INTRODUCTION TO
COMMERCIAL LAW
(LAWS1IC) 2022
THE LAW OF
INSURANCE
PART 3
Part 3:
THE LAW OF INSURANCE
• Formation of an Insurance Contract: Textbook Chapter 8 p313
• Proposal Forms: Textbook Chapter 8 p313
• Conclusion of Insurance Policies by Direct Marketing: Textbook
Chapter 8 p313
• Cooling-off Period: Textbook Chapter 8 p314
• Insurance Policies and Policy Documents: Textbook Chapter 8 p314
• Legality: Textbook Chapter 8 p314
• Disclosures by the Insured: Textbook Chapter 8 p315-317
• Disclosures by the Insurer or its Intermediaries : Textbook Chapter 8
p317
FORMATION OF AN INSURANCE CONTRACT
• An insurance policy like any other contract must comply with certain
requirements before it will have legal effect.
• In general a contract has to be concluded by agreement or consensus
between the contracting parties.
• The intermediaries who facilitate the conclusion of insurance
contracts normally will not have the authority to conclude insurance
contracts on behalf of insurance companies.
• Insurance contracts are concluded by completing proposal forms or
by direct marketing.
PROPOSAL FORMS
• When an insurance contract is concluded by using this method a
prospective insured or proposer will make an offer to the insurer by
submitting a printed proposal form.
• The form is composed and issued by the insurer but must be
completed, signed and submitted by the proposer for insurance.
• The proposer will answer questions posed in the proposal form which
will allow the insurer to determine the risk of concluding the policy.
PROPOSAL FORMS
• The proposal form is an odd type of offer because it does not contain
the terms upon which the proposer intends to contract.
• The proposer will know only the premium and basic benefits of the
policy.
• For the most part the insured will offer to contract on the terms
which the insurer will determine or the usual terms of the insurer.
• Moreover the insurer or intermediaries have to inform the insured of
the material and special terms of the policy.
PROPOSAL FORMS
• If the insurer accepts a contract of insurance comes into being.
• Insurer will send policy document outlining the terms of the
insurance and a cover letter confirming acceptance.
• Insurers will have to investigate risks carefully before they take them
on.
• As this is time consuming - usually grant interim cover – during the
period of consideration.
• The interim insurance and final insurance contracts are related but
still separate, independent contracts.
• Interim contract will exist until the time expires or insurer accepts or
rejects the final proposal.
PROPOSAL FORMS
• Policies which are concluded for a fixed term – frequently renewed.
• A renewal is an entirely new contract but may be concluded on the
same terms as the old contract.
• Where an insurer sends a renewal notice to the insured it constitutes
an offer to conclude a new policy. The insured must then accept or
reject the policy.
• Renewal must be distinguished from continuation – life insurance
continues every time a premium is paid.
CONCLUSION OF INSURANCE POLICIES BY
DIRECT MARKETING
• Today – insurance policies are often concluded by direct marketing
especially over the telephone.
• The proposer will telephone the insurer – answer questions.
• In effect the proposed insured make an offer to the insurer.
• The insurer will record the offer made – will make disclosures to the
insured about the prospective policy.
• A policy document will then be sent to the insured in the usual way if it
is accepted.
• Oral disclosures made by the insurer to the insured – confirmed in
writing within 30 days of the policy.
COOLING-OFF PERIOD
• In a long-term insurance policy the cooling off period ends 14 days
after the date on which the policy document that must be provided
ito the Policyholder Protection Rules was received.
• Cancellation by written notice to insurer.
COOLING-OFF PERIOD
• Must be received by the insurer within the cooling-off period or
within 60 days if the insured can show that it was sent within the
cooling-off period.
• Where a policy is cancelled within the cooling-off period premiums
paid must be returned to the insured subject to cover received before
cancellation.
INSURANCE POLICIES AND POLICY
DOCUMENTS
• An insurance contract is concluded by agreement between the insurer and
insured.
• It does not have to be in writing to be valid.
• An insurance policy therefore has to be distinguished from the policy document
which sets out the terms of the policy.
• However a short-term insurer must provide the insured with a policy document
within 30 days of conclusion if the insured is a natural person.
• A long-term insurer is obliged to provide only a summary of the terms of the
policy.
• In both cases the insured has a right to request a policy document from the
insurer
• Short term policies must be in clear and understandable language.
LEGALITY
• The Long-Term Insurance Act and Short-Term Insurance Act
specifically determine that certain provisions such as waiver of rights
obtained by the insured by virtue of insurance legislation will be void.
• Conversely a policy concluded by an unregistered insurer will not be
void unless cancelled by the insured or authorities responsible for
supervising insurance.
LEGALITY
• An insurance policy may provide cover to the insured against losses
caused by his actions.
• Many insurances will protect the insured against losses caused by his
negligence even if the negligence also constitutes a crime.
• In most cases a person will not be able to cover losses caused by a
person’s deliberate conduct.
DISCLOSURES BY THE INSURED
• An insurer must evaluate the risk of providing cover for the insured.
• The law therefore requires that the insured must before conclusion of
a policy; make disclosures to the insurer of all material facts known to
him.
• The insured will normally have to answer questions being posed by
the insurer but will also have to disclose other material facts of his
own accord.
DISCLOSURES BY THE INSURED
• Where an insured makes disclosures they must not be materially inaccurate.
• The correctness of facts is usually warranted.
• This duty endures up to the moment of conclusion of the insurance contract.
• Failure to comply will allow the insurer to cancel the insurance policy if:
➢It can be shown that the insurer would have refused the cover or would have
concluded it on different terms if not for the failure, or
➢The correctness of a disclosure is warranted.
DISCLOSURES BY THE INSURED
• Cancellation will relieve the insurer of any liability in terms of the
policy.
• Problems arise where false information is provided to the insurer by
intermediaries.
• Not clear if insurer may cancel - only partially addressed in legislation.
• An intermediary may not offer to fill in the proposal form on behalf of
the insured – inform insured that he need only sign in blank.
• Will not affect the validity of the contract but intermediary may be
held liable for loss caused and be guilty of criminal offence.
DISCLOSURES BY THE INSURED
“Materiality”
• The Insurance Acts determine that :
“a representation or non-disclosure shall be regarded as material
if a reasonable, prudent person would consider that the particular
information constituting the representation or which was not disclosed,
as the case may be, should have been correctly disclosed to the insurer
so that the insurer could form its own view as to the effect of such
information on the assessment of the relevant risk.”
DISCLOSURES BY THE INSURED
“Materiality”
• The question of whether a particular fact is material is considered
from the perspective of a reasonably prudent person who is neither
the insurer nor the insured.
• It must then be determined whether that person would have thought
that the insurer would want the information to be accurately
disclosed to it so that it can assess the risk.
• So the perspective of the insurer is not irrelevant.
• The issue is whether a reasonable person would have thought the
disclosure necessary to allow the insurer to make up its mind.
• Examples of material facts : see Table 8.1
DISCLOSURES BY THE INSURED
“Within the knowledge of the insured”
• The insured is obliged to disclose all material information which falls
within his knowledge and all information which he should have
known had he taken reasonable steps.
• Unlike an individual, a juristic person does not have a mind. So a
company will be deemed to know and disclose a fact under the
following circumstances:
➢Knowledge possessed by directors and managers
➢Knowledge possessed by agents or representatives
DISCLOSURES BY THE INSURER OR ITS
INTERMEDIARIES
• In terms of the common law the duty to make disclosures is firmly on
the insured.
• However statute law now imposes a wide range of disclosure duties
on the insurer or its intermediaries.
• Insured parties will be able to bring claims for damages against
intermediaries or insurers who do not comply with these duties.
DISCLOSURES BY THE INSURER OR ITS
INTERMEDIARIES
• The General Code of Conduct for Authorised Financial Services
Providers and Representatives – ito the FAIS Act requires them to
disclose and explain:
➢All material terms of an insurance policy
➢The premiums which the insured will pay and increases in these premiums
➢Fees which will be charged for concluding the policy
➢Cooling-off periods
➢That the insured will have to disclose all material facts and consequences if
not done
➢That the insured must be satisfied about the correctness of information
submitted on his behalf.
DISCLOSURES BY THE INSURER OR ITS
INTERMEDIARIES
• Where financial advice is given to an insured the needs of the insured
must be properly discerned and a record must be kept of the advice
which is given.