and subject to the purchase price
o If sold under its market value, the outstanding balance is the interest
o Where the purchaser bears the risk, the seller does not lose his right to the purchase
price because of the destruction
Sellers potential liability if he is to blame for the destruction
o Seller is liable for the full value of the merx which is the insurable interest
o Seller may not retain the insurance money and the purchase price (doctrine of
subrogation)

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Interest of a Shareholder in the Property of the Company

English courts: a shareholder cannot insure the property of his company even if he is the sole
shareholder
o May insure himself against the loss he may suffer in a venture the company fails in
o This not followed in Anglo-American legal systems
A company has insurable interest in a motor vehicle belonging to its directors where it has been
contractually undertaken to replace or repair it should it be damaged or lost (Brightside)

Interest of Spousal Regarding Property

Littlejohn v Norwich (1905)

If insured can show that he stands to lose something of appreciable commercial value by the
destruction of the insured thing, then even though he lacks jus in re and jus ad rem to the thing
insured. His interest will be an insurable one
Court asked whether
o Husband had suffered a loss; and
HELD: husbands interest = he had control of it & derived profit from it
o He was in a worse position after destruction of wifes property
HELD: suffered loss due to (a)

Phillips v General Accident Insurance (1983)

Went further than Littlejohn v Norwich
o Husband allowed insurable interest in wifes jewellery to the full value
o Court considered:
Husband felt morally (not legally) bound to replace jewellery
If hard times encumber them, wife would need to sell jewellery to provide
household necessities
o Therefore, the court created a means for the husband to acquire an insurable interest in
the absence of one

Steyn v AA (1985)
Facts
o S claimed right to live in house owned by SA Railway
o Right accrued from settlement of litigation & existed until land was required by SA
Railway
o Agreed to this rent-free and on this basis insured the house
o Subsequently burns down and claimed from policy
o Not owner but a bona fide possessor who suffered financial loss
Court Held

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 o Insurable interest existed by the existence of a personal right of him to occupy the house
free of charge

Manderson v Std. General Insurance Co (1996)

Facts
o HC installed & maintained electrical equipment
o Contracted with M in terms of which when customer called HC, M would repair & get
paid at the end of the month
o M would use own car & tools
o M would always available for short-notice & keep in good condition
o On that basis, HC insured M's car
o Subsequently car was stolen and HC claimed financial loss in terms of loss of profits and
goodwill
o Insurance company repudiated the contract on the basis of no insurable interest
Court Held
o Loss has to be of real value in trade and commerce
o Insured had no interest in the market value of the vehicle which he was claiming
o He only had interest in the profits and goodwill associated with M having the car and
doing his job
HC did not lose the car but lost the goodwill, thus his interest is the goodwill
o An agreement does not create insurable interest
o Concept of insurable interest: public policy and does distinguish a gambling contract
o Complex because the insurable interest is determined at time of loss not at time of
policy conclusion
o But subject of policy: what is being insured therefore it is the insurable interest
o There was not insurance against loss of profits and loss of goodwill, only on theft of the
car and therefore cannot claim for those losses only theft and a contractual obligation
not insurable interest
Principle: you insurable interest will be in YOUR loss specifically

NOTE: Courts will usually rule in favour of the insured but in these circumstances no insurable
interest could be found

COMPARE THE CASE BELOW TO SOUTH AFRICAN CASES

Brightwater Enterprises v Zimnat Insurance Co (2003)

Facts
o Zimbabwean decision
o BE contracted with D who owned a car
o The car was used for business purposes and company insured it
o D was a shareholder and director of BE
o Car was stolen in South Africa
o BE claimed but the contract was repudiated as they had no insurable interest

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 Court Held
o Ownership is not a requirement for insurable interest
Insurable interest exists in absence of intention to conclude a gambling contract
(erroneous decision)
Relevance of time of the policy
o Interest can only be insured to the extent of the loss you will suffer
o Deriving a benefit or advantage from the existence of a thing is sufficient
o Rejected the Manderson judgement approach which only asks, is he worse off after the
loss
If yes, then he has an insurable interest
Loss evaluated the loss when it occurred
Insurable interest should only have existed because of the employment
o The consideration of insurable interest should be at the beginning when looking at the
risk
o Thus an interest is not only measured in relation to the direct benefit a person receives
from its use - they may also have an interest in preservation
o Thus the director of the company had to replace the car if it was stolen which amounts
to interests in its preservation
Decision has been criticised since C suffered loss because he was employed by B

Thus far, Manderson established:

1. Littlejohn: Insurable interest is commercial loss

2. Profits and goodwill is insurable interests
3. Profits and goodwill is not insured by the party (must be expressly included)
4. Insurable interest therefore not only commercial interest but also actual insured interest

Brightside established thereafter:

Insurable interest is only a consideration in the inquiry into whether it is a gambling contract or
not
Provided insured is worse off or derived any benefit from existence of thing insured
o Suffice for insurable interest
o Expressly disagreed with Manderson regarding question of loss

Lynco Plant Hire v Univem (2002)

Facts
o Lynco was a CC that had insured two motor vehicles with U
o The insurance was effected in the name of one of the members of the CC

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 o The vehicles were stolen and U repudiated the claim lodged by the member in whose
name the vehicles were insured on the basis that he had no insurable interest in the
vehicles
o Insurance broker working for U advised L to insure vehicles through one member
therefore acted on advice of employee
Question: did member of the CC have insurable interest?
Court Held
o CC had a direct interest in the vehicle
o The member had an indirect, economic interest
o Insurable interest is a requirement for an insurance contract
o Court applied the Little John test: If he stands to lose something of an appreciable
commercial value by the destruction of the thing insured, then even though he is
without a ius in re nor a ius ad rem to the thing insured, he would have an insurable
interest
o Further, if the insured could show that he stands to lose something of an appreciable
commercial value by the destruction of the thing insured, then even though he is
without a ius in re nor a ius ad rem to the thing insured, he would have an insurable
interest.
o Further, by virtue of Ls membership in the CC, he would suffer broad economic loss and
would be worse off
o The member of the CC had a contractual obligation to pay over any insurance claims to
the CC thus if the member was not paid, he would have to pay himself
Principle: interest can be an economic loss

NOTE: court advised that insurable interest should be established when the contract is entered into

De Wet v Santam (1996)

Facts
o D sold car to buyer
o Gave a fraudulent cheque but fraudulent and was therefore never paid for it
o Claimed from insurer
Put in claim after sold it therefore does he still have an insurable interest
o Car later found in Lesetho
Court Held
o As the car was found, no loss suffered
o Claim was denied

Insurable Interest as Object of Capital Insurance

Insurable Interest as the Object of Capital Insurance in English Law

An insurable interest is seen not so much as the object of the contract of capital insurance but as
a legal requirement for the validity of the contract in order to avoid wagering on lives

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 o A contract of capital is illegal and void if unsupported by a proper interest
Insurable interest undefined in English law
o Academics say it is non-pecuniary interests founded on natural affection(own life; health
or limbs; person on their spouse) and pecuniary interests
o These are found to have a financial nature
o Where an interest has been insured with several insurers, the insured can only recover
the value of the interest

Time when Interest must Exist in English Law

Interest for non-indemnity needs to exist only at the time when the contract is concluded
o If the interest is not expected to continue, the status of the contract may be in jeopardy

Necessity of Insurable Interest for Capital Insurance in SA

Lack of decisions on whether an insurable interest is required

o Books postulate that insurable interest is a requirement for validity and that it is of a
financial nature
o English legislation never formed a part of SA law
o Roman-Dutch sources on insurance do not provide specific guidance
SA law is uncertain and flexible
o Parties to a contract intend to protect an interest
o Insurable interest serves not as a requirement for validity but the object of insurance
o If the interest is lacking, the contract is unenforceable
o This doctrine has been overlooked

Nature and Scope of Insurable Interest as the Object of a Contract of Capital Insurance according to
SA Law

If the purpose of the contract is to protect against non-patrimonial loss, the object of such a
contract is abstract in substance if not in form
An interest is eligible if its loss or impairment would cause hardship like pain or loneliness
o Need for redress would arise in the form of imperfect compensation
o Thus insurance against death is perfectly acceptable; and traumatic effects of an overly
long life, integrity of his body and limbs; physical and mental health
o Also have an interest in the companionship of their spouse
o Where the life of a third party is insured, the consent of the life must be obtained to
discourage fraud
In English law, insurance of a third party is limited to pecuniary value of the actual impact of the
peril
o Valuation of the interest should be left to the parties and must have an intention to be
bound

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 Insurable interest may be based on financial considerations
o Better opinion is that pure pecuniary interests should in principle be insured under a
contract of indemnity insurance
The interests that can serve as the object of the contract are not diverse
o Other interests complying with the general principles relating to non-patrimonial loss
may come to be recognised in the course of time
o Possible for parties to themselves create and define new interests provided that there is
no objection of public policy

Time when Interest must Exist According to SA Law

Must exist at the time of conclusion of the contract and the insurance us not affected if the
interest falls away
o This is in conflict with the essence of insurance as a method of transferring a risk
o The interest as the object of the insurance must be required to exist at the time of the
occurrence of the peril but that there is no objection to deferring payment until a later
time

Examples of Interests Insurable under Capital Insurance

Interest in Own Person

English rule: a person has an unlimited interest in his own person is observed in SA
o Can take various forms: his death, his survival, his body or limbs, and his mental and
physical health
o A person if in good faith may take out insurance for any amount and may recover the
total amounts insured where he has insured with more than one insurer

Interest in Person of Husband or Wife

Whether a person is recognised as a spouse depends on the validity of the marriage

This English rule is fully warranted in SA

Interest in a Cohabitant

Factual interest in this person

o Question: whether such an interest could be countenanced by the law
o Considerations of public policy may be in the process of change

Interest in a Fiance

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 A real emotional interest in the person
o Death can cause abstract loss in the form of grief and shock
o No objection in SA law to a contractual undertaking to pay a sum as consolation

Interest in the Life of a Parent or Child

No clarity on question whether a child has an insurable interest in the life of his parent
o Close relationship of affection should be sufficient to ground an insurable interest
o Confirmed by common law right of support
o The interest is unlimited and not restricted to the actuarial value of the right to support
o Also holds good for other relationship of close affection confirmed by a contingent duty
of support
The LTIA recognises an interest in an unborn child and minors below the age of 14 years
o Imposes a limit on the amount claimable
o Not clear who may take out this insurance
o Emotional repercussions, trauma and expenses of death of an unborn child, can insure in
his own name
o Children above the age of 14 years, the close relationship is sufficient to ground an
insurable interest in favour of the parent
o Only complicating factor is that the recommended requirement of consent by the
person cannot fulfil a meaningful role where is child is still a minor

Interest of a Creditor in the Life of his Debtor

Can be insured up to the amount of the debt and the interest due including the first premium of
insurance
o This is pecuniary interest and it is doubtful that such an interest would be accepted as a
proper object of a contract of capital insurance

Interest in an Employee or Employer

Such an interest is said to extend to the value of his future salary

o Can also insure life of employee up to the value of the employees services for such a
time as he is under a legal obligation to serve the employer
Must it be a pecuniary interest?
o Death is a disruptive experience
o Employee can lose security and job satisfaction
o Employer can lose a skilled person whose value cannot be quantified
Replacement is possible but the employer is inconvenienced or financially
endangered in relation to key persons
o Thus the law is criticised and often ignored

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 Relationship could leave room for proper capital insurance in the sense of insurance of non-
patrimonial interest for an amount decided upon by the parties without the contract being
contrary to public policy
o Insurance can be payable even if relationship is terminated is no cause for alarm

Interest in a Partner

One partner may have a pecuniary interest in the life of a fellow partner
o The nature of the relationship is such that it founds an unlimited non-patrimonial
interest
o Death of a partner causes disruption, inconvenience and bereavement of close personal
or business ties

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SECTION 8: WARRANTIES
Warranties in English Insurance Law

Developed from English insurance law

o Strict contractual term by which the insured undertakes that certain representations are
accurate or that certain duties will be performed
o Breach of a warranty amounted to breach of a fundamental term which allows
cancellation of the contract
o Can cancel notwithstanding the fact that the content of the warranty may have been
immaterial to the risk OR that the breach of the warranty may not have contributed in
any way to the loss in respect of which a claim was brought
o Election is up to the insurer
Nature and effect of a warranty may be compared to a supposition or a resolutive condition
o In SA law, these only control the operation of a contract

Adoption of English Law on Warranties

Warranty is a strict contractual term in that the parties intend that the undertaking be honoured
o Whether breach justifies cancellation depends on the seriousness of the breach or if
there was agreement that innocent party may resile upon breach
o Our courts have adopted the English rules

Purpose of Warranties

Insurer who relies on misrepresentation as a cause for avoiding the contract must prove that the
misstatement involved was material to the risk
The wide protection which warranties afforded insurers placed the insured at a disadvantage
that legislation was passed to strip insurance warranties of this
o Insertion of warranties is still advantageous to insurers
Provides an alternative cause of action for breach of contract
More favourable than a delictual action for misrepresentation
Warranties of another kind impose strict duties on the insured to take certain
steps in an attempt to control and diminish the risk
May serve to ensure the correctness of a claim and to facilitate settlement

Definition and Creation of Warranties

No formal or technical wording is required for the creation of a warranty

To establish a term as a warranty, it must be proved that:
o The term was intended as provision forming the contract
o The term is in the nature of a strict undertaking (debtor must agree to be bound)
It is only a warranty if it is a vital term entailing a right to cancel (English Law)

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 o Term vital due to importance of its subject matter
If material to the assessment of the risk
o Breach will amount to serious malperformance justifying cancellation
If the subject matter is not decisive, it can still be a warranty if the parties employed words to
indicate that they regard them as fundamental
o Common way is to require the insured to assume absolute liability for the correctness of
his statement
o Thus parties must expressly or tacitly agree that a breach will justify cancellation
irrespective of the seriousness of the breach
o Thus intention is the parties is very important
Reforms in legislation has restricted the insurers right to cancel on the ground of breach of a
warranty
o Can only cancel if incorrectness of representation is material and no longer on a
technical grounds
o Promissory warranties fall outside the scope of the Acts and are still governed by English
law
o Must determine the effect if a lawful cancellation on the ground of breach of a warranty
as breach in an insurance contract is not treated in the same way as other contracts

Nature of Obligations Created by Warranties

According to some systems of law, warranties foes not create an enforceable obligation but
merely a defence in the event of its non-performance
o Existence of the contract is never in jeopardy, but just qualifies the risk
o It does not provide the insurer with a cause of action
In English Law, if insured does not comply the contract comes to a premature end
o Same position in South Africa
o A promissory warranty may be compared to a resolutive condition where the debt is
automatically enforceable but the obligation is discharged upon the non-fulfilment of
the condition
In SA, a breach of a warranty amounts to a breach of contract
o Warranty creates normal contractual obligations
o Contract will not cease automatically but only on cancellation
o Protects the insurer
o The debt created by the warranty is subject to the normal rules of prescription
o Not an independent debt but forms part of duty to perform

TYPES OF WARRANTIES

Affirmative and Promissory Warranties

There is no restriction on the subject matter of a warranty, they cover a wide field
Affirmative

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 o This requires materiality
o Insured warrants or affirms the correctness of the info submitted through a declaration
regarding an existing fact
o Relates to the past and the present
What is this warrant- warrant of fact or opinion
The policy will be a guide here
Promissory
o Insured warrants to do something or not to do something in the future
o Obligation to disclose arises only during pre-contractual negotiations
o Once concluded, no obligation to disclose
o If something transpires, only obligated to disclose upon renewal therefore promise to
disclose of new developments (e.g. life policies new hazardous hobby)
o Only valid if you reserve a right to adjust the policy
o Notify insurer of specified changes in risk circumstances
o Have to prove the same things as you would for misrepresentation
As such it will not make it easier for the insurer to repudiate
o This warranty does not require materiality for a breach
Excluded from section 53 of the Short Term Insurance Act
This is where the issue of HIV/Aids comes in
If the insurance wanted you to do regular medical check up and it was
discovered that you were positive with the disease they were entitled to cancel
the contract
Section 1(a)(iii) of the STIA- cannot give the insured more onerous duties
Have to prove the same things for the warranty that you have to prove
to misrepresentation. As such it wont make it easier for insurers to
repudiate

Warranties of Fact, Knowledge or Opinion

Affirmative warranties divided into these

o Warranty of fact
A warranty that a certain state of affairs does or does not exist irrespective of
this knowledge of the state of affairs
o Warranty of knowledge
Guarantees that to the insureds knowledge a certain state of affairs does or
does not exist
If there is a doubt as to which warranty it is, it is presumed he was asked
something of knowledge
o Warranty of opinion
Insured does not warrant the existence of certain facts or his knowledge
concerning such facts, but gave a warranty of his opinion
Difficult to determine if warranty relates to a state of affairs and hence to a fact, or an opinion
about certain matters

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 o Treat question which elicit an opinion as demanding a state of facts

Jordan v New Zealand Insurance (1968)

Facts
o J insured motor vehicle
o He was asked his age at his next birthday
o J misunderstood the question and gave his current age
o Made no difference of the discrepancy to the policy
o The insurer relied on this and repudiated and cancelled policy
o Refused to pay claim for stolen or damage
o Insurer argued that J warranted that all information was true and correct
Court Held
o Had to uphold the cancellation (no choice)
o Decision created uproar and the Insurance Acts were amended subsequent to this
decision
o The law now requires that in order to repudiate the claim the breach has to be
material

S 53 and S59 of the Insurance Acts

Materiality requirement for cancellations = applicable as well (even if signed it)

Insurance companies still use warranties in contracts because it is easier to prove a breach of
contract than a misrepresentation
o Therefore ask for breach of warranty in the alternative
Remedies differ for both as well

De Gavaya

Facts
o Iinsured represented that anyone that drove the car would have a drivers licence
o The car was parked at a shopping centre when someone drove into it
o The person that had drive the car to the shopping centre did not have a licence
Court Held
o There was no link between the breach and the damaged caused, however, this
warranted and as such they repudiated the claim

BREACH OF WARRANTY

Relative and Absolute Warranties

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 Constitutes as a breach of contract
o The burden of proving breach rests on the insurer whether it involves truthfulness or
non-compliance with an undertaking to perform certain acts
o To establish breach, a distinction should be drawn between relative and absolute
warranties
A relative warranty is framed in general terms and does not specify what is required by the
insured
o An absolute warranty is a tenor leaves no doubt as to what is required
o Language of both must be ascertained to determine the scope, only then must conduct
be assessed to determine compliance
With relative warranty, an element of reasonableness is incorporated expressly or by implication
o Insured is obliged to comply with the warranty to a substantial degree which is judged to
the standards of a reasonable person
o If no time has been stipulated within which the insured should perform a promissory
warranty, the insured must perform his obligation within a reasonable time
Failure to do so can result in cancellation of the contract
If warranty is absolute, the terms must be complied with exactly
o Failure to do so results in a breach of contract
o Substantial performance is tantamount to no performance
Once breach has been committed, it cannot be undone or cancelled by subsequent conduct

Defences Available to the Insured

At common law it was irrelevant that the warranty concerned a matter not in an way affecting
the risk covered by the contract
o This has been altered and materially is required by statute at least for affirmative
warranties
Courts say it is not necessary to establish that the breach was causally connected with the event
insured against and hence contributed to the occurrence of the event
o Undecided if this English should be recognised in SA law as Roman-Dutch law holds the
contrary
Compliance may be waived by the insurer or be estopped from relying on a breach of a warranty
o A breach is excused when, by reason of change in circumstances, the warranty creases
to be applicable or when compliance with is becomes unlawful

Renewal of Insurance Contract

Where a breach has occurred because of incorrect information in the proposal, the question
arises what the position would be if the contract were renewed and the effluxion of time has
corrected the incorrectness of the original answer
o Amounts to the conclusion of a new contract
o It replaces entirely the terms of the old contract
o Insured will be deemed to have answered the questions afresh

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 o For purposes of enquiring whether there has been a breach in respect of the renewed
contract, the correctness of the warranted answers must be tested upon the conclusion
of the renewed contract
This principle does not apply to continuous contracts (life insurance)
o On the faith that the original representations, the insured is given rights which the
insurer cannot take away or alter

REMEDIES FOR BREACH OF A WARRANTY

Validity of a contract depends on proper performance and the observation of a warranty is a

condition precedent to the insurers liability
o This is cryptic as it obscures the fact that the contract is neither voided nor automatically
terminated
o Innocent party enjoys an election
Does not serve as a condictio indebiti
Effect of cancellation must be contrasted with avoidance under misrepresentation
o Cancellation does not render the whole contract as null
Depends on the divisibility
Can still rely on terms not affected by the breach
o In misrepresentation, the whole contract is avoided and cannot rely on any term
Same remedies for breach of contract exist
o Curtailed by statutory remedies which include damages
o Insurance companies do not favour the remedy of damages
Effect of cancellation
o Contract is cancelled wit retrospective effect from the moment breach occurred
o Insured is not entitled to claim for any loss for affirmative warranty
o Claims arising before the breach are fully recoverable for promissory warranty
This is true even if claim arises after the breach but before the cancellation
Cancellation requires decision by the insurer and notice to the insured
o Can be given in any way whatsoever; service of summons is sufficient
o Thus it is a declaration of intention and the sanction of the court is not required
o Court can be asked if cancellation was lawful
Insurer loses the right to cancel by waiving this right
o Cancellation done at any time
o Does not need to wait for insured to process a claim then deny liability
o Once contract is cancelled, entitled to recover performance and restore what has been
received
This is not a prerequisite for valid cancellation
Where there is cancellation with no such right, conduct is treated like repudiation

Statutory Curtailment of Remedies for Breach

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 Became evident that insurers did not abide by this moral principle but insisted on strict
adherence to the terms of the contract regardless of materiality
o The insertion of S63(3) in the LTIA and STIA
o Dfbdj
o The aim of this measure is to protect claimants against repudiations based on
inconsequential inaccuracies or trivial misstatements
o Criticised as it does not go far enough, needs fundaments reconsideration and revision
Retrospective effect
o Consequences has on claims based on short-term insurance need not be considered
since such must have been prescribed by now
o A decreasing number of unsettled claims must still exist, unaffected by prescription,
under long-term insurance contracts concluded prior to the introduction of this
o Claims cannot be defeated on account of a breach of warranty concerning an immaterial
misstatement

Representation

Provide that no remedy is available on account of an untrue representation whether true or not
unless the representation was material
Cannot contractually waive protection as it overrides any agreement to the contrary between
the parties
Probably unintended effect of this on positive representation as a cause of action
The precise meaning of needs to be ascertained as it only applies to where a representation has
been made to the insurer
Question: does representation refer only to the past and existing facts or also to future
eventualities
o The first interpretation would include affirmative warranties whereas the second would
also include promissory
The basic meaning is a pre-contractual statement or non-disclosure of fact at the conclusion of
the contract
o Insurers knowledge is able to estimate the risk
Decide whether to take the risk and on what terms
o Representations are on past or existing facts and only form part of the contract if
warranted to be true and correct
In assessment of the risk, the insurer is guided not only by past and existing facts but also by
what may happen in the future, not only as far as the object of risk is concerned
o Conduct of a proposer in replying to the questions amounts to a representation even if
to a future event
o A representation on a future event cannot form part of the contract itself
Law is loath to grant an action for damages based on a representation regarding the future
o Does not mean representation cannot be the subject matter of a contractual warranty
o Insured can warrant a representation made by him in proposal regarding his future
conduct
o Liability follows upon such a breach

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 Even if warranty does not result from an answer to a question but appears in the form of a
promissory warranty, it may be argued that be agreeing to the contract, the insured
represented he would perform certain acts in the future
o Warrantor binds himself contractually to the effect that his representation will become
true
o Representation may be the subject matter of a promissory

Materiality

The LTIA and STIA deprive an insurer of his common law remedies for breach of a warranty only
if the representation was untrue and likely to affect the assessment of the risk at time of issue or
variation
o Thus only if representation was material
o Materiality does not refer to the incorrectness or untruthfulness
Effect of statutory measures has already been noted in connection with untrue representations
not warranted to be true

Incorrect Statement of Age

Legislative measures are subject to providing for the curtailment of the insurers remedies in the
case where the age of the life insured has been incorrectly stated
o A more severe curtailment of the insurers rights when an incorrect statement of age is
involved
o At common law, it is material to the risk
o Requirement for materiality under S59 and S53 would have not provided any protection
o Provision has been made for adjustment in appropriate cases
If age under a long-term policy or under a short-term policies od accident and health is incorrect,
the policy benefits will be those that which would have been provided under the policy in return
for the premium payable if the age has been stated correctly
o If nature of the policy is such as to render this arrangement inequitable, provision is
made for the registrar to direct the insurer to apply such different method equitable in
relation to the misstatement

Conclusion

It does not seem just that English law on insurance warranties was adopted in SA
o Terminology caused a considerable amount of confusion
o Legislature has removed this from affirmative warranties but promissory warranties
remain unchanged
o Controversy in relation to materiality
o Other aspects are unsatisfactory like the rule of cancellation having a retrospective
effect

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 o Absence of statutory confirmation of the common law requirement of a causal
connection between the breach and the eventual loss for which compensation is sought
Reform in this aspect of the law is far from complete

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SECTION 9: RISK
Every individual is constantly exposed to conditions, events and conduct which may cause an
undesirable change in his particular situation, whether it be financial or otherwise
o Regards this situation with uncertainty as to whether it will change and if so, when and
to what extent
o Before their occurrence, these circumstances are potential source of undesirable
change, that is, they imply the possibility of undesirable change
o This possibility is known as the risk
Being a possibility, a risk is always related to uncertainty which gives rise to the need for creating
a degree of certainty
Loss caused by inherent vice or wear and tear relates to the natural behaviour of the object
o This relates to certainty and not the risk
o Should there be uncertainty about the moment or extent of the occurrence of the
inherent vice, a risk may exist
o Same reasoning applies where an object which is believed to be at risk, has already
perished upon the conclusion of the insurance contract relating to it

Possibility of Harm

Existence of a risk and its transfer who the person who is exposed to it constitute the basis of
every contract if transfer of risk is not an independent undertaking but an ancillary obligation
o Such an agreement cannot be said to be an insurance agreement
Uncertainty underlying the risk foes not pertain to any change to the person who is exposed to
the risk
o Pertains more to patrimonial or non-patrimonial loss the insured may suffer as a result
of the peril
o Risk can therefore be the possibility of harm
Facts which may cause harm as known as perils
o Its consequences are the risk
o Risk can usually be expressed as a probability, risk in principle remains a mere possibility

Objective and Subjective Possibility of Harm

Risk of a possibility of harm displays objective and subjective aspects

o Objective as the impending harm must at least be objectively possible
o Requires the subjective conclusion by a particular person as to whether harm will indeed
occur
o There is objective certainty about the actual occurrence; the time of occurrence; and the
extent of the harm, there is no possibility but certainty of harm thus there is no risk
If harm in one of these dimensions is uncertain, there is a risk
Problematic whether a risk exists if it is objectively certain that harm will occur but the person is
subjectively uncertain
o Support for the subjective approach

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 If the person believes that the occurrence of harm is uncertain, there is a risk
In the absence of a special agreement, there is no consequence whether the possibility of harm
should be construed objectively or subjectively
o Usually based on tacit common supposition by parties that the risk described exists and
that the possibility of harm has not yet materialised
o If upon cancellation of the contract, the risk has already materialised, the supposition
has filed and there is no risk and no contractual liability (objective construction)
This is the position even if the parties that the risk has not materialised
o According to a subjective construction of uncertainty and risk, there is a risk as long as
the parties are unaware of the fact that the possibility of harm has already materialised
No contractual liability as the supposition has failed
If the agreement contains a term that cover is retroactive but harm has already occurred
o This term is ineffectual as there is no risk at all (objective construction)
o Subjectively, there is a risk
o Such a term excludes any supposition that the harm has not occurred
o Thus there is a contract with retroactive effect subject to the provisio that the parties
are unaware of the materialisation of the risk
This is more generally applied to the insured
If insurer knew of existence, can be estopped or held liable for
misrepresentation

Fortuitousness and Risk: The Risk-Bearers Control over the Risk

Fortuitousness in the sense of uncertainty is part of the concept of risk

o Occurrence must be entirely outside the control of the parties is generally not an
element of the risk
Argument that one cannot be uncertain about that which lies within the sphere of ones will is
subject to the counterargument that no one can control his own will absolutely
o Can insure against harmful results of his own acts which are voluntary occurrences
within his control
o Occurrences Need not be entirely outside the control of the insurer
o Nothing prevents insurer from attempting to avoid or defer the materialisation
Question whether it should be outside the control of the insurer has been raised in connection
with the distinction between contracts of insurance and other contracts
o Need is apparent when questions about the possibility of control by regulatory
authorities and the applicability of rules relating to insurance contracts
Not every agreement to cover risk is an insurance contract
o Basis for such a distinction may vary accordingly to the construction placed on insurance
and the system of official control which prevails in a system of law
Guidance: if the elements of insurance are not sufficient to help determine whether an
undertaking amounts to insurance, the additional test is whether the undertaking to cover risk is
an independent undertaking
o If it is separate and divisible, there are two contracts one of which is an insurance
contract

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 o Distinction must be sought in the substantial part of the contract
o An agreement to bear a risk will be an insurance contract if it is an independent
performance representing the substantial part of the contract
o A continued practice may justify official supervision and regulation if only because it
effect risk-bearing in exchange for a counter-performance
The law may develop to the extent that an independent and substantial acceptance of risk is
nevertheless not treated as an insurance contract if the risk is within the control of the party
who accepts it
o Due to public policy considerations

Description

Each party must come to a decision about the full extent of the possible harm and its probability
that the harm will materialise
o Insured: decision reached to decide whether to obtain cover and the extent of such
cover to avoid uneconomical over-insurance or detrimental under-insurance
o Insurer: decision whether to conclude contract and what premium to charge for
profitability and competitiveness
Risk transferred must be identified and described in the contract
o Eventual performance and extent is directly related to and dependent on this
description of risk
Risk is subject to interpretation of the terms
o Cannot be determined in advance with reference to the type, name or label of the
insurance contract

The Event Insured Against

Insurers duty to perform is subject to the materialisation of the risk

o Description usually made with reference to the object of the risk; the peril which may
cause the eventual harm; the circumstances affecting the risk, qualifications as to time
and place; and qualifications as to the extent of liability
Materialisation is referred to as the event insured against
o Expression which indicates the entire occurrence which will render an insurer liable

The Object of Risk

It is common practice to describe the risk transferred with reference to a specific object which is
subject to a peril or which is instrumental in causing the loss
o Since risk is the possibility, a particular one need not be described with reference to a
risk object

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Peril

Contract is based on a considered prognosis about the materialisation of the risk

o Made best and most reliably if the peril or hazard involved is taken into account
o Perils are facts which already contain the possibility of harm that is the risk
o Can be called a source of potential loss
o It is not part of the risk itself, it is causally connected with harm and therefore with the
risk
o The risk is described by identifying a particular peril which may cause harm

Circumstances Affecting the Risk

The circumstances are mostly indicative of the peril in general or as causal, favourable or
unfavourable
o Should be called peril circumstances
o Due to the close relationship between perils and risk, they are known as risk
circumstances
o In identifying them, the parties are able to establish the exact extent of the cover they
wish to provide
The risk circumstaces are relevant to a contract are contained in the terms describing and
limiting the risk
o Terms deal with matters that are problematic in practice for technical reasons
Subjective risk circumstances are those which relate to personality and character ot the insured
or those in close relation to the objects of risk
o The other risk circumstances are objective
o Both are primarily important in the technical sense but they have legal significance
insofar as they are taken into account to determine the framework within which the
insurer calculates and manages the risk

Qualifications of the Risk and Risk Circumstances regarding Time and Place

Usually redefined further by qualifications relating to time and place

o The time limits relates to the duration of the contract
o Contract may contain further limitations as to time or place f occurrence of the peril

Qualifications as to the Extent of Insurers Performance

Risk undertaken can be described by limiting the extent to which the insurer will be liable to
perform
o Occurs with reference to matters such as the amount payable, the degree of
reinstatement, the nature of the loss, and the excess which the insured has to bear
himself

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Limitations and Exceptions

Usual method of determining the confines of the risk is to limit, qualify or define the risk OR to
create certain exceptions from the risk as described
o Whether a description is a limitation or exception depends on the intention of the
parties
Form of policy is an important guideline in determining intention
o A single clause can upon interpretation be capable of being divided into a qualification
phrase and an exception phrase
o Distinction is not always so simple
o Use of words limitation, qualification and exception is not necessarily conclusive
o Distinction is not merely one of expression but one of substance since it affects the
burden of proof

CAUSATION

Legal way to limit risk of insurance

o the insurers duty to perform is made conditional upon a particular peril causing a
particular fact (such as a loss or an occurrence)
o claim requires proof of a causal link between the peril and the loss or occurrence as
described in the contract
o Only liable for damaged caused by an included risk provided that the damage does not
fall into an expressly excluded category
o E.g. insured for personal injury from accidents
Excludes any pre-existing medical condition causing personal injury
Test depends on intention of parties therefore a matter of interpretation of contract (since
public policy does not enter the enquiry)
o If no other intention is mentioned, it must be assumed that the reference to causation
was intended prima facie to bear the meaning which is attached to the concept of
causation
o Ordinary concept of causation is applicable here
Determination of causation raises two questions
o Whether such a link exists in fact, and if so
o Whether and to what extent a person should be held liable for the factual consequences
A claim can therefore only arise if a factual causal nexus exists between peril and loss described
in the contract
o If a link is lacking and the peril is an included one, the event insured against has not
occurred then there is no claim
o If a link is lacking and the peril is an excluded one, the exception does not apply
o Test for factual causation is a process of elimination known as the test of a causa sine
qua non (but for test)
Once factual causation is established, the extent of liability must be determined

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 o Question is whether there is a sufficiently close relationship between the two events to
constitute peril the legal consequence of the loss
Provisions of the contract, the type of contract and nature of the risk may assist
in determining whether a factual cause should be regarded as the cause in law

Proximate Cause Test

Question is whether it was the result of a cause as defined

o Insurer will be liable if the fact for which a claim is brought is the result of a proximate
cause included in the perils insured against or that its liability will be excluded if the
proximate cause was an excluded peril
o This is a factual determination
Application of the rule is expressly incorporated in the insurance contract by reference to the
rule or appropriate words
o In the absence of the above, the justification for such application being that it reflects
the presumed intention of the parties to an insurance contract
Cause is proximate if it can be described by terms such as dominant, direct, actual, effective,
determining operative, predominant or efficient
o If causal connection is indirect, that cause is not proximate and there is no legal
connection
o Need not be the sole cause
o Must be proximate in efficiency but not the latest in time
Thus in order to found a claim, a cause and its consequences must be sufficiently or reasonably
directly linked
o Flexible test approached using common sense

Leyland Shipping v Norwich Union (1918)

Facts
o Warships were covered against perils of the sea but damage resulting from war actions
(specifically excluded)
o Ls ship torpedoed and taken to harbour for repairs
o There was a big storm and the ship was relocated to a different harbour for repairs
o Whilst relocating, storm sinks ship
o Owner claims from insurance company
Question: what was the proximate cause?
Court Held
o The proximate cause was the storm
o Courts state that the real cause was the torpedo (war actions) and therefore the cover
was excluded

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Incorporated General Insurances v Shooter t/a Shooters Fisheries (1987)

Facts
o Ship was insured by IGI
o Lloyds-Marine policy insured against perils of the sea & arrest and detention by
captain or kings
o M was fishing unlawfully within a few miles of Moambiquan coast (international law
prohibited this)
o Stopped by Moambiquan authority & trawler and fish were confiscated
o Captain and crew arrested on ship
o Moambiquan tribunal found captain and crew guilty and fined them R170 000
o Neither captain nor owner had R170 000; contacted IGI to pay it to release ship but
refused
o Ship sold at defray costs
o S put in insurance claim for loss of ship
Court Held
o Onus: if the insurer alleges that a risk falls outside of its included risks, they bare the
onus of proving this BUT the insured must first establish a prima facie case that brings its
loss within cover of the policy
o Difficulty in causation: when two events contribute to loss & one of them is excluded
event
o Causation: what was the cause for the loss of the ship?
Failure to pay the fine
S argued that the detention by the State was covered
Court rejected this argument: state detainment was not detention therefor loss
was not caused by detention by the king but by ordinary judicial process
Regardless, the proximate cause was failure to pay the fine therefore was not
covered in policy
o Public policy issue: should you be covered by insurer when engaging in unlawful
activities?
o Partial loss: should IGI pay loss in propoertion?

Concorde v Oelofsen (1992)

Facts
o Personal accident policy
o Insured was insured versus bodily injury
o Defined in policy as injury of whatever kind to the body cover if the insured bodily
injury which, independent of any other cause, results in the death/disablement of the
insured
o Defined body injury: injury caused by accidental means which result in the insureds
death/disablement
o Therefore long-term life insurance working as indemnity
o Mr O diagnosed with serious heart disease
Lived normal life on meds

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 Had a car accident
Not injured in it but shocked
3 hours later, dies from heart attack
o Insurer repudiates claim on the basis that the cause of death was not insured against risk
(a pre-existing medical condition)
Court Held
o Always look to contractual context therefore do not use delictual principles
o Give effect to the parties intentions and to their perceptions of causality
o Must interpret: ...independent of any other cause...
o Further, parties do not intend to use the word cause to exclude every conceivable
cause, because that would lead to absurdity therefore cannot interpret literally
o Court thereafter excluded ...independent of any other cause... wholly therefore what
was the cause of his death? On medical evidence, cause was the accident and not the
heart attack

Napier v Collet (1995)

Facts
o Lloyds Blood-stock policy covered racing valuable stallions
Value of horse in death and expressly excluded cover if the stallion
o Purposefully slaughtered (euthanasia) unless Lloyds representative authorised its killings
o One stallion raced and was injured
Treated but continued to suffer
Vet recommended putting it down but Lloyds vet disagreed
Determine extent of injury
Anesthetised & horse dies from it
Court Held
o Anaesthetic was the cause of death
o this question can best be examined by working backwards from effect to cause
o Effective cause of death was the administration of anaesthetic which was not an
included risk
o Initially, tried to get Lloyds consent to euthanize, then to initial accident of horse

Exclusion and Adaption of Proximate Cause Test

Parties may exclude the operation of the rule

o Achieved by extending the range of consequences for which the insurer will be liable or
by limiting it
o Can also exclude by limiting the range of consequences for which the insurers liability
will be excluded or by extending it
o Exclusion of rule is usually accompanied by words like directly or indirectly
o Exclusion of this rule does not also exclude the operation of causation and a causal link
between peril and occurrence still has to be shown

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 Rule can also be adapted to require a peril to also be the sole clause, or that it should have
caused the loss independently of any other cause
o Such a result will be achieved only by a clear and unambiguous provision in the
insurance contract

Multiple and Intervening Causes

Little difficulty arises where there is only one cause but the situation is more problematic where
here are two or more possible causes for a single consequences
o Causes may operate successively or concurrently
An independent intervening cause which occurs subsequent to an original cause neutralises the
latter as a factual cause or diminishes its effect
o If it is independent depends on the facts
Position where an excluded peril occurs and it in turn causes or is followed by a peril which is
included in the risk
o If occurrence does not sever the causal link, the exclusion should prevail and excuse the
insurer from liability
o Insurer must prove that the loss was caused by the excluded peril inasmuch as it
preceded and caused the subsequent peril
o Where an included peril occurs and it is in turn subsequently followed by a peril which is
excluded from the risk
o If the intervening occurrence does sever the causal link, such as where it may be
considered a new and quite independent occurrence which as only fortuitously linked to
the earlier occurrence OR
o Where is it a fresh cause which is not the probable consequence resulting in the ordinary
course of events from the peril but an independent cause
Possible to have more than one proximate cause

Conduct of the Insured

A factor considered by the insurer when assessing the risk and the premium
o Degree to which the insureds conduct causes or may cause the risk to materialise
Where conduct causes loss for which he wishes to claim compensation or satisfaction under the
contract, the first question is whether the conduct falls within the description of the risk
o Question of interpretation
o All terms of the contract must be taken into consideration
o Parties may have included a special arrangement concerning the insureds conduct
whether by way of limitation or an exception
Tacitly or expressly
Once it is established that it is within the description of risk, the next step is to determine
whether the lawfulness of the contract is affected by the inclusion of the conduct in question
o Certain types of conduct could render the contract as whole or else part of its unlawful
on account of its illegal purpose

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 o Statutory enactments and common law must be taken into account
o Common law frowns on contracts that are contrary to public policy and good morals
o Third party may be barred from claiming under a valid contract because of his role in
causing the risk to materialise
Risk as a possibility and therefore an uncertainty, includes human conduct as a peril
o Fact that conduct is that of the insured does not alter the position
o An agreement to transfer a risk includes the conduct of the third party and also of the
insured which causes materialisation of the risk
o Can be personal conduct, agents or employees, or third parties acting on his instruction
Thus differed depending on whether the conduct was faultless, negligent, intentional, wrongful
or unlawful

Conduct Unaccompanied by Fault

Insurers liability remains unaffected as such conduct is included in the risk

o Such acts are included in the risk because they are involuntary or because they are not
acts of the insured
o There is no express or tacit agreement nor any reason of policy to exclude such acts
from the risk

Negligent Conduct

This is also included in the risk

o Includes all acts of negligence, even gross negligence and reckless conduct
o If recklessness is the equivalent of dolus eventualis as a form of intent, the conduct is
governed by the rules below
If parties want to exempt liability for negligent conduct, it must be done in clear terms
o Insurer will have to prove that the insured acted recklessly
o Such conduct in included in the risk where it amounts to wrongful or unlawful conduct
and constitutes a delict or a crime
o The principle of public policy underlying the adage has been said to be a fluid concept
which may vary according to the circumstances
o Rules relating the benefits derived from wrongful acts has been held to mean it may be
against public policy to allow a claim
Claims may also be allowed where the loss is caused by the insureds wrongful or unlawful
negligent act affects third parties and the policy considerations outweigh the considerations
against permitting the insured too draw those benefits himself
Insurance cover against negligent conduct may be against public policy and therefore not
included in the risk

Intention Conduct

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 Insurance contracts exclude from the risk the consequences of the insureds own deliberate
conduct
o Includes reckless conduct accompanied by indirect intent or dolus eventualis
o It has not become a naturalia of a contract with an implied term to this effect
o Exceptions to this rule seem to include conduct intended to avert a greater danger or to
save human life
The parties may agree otherwise
o If inclusion will render the contract contrary to public policy, the term may be
unenforceable
Should conduct amount to a delict or a crime, the nemo ex suo maxim applies as public policy
frowns upon this
o If it does not amount to a crime or a delict, the purpose may be rendered contrary to
public policy
o Any inclusion in the risk of unreasonable conduct entitles the insurer to avoid liability
In terms of wrongful and unlawful negligent conduct, conflicting considerations of public policy
may find application and result in insurer being held liable
o Especially the case where third parties and beneficiaries are involved
This has not been settled in the law
o Contracts in the future which are against public policy will be regarded as unenforceable
o Important in life insurance contracts containing a suicide clause

Suicide

This is a deliberate act by the insured and is not covered

o If contract does contain such a provision, its enforceability is questionable
o Suicide is not a crime so principles applicable to intentional conduct should apply
Although it is sane, it should be regarded as against public policy
o Practice to include such a clause after a lapse of time may become acceptable
o Supported by the notion that suicide is an indication of an abnormal, psychological
condition and should as such be included in the risk
Construction is void and unenforceable to the extent of it being contrary to public policy
o In the case of sane suicide, the contract is valid but the full sum is not recoverable
Scope and meaning of the clause is a matter of interpretation
o Thus held not to exclude liability

Paterson vs Aegis (1989)

Facts
o P enjoyed walking on beach regularly
o One day, on beach with gold jewellery
o Went into alcove before putting it inside, looked around to make nobody was there and
his dog was not barking
o Hid jewels under rock

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 o Upon returning, they were all gone
o Claimed from insurance company
o Repudiated on ground of the clause relating to reasonable care
insured must take all reasonable precautions for the maintenance & safety of
property insured under the policy
Usually strengthens insurers position in terms of stopping at negligence does
not further to recklessness
Court Held
o Rejected that there was intention of parties at time of conclusion to enable insurer to
avoid liability if insured is negligent
o Insurer needs to word it more explicitly & expressly to exclude insureds negligent
behaviour
o Further, policy is all-risk therefore insured against all loss
o Insurer should have expressly excluded accidental or negligence
o The reasonable care clause does not suffice to exclude an all-risk policy
Therefore a provision in an insurance contract that the insured should take all reasonable
precautions for the maintenance and safety of the property insured or to avoid loss held is not to
exclude the insurers liability for loss or damage done by the negligence of the insured

Nathan NO v Ocean Accident (1959)

Facts
o N was wealthy business man with speeding endorsements on his drivers license
o He took out insurance, he disclosed this to the insurer
o Negotiated premium: 50% higher for them to insure him therefore O was aware of
history
o N was speeding (unsure of inebriation); AA patrol man on roadside
o AA (upon noticing reckless driving) warns N by raising his hand
o N (thinking it was the police) drove faster
o AA contacted police (attempted pulling him over)
o N killed in accident
o Ns executor claims from policy from O
o O repudiates on basis that his conduct was intentional
Court Held
Behaviour amounts to dolus eventualis but not inebriated
o Factually, it was criminal conduct but no dolus to die and the incident was negligent and
accidental
o Further, behaviour was reckless and even unlawful but nonetheless found he was
covered by the policy
o O did intend to indemnify N for damaged caused in a manner that was manifestly
unlawful or intended to cause harm
o Therefore, if the insureds conduct was negligent, it was included in the risk
o Applies to all negligent acts, even those that are grossly negligent

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 True for reckless conduct insofar as the recklessness involved is nothing other
than gross negligence
o Therefore, recklessness was coverable
o Insurer was aware of circumstances therefore court gave a lot of weight to this higher
premium

Van Zyl NO v Kiln Non-marine Syndicate (2003)

Facts
o V went to work party 100kms from his home
o Left the party at midnight, left party
o Body & car found at scene; no witnesses
o Courts accepted that V probably fell asleep at the wheel
o Blood tests: high blood-alcohol levels
o Conflicting evidence, V drank at the party but had a high tolerance
o Life policy had cover for accidental bodily injury resulting in death/disablement
o Accident was violent sudden event
o Exception: insurer is not liable for wilful exposure to danger
Court Held
o Drinking whilst aware of a 100km drive at night is wilful exposure to danger
o Further, driving whilst intoxicated is unlawful therefore policy is not liable for covering
unlawful conduct
o Subjective enquiry: look at insured state of mind when in the car (that he appreciated
the unreasonableness of driving intoxicated and the perils resulting does not deter him
therefore cannot claim)
Dissenting judgment
o Can claim using the Nathan NO v Ocean Accident judgment and that is not suicide

Santam v CC Designing
Facts
o Reasonable care clause
o Mr K (member of CC) has car to sell on CCs behalf
o Advertises it; S calls K saying they wants to buy it
o K gives S the car on the assumption that S will pay him cash in his account
o S calls K to tell him the money is in but banks are closed
o S faxed deposit slip showing R160K deposited (agreed price = R150K) and K believes it
was a generosity tip (bona fide belief)
o K was suspicious of it though and but bank confirms payment
o Deposited money was from a stolen cheque and S disappears
o Cheque is stopped
o K claims for theft of car from insurance company
o Insurer repudiates with reference to the clause of reasonable care required
Court Held
o K was covered

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 o Conduct (whilst careless) is not excluded under the policy
o Reasonable care clause is interpreted in light of the policy as a whole
o Cover is widely stated and induced negligence
o Reiterated that dolus of motor vehicle policy to give cover even for insureds own culpa
Therefore to exclude negligence needs to be expressly excluded

Nicolaisen NO v Permanente (1976)

Facts
o Insured committed suicide
Court Held
o Distinguish suicide whilst sane and whilst insane therefore looks at CAPACITY
o Sane is not covered due to the intentional nature
o Insane is covered due to no intention because of no capacity
o Validity of suicide clauses in life policies? Most policies include them
Generally, claim paid if premium paid for more than 2 years
Policy itself may be against public policy and therefore unlawful
No authority for this proposition

BURDEN OF PROOF

Insured who brings a claim must prove that the risk insured against has materialised
o If the risk is limited in the contract, must prove claim falls within limitations on a balance
of probabilities
o Does not have to prove that the event on which his claim is based was not excepted
from the risk, this rests on the insurer on a balance of probabilities
o Clause may involve a limitation and an exception
o Insured must prove that claim falls with the qualification and if he succeeds in doing this,
the insurer must prove he is exempt from liability
Parties may be agreement impose on the insured a burden that would otherwise be borne by
the insurer
o This is not against public policy
o It is not sufficient for insurer to merely allege but bears an evidentiary burden
Limitation is usually worded in such a way that the insured will have to prove a negative to bring
his claim
o This does not cause hardship if the matter to be proved is within the peculiar knowledge
of the insured unless not in his personal knowledge

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SECTION 10: PREMIUM
Function of a Premium

A contract of insurance is not always reciprocal but payment of a premium is essential

o Interpreted to mean the insureds proportionate share of the total cost of spreading risk
over the community of exposed persons

Requirements for Premium

It is primarily in the nature of a monetary performance

o Amount must be certain or ascertainable for certainty

Common Terms Relating to Premium

There is no common law rule for prior payment, the parties frequently stipulate that no contract
comes into existence without it or liability will not attach until payment is made
o Contract will usually end ipso facto if the premium is not paid by a certain time
Provision for payment may appear in the proposal form; in a letter where the insurer purports to
accept the proposal; or the policy itself
o In the latter two, it may constitute as a counter-offer that must be accepted before it is
binding
Purpose of prior payment is to ensure the insurer does not go into risk before receipt of
payment
o Nature of a provision depends on the wording and interpretation
o Parties must have intended the provision to be a formality
o May be subject to a suspensive condition (payment of the premium) or a resolutive
condition (on-going duty of insurer until payment ends)
o The above is the intention to implement more effective techniques to ensure payment
before insurer is placed at risk

Consequences where Duty to Pay Premium is Created

Only if there is an express or tacit undertaking to pay a premium obligationary term

o As a consequence, there is a duty on the insured to pay the premium
o The insurer obtains a corresponding enforceable right to the payment of the premium
If a contract creates this obligation, failure to do so amounts to breach of contract
o In appropriate circumstances , the insurer will be able to resile from the contract
Election to cancel or uphold the contract
If he cancels, it will have to notify the insured and only then will the obligation
concerned be extinguished

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 An election must be exercised and the other contracting party must be notified of the election in
all cases of breach even if contract states it will become void upon breach

Consequences where Payment of Premium a Formality Imposed by Parties for Validity of the
Contract

A clause requiring prepayment may be intended as a formal requirement or for renewal

o No obligation before conclusion of the contract
o There is no question as to breach if the insured fails to pay
o Prospective insurer is not liable for any losses incurred prior to the payment
o The duty to disclose material facts will endure at least until payment of the premium
o Any party may withdraw from the negotiations at any time before payment is rendered

Consequences where Premium a Suspensive Condition for Liability of Insurer

This qualifies the duty of the insurer

o The effect is that the full consequences of an obligation are made subject to the
fulfilment of an uncertain event
o Difference between a condition and a obligationary terms lies in the intention of the
parties
o With a condition, no positive duty is imposed on a party to fulfil the uncertain event
o If the uncertain event is payment of the premium, there can only be a condition if the
liability of the insurer is dependent on the payment of the premium but the insured is
not obliged to pay
Where prior payment is a condition suspending liability, the contract is concluded upon
acceptance of the offer and the duty to disclose then ceases
o Insured does not enjoy any cover prior to payment
o Once payment is made, contract is fully operative and some parties make operation
retrospective
o Insurer cannot refuse premium without making itself liable in terms of the doctrine of
fictional fulfilment of a condition
o Insurer cannot compel payment before conclusion of contract and failure to pay is not a
breach of contract
o Insurers duty will simply fall away if premium has not been paid within prescribed
period; no need to exercise election

Consequences where Non-Payment of Premium a Resolutive Condition Attached to Duty

Condition does not affect the enforceability of an obligation but it dissolves the obligation upon
the happening of an uncertain event
o In continuing contracts, it is useful to make the continued existence of the insurers duty
dependent on the payment of a premium

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 o Failure to pay premium by a specified date means that the obligation will be terminated
automatically
o Can only be a prior condition if the parties did not intend to create a duty for the insured
to pay the premium

Legislative Provisions Pertaining to Premiums

When a premium is paid in bank notes and coins, the payer must be given a receipt
o A long-term insurer may enter into a policy if the statutory actuary is satisfied that the
premiums, benefits, and other values are actuarially sound (LTIA)
o Insurer may not distinguish between premiums, benefits or other values of different
long-term policies unless the actuary is satisfied that the distinction is justified
Payment of a premium to a person on behalf of a long-term insurer will be deemed as payment
to the insured
o With short-term insurance, intermediaries may deal with premiums only if authorised by
the insurer
o Way in which intermediaries must deal with premiums is prescribed through regulations
in the Act
The liability of an insurer under a long-term policy will be suspended until the first or only
premium has been paid or until satisfactory arrangements for payment have been made

Time of Payment: Relevance of Time of Payment

If a duty to pay has been created, the premium must be paid in good time or the insured will be
guilty of a breach of contract in the form of mora debitoris
o Where payment is a formality for conclusion or renewal, there may be a time limit
within which the premium must be paid
o Where payment is a suspensive condition qualifying the duty to compensate, the
question arises how much time the insured has to make payment of the premium if he
wishes the contract to be fully operative
o Where payment is a resolutive condition attached to insurers duty to perform, the
question is how much time the insured has for payment of the premium to avoid the
termination of the agreement

Periods of Insurance

In a contract for a single period of insurance, there is only one premium

o Only one date for payment is established
o Parties may divide his single period into shorter periods to enable the insured to pay the
premium by way of instalments for convenience sake
o The due date for each instalment must be arranged in the contract
Indemnity insurance is often for a single defined insurance period

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 Where the contract is to endure indefinite period, the parties will have to provide for
consecutive periods of insurance and agree on the premium for each period
o Payment dates will need to be defined in the contract
o Usually capital insurance is for an indefinite period subject to continued payment
although insurance cover may also be arranged for a single period

PAYMENT OF PREMIUM

Payment in Legal Tender

Must be paid in a legal tender unless parties agree otherwise

o Frequently agree that the debtor may pay the premium by means of a cheque, stop
order or debit order

Payment by Cheque

Where such payment is authorised, payment is condition on the cheque being met except where
the cheque has been accepted as unconditional payment
o If sent through the post in time to reach the insurer in the ordinary course of affairs
before the due date, the risk of delay and theft is with the insurer if authorisation has
been given for payment through the post

Payment by Means of Stop Order

Payment of recurrent premiums is frequently arranged in this manner

o This method is employed at the request of the insurer who may bear the costs involved
o The banks customer is the insured; third party is the insurer
The relationship between the bank and the customer is governed by the rules of mandate
o Bank is the insureds agent and undertakes to honour the stop order provided that the
customer has sufficient funds
o If bank fails whilst there are sufficient funds, it commits a breach of contract towards its
customer
o Bank will need to compensate its customer for his positive interesse
o If transfer is not made, the insured must suffer the consequences unless payment by the
stop order was at the request of the insurer and the insurer could be said to have agreed
to bear the risk
A stop order does not create a legal relationship between the bank and the insurer
o If there is no payment because of the banks negligence or if the insured cancels the
contract, the insurer has no remedy against the bank
Payment only takes place when the bank as the insureds agent actually pays the insurer

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Payment by Means of a Debit Order

This is useful where the amount of premiums fluctuate

o Described as in the nature of an electronic cheque
o In its common form, it is a document signed by the customer of a bank ordering the
bank to pay periodic amounts from the customers account in favour of a third party
o It embodies a tripartite relationship
o The debit order is handed over to the insurer empowering it to take control of the
process of payment
Slips are exchanged and eventual payment is effected by book entries

By Whom Premium Should be Paid

No distinction drawn in case law between a situation where the contract creates a duty to pay
and where there is no duty to pay
o If a duty is created, the insured is responsible for the payment of the premium
To discharge this duty, eventual payment must be made by him, a person with
authority to act for him or a third party who pays the insureds debts
o If a duty is not created, payment can be made by any person wishing to achieve the
desired result (renewal or preventing the lapse of the contract)
Clear agreement between person who pays and the insurer
Persons other than the insured may have an interest in paying the premium
o Nothing prevents these people from paying as long as there is an agreement
Can even be an express agreement
o Whether such a party has a right to recourse depends on the general principles

To Whom Premium Should be Paid

Should be paid to the insurer or a person authorised by the insurer to receive the premium
o LTIA: payment to such a person will be deemed to be payment to the insurer
o STIA: insurer may authorise an independent intermediary in writing to receive, hold or in
any manner deal with payments to it
Must be paid over to the insurer within a prescribed period

Place of Payment

May be effected by debtor at the place which the parties have expressly or tacitly fixed for this
purpose
o Or any other convenient place like the insurers place of business
o Creditor can only claim at the proper place of performance
If a date for payment has been fixed, there is a duty on the debtor to seek out his creditor and to
effect payment

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 o If no date fixed, the insurer must demand payment and request payment at the proper
place for performance
o The proper place for performance may be altered by subsequent agreement
If authorised payment through post, delivery to the post of a correctly addressed letter
constitutes payment at the proper place

RETURN OF PREMIUM

In instances of fraud or in circumstances under which a premium paid to an insurer may be

reclaimed have not yet received the attention of the courts
o In considering the principles, the possibility that the contract may be divisible must be
kept in mind
The question of whether a premium must be refunded cannot be simply answered by referring
to a failure of consideration or to the doctrine of frustration, since these general concepts of
English law have not been adopted
o Measure of caution must be observed when guidance is sought from English law
o The refund question may arise in a variety of circumstances, some of which merit special
consideration

Void Contract

If contract is void for lack of consensus or any other reason, the premium must be restored
o This is subject to special rules if the contract is void because of illegality
o The appropriate remedy for recovery is the condictio indebiti

Absence of Insurable Interest

English Law: an insured who never have insurable interest during the period of insurance is
entitled to repayment
o This is an application of the general principle that if the insurer has never been at risk
the premium must be returned
o May be applicable in SA in some circumstances if the insurance has been concluded to
protect a particular interest which were thought to be in existence
Contract subject to a supposition and non-existence means contract fails
Any premium rendered is undue payment
Same applies to contracts subject to a suspensive condition
In the absence of an appropriate supposition or condition, any possibility of reconciling the
English rule with SA principles seems to be remote
o Requirements for a valid contract has been met
o Performance remains possible despite the absence of an insurable interest
o It would not be equitable to make premiums returnable

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 Insurer at least runs the risk that the insured will obtain insurable interest which
can be the basis of a claim for compensation

Impossible Suspensive Condition

Liability often depends on the fulfilment of such a condition unless the insurance is intended to
be retrospective
o If the object of the risk has already been destroyed, such a condition cannot be fulfilled
o Ordinary rules of impossibility come into operation
o Conduct is of no force and effect and if the premium has already been paid, it must be
restored
The conditio indebiti is the appropriate remedy for the insured to recover the premium

Inoperative Contract

If the obligation to pay the premium does not come into operation, the premium is not payable
The conditio indebiti is the appropriate remedy for the insured to recover the premium

Where Breach of Warranty has Occurred

Where contract is cancelled on the ground of breach, the parties must be restored to their
positions quo ante
o Insured can recover the premium paid
In contract is cancelled in toto on account of continuing breach of the warranty, cancellation
does not occur retrospectively but only for the future
o According to English law, the insured is entitled to a pro rata return of the premium only
if the risk is divisible into period corresponding to the dates when the premium is
payable
o Since the contract comes to an end prior to its extended full term, a case may be made
out for adjustment of the premium on equitable grounds

Premature Termination

Contracts often do not last for the full period of cover

o The object of the risk may be destroyed by expected perils or the contract may be
cancelled
o If the risk is divisible into insurance periods, the insured is not liable for the payment of a
premium for the period of risk commencing after the termination of the contract
o For reasons of equity, an adjustment of the premium seems to be called for

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Over-Insurance

An insured who is covered for an amount in excess of the sum that he can rightfully recover in
the event of total destruction of the object of risk, is entitled to a pro rata return of the premium
o Unless there has been a mistake in the calculation of premiums, this proposition seems
doubtful in SA

Contractual Provisions

Provision for cancellation at any time and repay a rateable proportion of the premium for the
unexpired term is fully binding
Other contracts provide that all sums that have been paid by the insured, will be forfeited in the
case of breach of a warranty or misrepresentation
o Such provision could have penalties in terms of the Conventional Penalties Act

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SECTION 11: INSURABLE INTERMEDIARIES
Legal relationships between intermediaries, their principals and third parties are governed by
the law of agency and the law of contract
o Agency denotes an agreement in terms of which one party undertakes to perform a task
on behalf of another
o The person giving instructions is the principal and the person carrying out the
instructions is the agent
o Nothing more than a contract of mandate
Agency also used to describe situation where an agent concludes a juristic act on behalf of
another principal
o Juristic act is whereby a legal relationships are created, altered or extinguished by an
expression of will by one or more persons
o Agency amounts to representation
Agency used to embrace contract between the principal and agent with the representation
o Authorisation is found in the contract of mandate but the final analysis is the unilateral
a juristic act performed by the agent
o Thus the two contracts are distinct legal concepts

Incidence of Agency in Insurance

Insurance business is transacted through agents

o Insurer is not a natural person but a legal entity which can act through persons
representing it
o Persons seeking insurance resort to agency for the sake of convenience
o Prospective insured usually has a broker to negotiate terms
o Many commercial contracts contain provisions requiring one party to it to take out
insurance to protect the interests of the other party
Insurance business includes contracts of insurance and any conceivable juristic act to be
performed
Agent refers to intermediary who has authority to conclude to juristic act on behalf of their
principal or on intermediaries behalf
o Intermediaries include employees, assessors, doctors, etc.
o Is the insurer liable for delicts committed by such a person and is knowledge possessed
by such a person imputed to the insurer?

Types of Insurance Intermediaries

Various types of persons who fulfil a function in connection with the canvassing or conclusion of
insurance business or the execution of insurance contracts
o May be designated as an insurance broker, agent or Lloyds intermediary
o Acts refer to them as intermediaries
o Can be independent or representative intermediaries

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 o Representatives are employed by the insurer and therefore acts on behalf of an insurer
(synonymous with insurance agent)
An independent intermediary is a person other than the representative who renders services as
an intermediary
o Includes a Lloyds correspondent in the STIA
o This also includes an insurance broker
Classification is to regulate the remuneration, not codification reasons

Intermediaries Acting for Insurer and Intermediaries Acting for Insured

To evaluate the consequences of a mistake or failure to follow instructions, it must be

established if the intermediary is employed by the insured or the insurer
o Where employed or instructed by one party, he also instructed by the other party to
perform a different (non) juristic act
o It should not be possible for a person to act simultaneously for both parties in the same
juristic act
Meeting of the minds is required in contracts
Duty of care and good faith to both parties is impossible

MISREPRESENTATION BY INTERMEDARIES

Contract is frequently concluded as a result of misrepresentation by the intermediary

o He is liable for damages caused by him
o Whether the principal is guilty depends on whether the normal requirements for
delictual liability have been satisfied and whether the principal is answerable for
misrepresentation by his agent
o If principal is guilty, normal remedies for misrepresentation will be available

Requirements

For a contract to be avoided, the normal requirements for a delict must be met
o If liability is vicarious, the intermediaries conduct is examined
o If liability is of the principal, it can be his personal wrongdoing or that of his intermediary
for whose delicts he agreed to be responsible
Focus must be on the element of causation
o Must prove that the person who concluded the contract was misled by the
misrepresentation
o If the agent who concludes the contract has not been misled by the other party or his
agent, the element of causation is lacking even if the principal may have been misled
o This is not the case where a cause of action is defected by the doctrine of constructive
knowledge
It is difficult to establish circumstances under which is principal is liable

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 o Where an agent concludes a contract in a representative capacity, the agent rings into
being the rights and duties for his principal
o If agent makes use of an improper method to persuade the other party, the rights
obtained are tainted; other party has a defence of misrepresentation
o Thus his liability is effect by way of a defence, and not constructive knowledge or
authorisation for the representation
o If liable for damages, it must be based on another ground

Liability of Principal Based on Authorisation

Must be prove that the principal instructed the intermediary to make the misrepresentation
o May be tacit or express authority
o Principal is liable regardless if intermediary was a stranger, agent or messenger based
on the qui facit maxim
o Maxim is inappropriate if agent had no authority
If the basis for liability is a contractual undertaking, it is not a true instance of vicarious liability
o Content of the contract is that the principal undertakes for the absence of fraud

Vicarious Liability of Principal

Principal is fully liable where he is an employer and controls the intermediary as his employee
o Delict committed in the course of his employment
o All the usual remedies are available to the representee

Liability of Principal for Mandatary

Usually representation is not made by an employee but a mandatary of the insurer or insured
who has no instruction to make a representation
o The general rule is that the principle is not responsible for this persons negligence or
wrongdoing
Independent contractor or mandatory employed by him

INSURANCE BROKERS

Nature of Relationship

This person is an intermediary between the insured and the insurer

o He is independent in that he is not tied to a particular insurer
o He exercises a profession due to the nature of the services he renders
o Where he is retained by a proposer, he acts in the interests of his client

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 Relationship between broker and client is based on a contract of mandate, called a brokerage
contract
o Relationship between the broker and insurer is a commission contract
o Both contracts create rights and duties

Duty to Act with Reasonable Care and Skill

This is the most important duty arising from a brokerage contract

o This is implied by law, thus a naturalia of these contracts
o Duty broken down into the performance of a specific task
When judging if duty has been complied with, two issues arise
o What is the level of skill and knowledge required
o Is the standard required the level that can be attained by an ordinary broker, or is a
highly skilled and specialised broker needed
Level of skill to be measured is that of the members of the branch of the profession
o If an ordinary broker is needed, he is required to exercise the degree of care and skill
which is ordinarily exercised by reasonable competent members of the profession who
have the same rank and profess the same specialisation as he does
Court can employ different methods in assessing the standard required
o May accept evidence of another experienced member of the profession
o Code of conduct is not binding but helpful in defining context in which intermediary
operates

Duty to Obtain Insurance Coverage

Primary duty is to do this within a reasonable time and advise insured promptly of the terms
o Nature of duty depends on the nature of the business underwritten and the contract
o Duty is not absolute and the broker must make a reasonable attempt to obtain
coverage, but is not compelled
Broker has the authority to conclude the contract on the insureds behalf
o Authority extends to all incidental and necessary tasks of execution
o Failure to obtain cover or delay may render the broker liable to the insured
o Duty to investigate the insureds needs is an important consideration
Insurance obtained must actually cover the insureds needs
Can the insured ratify the contract upon conclusion if loss has already taken place
o Can be ratified if it takes place in good time

Duty not to Insure with an Insolvent Insurer

Both Acts provide that an insurer must at all times maintain its business in a financially sound
condition by having assets and providing for its liabilities
o Is broker liable for the insureds loss as a result of the insurers inability to pay claims

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 o Duty will be breached only if he broker fails to act with reasonable case and skill
o After concluding the contract, the broker must warn the insured if it seems unlikely that
insurer will be able to pay a claim

Duty to Assist Insured to Disclose Material Information

Included in this duty is not to make a misrepresentation to the insurer so that risk can be
assessed properly
o Failure will allow the insurer to avoid the contract
o Insured uses a broker in order to procure insurance
o Where a broker fails to communicate information or furnishes incorrect information, the
insured is bound by the acts or omissions of the broker
o Broker will be liable to the insured where incorrect information is submitted
Furthermore, broker may have the duty to disclose all material information and to assist him
with this
o Failure to warn the insured to comply with the duty of disclosure and failure to assist
may render the broker liable for the loss as a result of the insurers rejection of the claim

Duty to Deliver Policy or a Copy or Summary Thereof to the Insured

In terms of the LTIA, an insurer has a duty to provide a person with certain information in the
form of a written summary or in another form prescribed by the registrar
o In the STIA requires a copy of the document within 30 days
If the broker has received the required documents, it is his duty to deliver these to the insured
unless authorised to keep it for safekeeping
o Content of policy is important as it allows insured to verify correctness of
representations
o Failure to deliver will deny opportunity to ratify incorrect representations and the broker
could be held liable for any losses

Duty to Advise Insured as to Meaning of the Policy

No general duty to explain every clause or to interpret it

o If advice is given, he could be liable if such advice was incorrect
o If the policy contains unusual, limiting or exempting provisions, the broker has a duty to
bring the provision to his clients express notice

Duty to Advise Insured that Cover has Lapsed

When broker is aware that insurance is no longer in force, has expired, or insurer has cancelled
it, he must notify the insured immediately

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Duties on Renewal of Contract of Insurance

No general duty to renew the insurance contract but it is one of the services he may perform
o Some brokers act as risk managers who have a duty to make sure that the insured
remains covered and for renewing cover timeously
o Broker has same duties that he had when the contract was originally concluded
o Broker who fails in this duty is liable to the insured for any loss
o It is not a defence to plead that a renewal notice was not sent
o Broker also has a duty to renew where such a practice has developed over time
Also has a duty to disclose material information when the contract is renewed
o Inform insured of any changes made by insurer

Duty Not to Cancel the Contract of insurance Without Necessary Authority

Broker is not empowered to cancel the contract

o If he has authority, he can cancel it without running the risk of incurring liability for any
loss suffered
o Insured may be estopped from raising lack of authority if authority was given, but the
brokers person liability towards the insured is not necessarily excluded

Duty to Assist with the Claim

An insured may request a broker to assist him with a claim in terms of the contract of insurance
and a broker who undertakes to do so must exercise reasonable care
o In the absence of an agreement or trade usage, there is no general duty
o Has to fulfil various duties if he undertakes to do so
Duty to establish whether loss is covered; to ensure that the claim form is
completed and submitted in time; to receive notification from the insurer
regarding the claim; and to receive payment and transmit it to the insured
o Payment to the broker does not discharge the insurer from liability unless authorised to
receive payment
If not, can be reclaimed on grounds of unjustified enrichment

Duty to Account and to Render Accounts

Initially, broker will account by procuring the required insurance

o If he agrees to assist with the claim, must account once he has received payment under
the contract by paying it over to the insured
o Also account for all income and expenditure relating to insurance especially if broker is
the risk manager

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 o Broker has a wide discretion to see to the insurance business of the insured and must
furnish full accounts
If necessary, specific documents must be relayed

Duty to Act in Good Faith

Broker must perform his mandate in the interest of the insured

o He must be frank and honest with his client and cannot make a secret profit
o Liable for any loss due to breach of this duty
o Insured can set aside brokerage contract and will be entitled to any benefit the broker
received due to his breach

Duty to Perform Mandate in the Interests of the Insured

Broker may not place himself in a position in which his personal interests conflict with his duty to
the insured
o He may safeguard his position by making full disclosure of his interest in the contract
and by obtaining the insureds consent to conclude the contract
o Burden of proof is on the broker to show he has made a complete disclosure and insured
gave consent

Duty Not to Enter into Contracts of Competing Mandates

Broker who acts for an insured and insurer at the same time or in quick succession breaches the
duty of good faith

Duty Not to Make a Secret profit

Any profit made without the knowledge or consent of the insured

o Earning of commission must be mentioned in terms of a commission contract
o Insured is entitled to such commission unless earned with insureds knowledge and
consent
o Argued that a right to earn commission is founded on a trade usage and forms an
implied term of the brokerage contract

Duty to Comply with Policyholder Protection Rules

In terms of these rules, a broker has a duty to disclose the information contained in the
Statutory Notice
o Brokers name, physical address, postal address and telephone number

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 o Can be standardised disclosure and broker must prove that it has been made and must
confirm it in writing within a certain period
Must keep a record of disclosure and must provide it to the insured upon
request
o Disclose his legal status in relation to the insurer and not to the insured
o Disclose whether he holds professional indemnity insurance and details of claims
notification procedures
o The amount of considerations earned must also be disclosed
o Brokers who are active in the long-term market must disclose additional information
o Rules do not prevent a broker from making any other disclosures to the insured
o An insured cannot waive the rights or benefits provided for in the rules and the registrar
may require that the short term broker who fails to comply must take corrective steps
Broker will be guilty of an offence and liable to pay a penalty or a fine if duty is breached

Right to Retain Policy

At common law, a broker has a lien on the policy against the insured for any expenses incurred
on his behalf
o This has been eroded by the statutory duty that an insurer has to provide the insured
with a cope or summary of the policy

Right to be Remunerated

Broke may charge the insured a fee for brokering a contract

o If it is a short-term contract, the intermediary must disclose the amount of this fee
expressly and separately

Right to be Reimbursed and Indemnified

For any reasonable expenses incurred on behalf of the insured

Also indemnified for any loss he has suffered provided it did not occur as a result of his own
negligence

Breaching Brokerage Contract

Contract creates duties for the parties and the broker may be liable for the payment of damages
if its duties are breached
o The claim will be founded in contract but uncertain whether a concurrent claim in delict
is available
Brokers duties are primarily owed to the insured but may be liable if he breaches a duty owed
to a third party

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 Measure of dames depends on the nature of his claim
o Usually limited to the amount that would have been payable by the insurer under the
contract
Broker has various defences including void contract or insured was responsible for the loss

Commission Contract

Contract between the broker and the insurer

o Insurer agrees to pay the broker commission for the introduction of business and
conclusion of contracts
o Trade usage plays an important role in defining the contract and explaining terms of the
agreement
These contracts do not contain an implied term placing a duty of reasonable care and skill on the
broker
o If it is in the contract, broker acts in conflict with a similar undertaking to the insured

Right to Commission

Broker must disclose this to the insured; the amount of consideration earned and if it is in the
form of commission, remuneration or a fee
o Only the insurer is liable for payment
o This does not alter the general rule that the broker is the agent of the insured
Requirements must be met for commission to be payable
o Broker must introduce new business to the insurer and must act in terms of the
brokerage contract
If no such contract exists, no commission is payable
Insufficient to inform the insurer that there is the opportunity to insure
Must act as an intermediary and mediate the conclusion of the contract
o Insurance contract must be concluded
Where contract is subject to a suspensive condition and the condition is not
met, no commission is payable
If contract is concluded partially as a result of the brokers work, the broker is
entitled to a percentage of the commission
o Must be a causal connection between the brokers conduct and the conclusion of the
contract
Broker must be the effective cause meaning the intervention of the broker must
be one of fact and law
o Payment of commission is dependent on the payment of the premium
Right to commission is suspended until insurer has received payment of
premium
STIA and LTIA say that the payment of commission must be in accordance with the regulations

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Issuing of Interim Insurance and Cover Notes

In English law, a principle of law that the broker has implied authority to issue on behalf of the
insurer, interim insurance contracts
o Doubtful if a broke will have this authority in SA as there is no implied authority to issue
these

Liability for Payment of Premium

This is the responsibility of the insured

o Where a broke has been authorised by insurer to receive the premium on its behalf
payment to the broker is effective payment
o Broker must account to the insurer
Where a Lloyds broker mediates a marine contract with an underwriter, the underwriter may
hold the broker liable
o Same applies to non-Lloyds brokers where the broker grants the insured credit for
payment of the premium

Authority to Collect Premiums

Broker does not have a general duty to collect premiums but can be authorised to do so
o For a short-term insurer, must comply with the manner of the STIA otherwise it will be
null and void
Includes payment under a concluded contract and a contract still to be
concluded
o Such payment is deemed to be paid to the insurer
o Broker is subject to certain duties such as the duty to provide security and to furnish
returns
o When paid in bank notes or coins, he must give the payer a written receipt
In terms of the LTIA, there is no authority of a broker to collect premiums
o Any payment made is deemed to be made to the insurer
o Broker must give the payer written receipt when payment is made in bank notes and
coins

INSURANCE AGENTS

Insurers may not be registered to do business unless they are incorporated companies (STIA and
LTIA)
o Can only act through agents
o Agents may apply to a number of different categories of intermediaries
Can be a full-time employee remunerated by salary or salary or commission

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 o Public is more likely to encounter a mandatary (canvassing agents, insurance
consultants, or insurance agents)
o Such an agent acts on a mandate to solicit applications from prospective insured and to
transmit these to the head office
o Such an agent is independent and not an employee, thus independent intermediaries
Intermediaries who are not employed but restricted by a contract as to the nature of their work
are also mandataries
o These tied-agents market insurance as part of the package in which insurance is not the
main element
Most agents acting on a mandate are not authorised to conclude juristic acts
o Insurer may authorise this
o Special rules apply when acting in terms of a binder agreement

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SECTION 12: PRINCIPLE OF INDEMNITY EXTENT OF THE INSUREDS CLAIM
In terms of a contract of indemnity, an insurer has an obligation to indemnify an insured against
loss proximately caused by the perils
o This basic obligation is conditional upon the happening of the peril
o Insured enjoys the corresponding right to indemnification
o If peril occurs, the obligation of indemnity becomes vested
o This is a separate obligation which stems from the basic obligation
It can survive the cancellation of the basic obligation
The right can be ceded
Debt involved is susceptible to prescription
Insureds corresponding right is a claim to indemnification
o More than one claim can arise during the period of insurance

Vesting of Claim

The requirements are:

o A valid contract of insurance must have been concluded
o Any suspensive condition must have been fulfilled (the peril insured against)
o The peril insured against must have occurred during the currency of the contract
o The insured must have suffered a loss as a result of the peril insured again
o The loss suffered must have been proximately caused by the peril insured again
If all the above are met, the peril has occurred
o The burden to allege and prove is on the insured

Enforcement of Claim

If the claim sounds in money, it is an unliquidated claim for damages

o Insured will have to observe any special terms which regulate the enforcement of a
claim against the insurer

Concept of Loss or Damage: Contents of Indemnity Clause

An insurer undertakes to compensate the insured for loss or damage proximately linked to the
peril
o To bring the claim within this scope, an insured will have to prove that he suffered loss
or damage
Show he had an insurable interest prior to the peril, and that this interest has
been adversely affected
Must also show the extent of impairment
o Close relationship between insurable interest and the id quod interest of the law of
damages

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 Parties can extend and limit the meaning of loss contractually
Possible that a wider concept of loss is being developed

Contractual Exclusion of Certain Losses

Indemnity afforded is usually limited in scope by virtue of the terms of the contract
o Law of insurance employs a special concept of loss
o Usually only covers loss suffered as a result of damage to or destruction of the object of
risk to the extent of the insureds interest in the object
o Consequential loss is normally excluded for the cover
o Loss of remuneration by a carrier as a result of destruction is not consequential loss and
is covered by ordinary property insurance

Theft and Disappearance of Object of Risk

Although the insured does not lose his right of ownership, he does suffer a real loss of the
property provided that the deprivation is not merely temporary
o Can be theft by false pretences of where no transfer of ownership takes place
Insured may claim for a total loss if he can show that a reasonable time has elapsed since the
peril
o Also, that in spite of his attempts to recover his property, his recovery is uncertain and
unlikely
o If these facts can be proved, a claim may be brought even where the general
whereabouts of the property is known
If property is found before settlement, the claim will be defeated although damage to the
property may still found claim
o If recovered after settlement, the insured may retain his compensation and leave it to
the insurer to exercise its right to salvage

Compensation (damages) for Patrimonial Loss

If insured succeeds in proving patrimonial loss, he is entitled to compensation

o Takes the form of substitution (direct or indirect)
o Direct: reinstatement or replacement
o Indirect: payment of a sum of money to restore the insured as closely as possible to his
former financial position in respect of the insured interest
Insured can use this money as he sees fit
Not bound to use it for reinstatement unless he has agreed to do so
If contract is silent on compensation, the insured must be compensated in money
o Usually a clause that entitles the insurer to make a choice between money and
reinstatement
o In such a case, an insured cannot choose on behalf of the insurer

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 o Once election has been made, it is irrevocable
If insured suffered a physical loss in respect of assets and liabilities, the loss must be quantified
in money to enable the insurer to make good on the claim
o Burden on the insured to prove this amount
o To avoid this difficulty, parties often quantify loss contractually

NON-INDEMNITY INSURANCE

Ordinarily no question of a basic duty from which a fresh obligation can be derived
o The sum becomes payable on the occurrence of an event which can occur only once
There is no question of several claims
o In exceptional cases, there may be several claims
The contract may be to the effect that upon occurrence of the peril, the insurer
is to make periodic payments
Qualification of loss
o Unlike the normal position with regard to indemnity insurance, the amount payable is a
fixed sum or sums of money
o There may be exceptions where funeral benefits are provided

LIABILITY INSURANCE

Quantification of Loss or Damage

This arises after the occurrence of the peril and the requirements have been met
o Physical loss must be translated into monetary terms
o The burden rests on the insured to prove the amount of the loss
Problem of expressing loss in money does not arise where the loss is to be compensated by
physical reinstatement or where loss is a loss of money
o Quantification related to the value of assets, be they proprietary rights, expectancies or
any other interests that may be the object of the insurance
o Where a liability is the object, the amount of the liability must also be determined
Necessary to place a value on the asset, namely a third partys assets that were
lost or affected in respect of their value
If established by way of a court order, it would be good as evidence of liability
but inconclusive as between the insured and insurer
The total loss is the insurable value
o In complete indemnity contracts, the insured can recover up to this limit but the
insurers liability is limited

Liability Policy

Liability insurance is insurance against a legal liability

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 o This is a contract in which a person, in return for a premium, undertakes to provide
policy benefits if an event relating to the incurring of a liability occurs (STIA)
Liability may arise from the contract, a delict, or any other source
o It is a contract of indemnity insurance
Usually features in combination with insurance covering loss of property
Liability must be described in the policy
o It may arise out of a wide range of occurrences or resulting from a particular kind of
accident
o It may be a liability to defined persons
o The cover may be limited to certain consequences of an accident
Limitations are usually imposed on the amount recoverable
o Maximum amount may be fixed
o Can also limit liability to one accident(s) arising from one occurrence
o The insured may have to bear part of the liability incurred
When insured is held liable to a third party and this is covered in the policy, it would appear that
costs awarded against the insured are part of the liability so covered
o The costs in the defending claim are not included unless there is a special provision
Liability policies without exception require the insured to notify the insurer of any accident,
claim, letter or summons and to forward any relevant document to the insurer
o Insured is prohibited from settling any claim by a third party or making any admission of
liability without the insurers consent
o Policies usually empower the insurer to take over the defence of any proceedings that
may be brought against the insured and to conduct them in the name of the insured
Allows insurer to make settlement
Must act with due regard to the rights of the insured otherwise it is liable for
damages to the insured
o By continuing the conduct of proceedings bought by a third party with the full
knowledge of the circumstances, the insurer is precluded from denying liability to the
insured
Where insured against liability to a third party, there is no contractual relationship between the
insurer and the third party
o Contract cannot be construed to be in favour of the third party
o Third party cannot entertain a claim against the insurer at common law
o The Insolvency Act: upon the insolvency of the insured, the third party is entitled to
claim directly from the insurer the amount the insured could have claimed

CONTRACTUAL INDEMNITY TERMS: TIME BAR CLAUSES; AVERAGE CLASES AND CONTRIBUTION
CLAUSES

Contracts nearly always contain a clause limiting the amount of compensation the insured may
claim from the insurer in the event of a loss
o It limits the liability of the insurer to a specific amount known as the sum insured
o The insured cannot claim more than this for all the losses he has suffered during the
insurance period

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 o This is the case unless the clause is phrased in such a way that it merely limits the
amount of particular claim
A contribution clause takes effect in the case of double insurance
o If the loss is covered by other insurance, the insurer cannot be held liable for more than
his rateable proportion of the loss
o Effect is given to this clause even where one of the contracts have been avoided
Although the insured is deprived of the right he would otherwise have had to
recover in full, he can recover the full amount by sing the insurers
A compulsory under-insurance clause requires the insured to bear a percentage of each loss
o The purpose of this is to ensure that the insured retains a very real interest in the
preservation of the object of insurance
o Cannot insure the proportion of the loss which he bears with another insurer
A limiting clause is often found in property insurance
o Requires the insured to bear a fixed amount of each loss himself
A franchise clause is a stipulation that the insurer will only be liable if the loss exceeds a certain
amount or percentage
o Once satisfied, insurer must pay in full for the whole loss

Contractual Limitation on Damages in terms of an Average Clause

The ordinary rule in under-insurance us that the insured can claim up to the limit of the sum
insured irrespective of whether his loss is total or partial
o The purpose is to avoid this disadvantage to an insurer and to encourage prospective
insured persons to insure up to the full value of their interest in the object of the risk
o Clause is often referred to as the first of pro rata condition of average
An average-clause only applied where the insured is under-insured and suffers a partial loss
o Insured is entitled compensation only for a proportion of the loss suffered
This is calculated by dividing the sum insured by the true value of the object
o If the insured suffered total loss, he is ipso facto entitled to claim up to the limit
o These clauses have been criticised; no effect should be given to them unless absolutely
necessary
If an insurer retains the object, he is not entitled to invoke an average clause to require the
insured to pay a proportional share of the cost of reinstating

Quantification of Loss or Damage

This arises after the occurrence of the peril and the requirements have been met
o Physical loss must be translated into monetary terms
o The burden rests on the insured to prove the amount of the loss
Problem of expressing loss in money does not arise where the loss is to be compensated by
physical reinstatement or where loss is a loss of money
o Quantification related to the value of assets, be they proprietary rights, expectancies or
any other interests that may be the object of the insurance

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 o Where a liability is the object, the amount of the liability must also be determined
Necessary to place a value on the asset, namely a third partys assets that were
lost or affected in respect of their value
If established by way of a court order, it would be good as evidence of liability
but inconclusive as between the insured and insurer
The total loss is the insurable value
o In complete indemnity contracts, the insured can recover up to this limit but the
insurers liability is limited

Principles of Quantification

How to quantify is fraught with theoretical and practical difficulties

o Often referred to as arbitration
o These difficulties can be avoided by inserting a reinstatement clause while they may
largely be surmounted by concluding either a valued policy or a policy for new value
Aim of compensation is to restore the insured to the position they were in financially subject to
any limitations
o Calls for a comparison between actual or real monetary value of the affected asset or
interest before the peril
o The comparison should be made at the time and place of the loss
o No allowance should be made for sentimental value or consequential loss
o The difference produced by such a comparison constitutes the insureds maximum loss
in financial terms
o This applies irrespective of whether the insureds loss is total or partial
It is not uncommon for an insured to have more than one insurable interest in the object of the
risk
o Apart from any positive interests, the peril may also give rise to a liability for him
o Whether any particular interest is covered depends on the terms of the contract
If different persons have different interests in the same object and these interests have been
insured separately, each insured can claim the full amount regardless of the amounts
recoverable by the other insured
Quantification is often clouded by points of fact and of law, so that the position of the claimant
is invidious
o If plaintiff can prove loss but not the amount of loss with mathematical exactness, it is
the duty of the court to assess the loss on the available evidence and allocate an amount

DOUBLE INSURANCE

This occurs when the same interest is insured by two or more independent insurers
o Insurance in favour of a third party may also result in double insurance
o This does not amount to over-insurance unless the total of all the insurances is more
than the total value of the insureds interest
Important for two reasons

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 o Insured who pays more than its proportionate share in the loss has a right to
contribution against each of the other insurers
o Insurance contracts often contain provisions that the insured must disclose other
insurances which subsist at the time the policy is issued or which are contracted
subsequently
Insurer only bound to pay proportionate share of the loss
In principle there is no objection to double insurance even if it amounts to over-insurance
o Insured may insure with many insurers as satisfies his need for security
o Does not mean insured can recover more than is necessary
o Once compensated in full, the insured has no further claim as the contract is one of
indemnity
o Insured has a fee choice in recovering the loss from various insurers; may select any one
or more or he may claim a proportionate amount from each; or claim shortfall of one
from another

Requirements

The policies must overlap as to the peril

o Does not have to cover the exact same risk but must have a particular event in common
o A brief overlap does not amount to double insurance
The policies must relate to the same interest
o May cover a variety of interests but the interest eventually suffered must be covered
o If two persons each having a different interest in the same object of risk each insure
their own interest, there is double insurance although the one may benefit from the
insurance of the other
o If a person takes out a cover in the interest of a third party who also insures the interest
in a separate contract, double insurance occurs
The policies must relate to the same object of risk
The policies must be in force at the same time
o Contracts must be valid and effective

Clauses Requiring Notice

The existence of other insurance is possibly not a material fact requiring disclosure
o May require notification of existing and subsequent insurance
o Unless timeous notice is given, the contract can be forfeited
o Purpose of such a clause is to prevent fraud and to enable the insurer to exercise his
right to contribution against the other insurer involved
When a time period is not specified for notice, it must be done within a reasonable time

Clauses Limiting or Excluding Liability

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 Clause that where there is double insurance, insurer will only be liable for its proportionate
share of the loss or not liable at all
o Clause is perfectly valid
o If other contract contains a similar clause, they cancel each other out
o Such a clause saves the insurer the inconvenience of having to claim a contribution from
a co-insurer
o It also causes inconvenience to the insured as he is unable to claim his loss in full
Effect of the clause depends on the words used
o Liability can be reduced to rateable proportion; limited to loss in excess of that cover by
another; contract avoided due to absence of notice; or consent of other insurer
o These clauses are inserted for the benefit of the insurer but if intelligible, are discarded

Right to Contribution

Insured is free to decide how much of his loss he wishes to claim from a particular insurer
o In total, cannot claim more than the full amount lost
o If insurer has paid more than their rateable proportion, it is entitled to claim from the
other insurers
This right is thus a right to recourse by one insurer against another which has insured the same
loss
o This right is in substitution of any subrogation which the paying insurer could possibly
have had to the proceeds of the insureds rights against the other insurers
o The right of contribution does not depend on the contract but rests on the principles of
natural justice and equity
o Can be said to be a naturalia of a contract and is therefore a legal consequence
o Transfer of the insureds right against the other insurers takes place by operation of the
law in exchange for payment

Requirements for Right to Contribution

Insurer claiming contribution must have discharged its liability to the insured
Insurer claiming contribution must have paid more than its rateable portion of the loss
The payment by the insurer must have been made in respect of an interest which is the object of
double insurance existing at the time of loss
The double insurance in respect of the insureds interest must have been for an amount in
excess of the loss

Apportionment of Loss for Right to Contribution

This calculation may be a simple matter

o Where the contracts are identical in material respects (amount of the insurance), the
loss should be apportioned equally between the insurers

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 o If contracts differ materially, all the amounts must be added up and compared with the
amount of the loss
Each insurer is liable for such a portion as the amount underwritten by it bears
to the aggregate amount insured by all the contracts
Where contracts differ substantially, there are some complications
Law is silent on apportionment
o In practice, it is a matter of negotiation between the parties

OVER-INSURANCE

This occurs when the sum(s) insured are more than the total value of the insureds interest
o Sum insures is also known as the limit of liability
o Most policies contain this for the purpose of assessing the premium
o There is no objection to such a clause but the insured cannot claim for more than his
actual loss
Over-insurance should be distinguished from over-valuation in a valued property
o This is where upon conclusion of a contract, the parties agree on the total value of the
object of the risk which exceeds its true value
In capital insurance, the sum insured may not exceed the value of the interest and over-
insurance may be a factor in assessing the risk

UNDER-INSURANCE

This occurs where the sum insured is less than the value of the insureds interest
o It is not usual to speak of under-insurance in the context of capital insurance
A person who under-insures his interest is entitled to recover up to the amount of the sum
insured or the amount of the loss, whichever is the lesser
o In marine insurance, if a person insures for less than the insurable value he is deemed to
be his own insurer for the uninsured balance

UNDER-INSURANCE

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