Insurance:Unit 12

Chapter 24
J Botha
Background
• People and their property are exposed to numerous dangers and
risks.
• Risk is defined as - “chance that an uncertain event or peril might
occur in future”
• Risk = possibility of harm (uncertain event or peril will occur
in future).
• Peril = event that causes loss.
• Risks causes uncertainty and insecurity, so we try to anticipate in
order toplan for it.
• People take out insurance so in the even of a risk even the
Insurer will pay them out.
Definition
• A contract of Good faith between an insurer and insured,
whereby the insured undertakes to pay a price or premium
to the insurer, in return for a sum of money or its
equivalent on the happening of a specified uncertain event
in which the insured has some interest.
How is a contract of insurance
formed?
• Parties are: Insurer (insurance company) / Insured (person who enjoys protection)
• Formalities: Need not be in writing (telephonic/online). In practice contained in a
written policy document setting out the terms and conditions.
• Consensus between the Parties must be reached on: the Person or property
to be insured/ Risk insured against / Amount of premium/ period of insurance (short
term/ long term) / amount payable by insurer on the happening of an insured
event.
• Consensus is reached by offer and acceptance – the offer normally made
by the insured and not the insurer.
• Offer made by way of an application by the insured known as a proposal.
OFFER by INSURER
• A Proposal: Is a printed form issued by the insurer and completed and signed by
the insured.
• Contains a series of questions that enables the insurer to assess the possibility
of the risk occurring. Example of questions are: Have you been in a motor
vehicle accident in the past 5 years / Life insurance: health, age, occupation and
habits.
How is a contract of insurance
formed?
• In a Proposal: Insured will be asked to warrant the truth of his/her
answers and declare that the answer shall form the basis of the
proposed contract of insurance.
• Insured must answer questions honestly, carefully and accurately.
• Often completed electronically or by telephone. (Electronic offer)
• Quotation v Proposal: a quotation is a mere invitation to negotiate.
ACCEPTANCE
• Contract of insurance is formed when the insurer accepts the
proposal unconditionally.
• Insurer sends the insurance policy and covering letter.
• Insurance policy contains the terms and conditions of the contract.
 Essentialia (Requirements of
Insurance
1. Con.)
Obligation of the insurer to compensate the insured for
loss (Uncertain insured events occur, causing loss) Example:
loss as result of motor vehicle accidents, hijacking, burglary,
etc.
2. Payment of a premium by the insured (amount of money
paid monthly or annually and insured obligated to pay the
premiums to maintain the policy. Failure to pay can result in
policy lapse / insurer can refuse to compensate for loss
(occurrence of insured event))

3. The occurrence of an uncertain future event ( an

insurance contract protects against potential loss. Uncertainty
takes two forms : (a) Event itself is uncertain. Example: Wild
fires, geyser burst /vehicle accident. (b) Timing of the event
that causes loss. Example: Death.)
Insurable Interest
• Insured must prove insurable interest in the loss, to claim in terms of a
contract of insurance. For an insured to have insurable interest, he must
prove:
1. Insured must show that he/she would obtain a real financial
benefit from continued existence of the thing insured; OR
2. that he/she stands to lose something of value by its destruction.
(Littlejohn Case page 262.)
• No need to be the owner of the thing to have insurable interest.
• Only show that you will benefit from its existence and suffer a loss if it is
destroyed.
• No insurable interest = no claim.
• Example: X and Y are married out of community of property. X owns and
manages a Hair salon. X decides to open a Bakery and can no longer manage the
Hair salon. Y offers to manage the Hair salon as it is his only income and he will
manage it to the benefit of them both. Y takes out insurance on the business and
pays the monthly premiums. Y has insurable interest as benefit from its existence
and suffer a loss if it is destroyed. Y does not need to be the owner.
Wager vs Contract of Insurance
• Wager:
• Contains an element of risk.
• It is Unenforceable.
• Creates a risk of loss and gain artificially.
• Example - Bungee jump (two spectators make a bet that if the
person jumps, he will die. (subjective event and interest is artificial)
• Contract of Insurance:
• Enforceable.
• Protects insured interest from risk of harm (insurable interest).
Duty of Disclosure
• Upon receipt of completed and signed proposal from the insured, the
insurer must decide: (1) to accept the risk and enter into a
contract of insurance; and if the insurer accepts, (2) it must
decide what premium it will charge.

• The extent of the risk is calculated based on the information

supplied by the insured in the proposal form.

• Insured has a duty to answer questions in proposal

form, truthfully and accurately; and also to volunteer
information material to the risk, even if not requested
(contract of good faith).
Duty of Disclosure by Insured
• Insured fails to answer honestly and accurately; and fails to
disclose information material to the assessment of risk.
Where there is Misrepresentation it renders contract
voidable at the option of the insurer.
Insurer can refuse to indemnify the insured and also return
the premium.

• Note: the Doctrine of Disclosure requires an insured to disclose all relevant and material
information to the Insurer, in order for the Insurer to assess the risk of the of the insured. Failure
to comply with the duty of disclosure entitles the Insurer to repudiate the policy. Where a policy
has been repudiated on the basis that the Insured did not act in good faith, and dishonestly
answered questions in the proposal form, any legal challenge to the repudiation will fail.
• An insurance policy is a contract based on good faith so there is a duty to disclose all relevant
and material information to the insurer in order for the insurer to assess the risk to be
insured.
Duty of Disclosure by Insurer
• Insurer also has a duty to disclose information to prospective
insured persons.
• Financial Advisory and Intermediary Service Act.
• General Code of Conduct:
• Insurer’s are obliged to ensure a policy offered is
adequate and appropriate. (Looking at the insured’s risk
profile, circumstances; and financial needs)
• Marketing:
• Insurer must disclose product details, benefits,
monetary obligations, product risks, specific terms and
conditions, exclusions, excesses, restriction, etc.
Warranties
• A warranty is a contractual term in an Insurance Contract.
• The insured warrants that certain representations made are
correct and/or certain duties will be performed.
• Breach of a warranty amounts to breach of contract.
• Insurer can cancel and reject the claim.
• Two types of warranties:
1. Affirmative warranties: Insured warrants the truth of
representation made. E.g. Good health (usually in proposal
form)
2. Promissory warranties: Insured warrants to perform in a
certain manner, in the future or that a certain factual situation
will exist in future. E.g. that he will Activate burglar alarm.
Warranties
• Common law: Breach of affirmative or promissory warranties
results in cancellation for breach of warranty (even if the
information is not relevant to the assessment of risk).
• Jordan v New Zealand Insurance Co Ltd.

• Insurance Act: Section 63 (3) – Can only cancel an insurance

policy based on misrepresentation ( provided the
misrepresentation is material to the assessment of risk).

• In terms of the Long- Term and Short-Term Insurance Acts:

Insurer CANNOT cancel and reject a claim for breach of
Affirmative warranties unless it can prove
misrepresentation or non-disclosure was material to
assessment of risk. (objective test).
• Not applicable to Promissory warranties. CAN cancel
Fraudulent Insurance claims and claims due to
Insured’s Own Conduct
• Fraudulent Claims: (Insured should Not submit fraudulent claims,
must always act in good faith.)

Fraudulent claim clause in contract: If the claim is

fraudulent/ Exaggerated – Insurer can cancel and reject the
claim. Example: Real loss = R150000 BUT claim R200000
(exaggerated claim).

No Fraudulent claim clause in contract: If the claim is

entirely false = insurer can reject the claim OR if the claim is
exaggerated = insurer liable for valid portion of the claim (Real
loss).
Fraudulent Insurance claims and claims due to
Insured’s Own Conduct
• Own conduct - causes loss/damage:
• Negligence: Insurer liable to pay – if the loss is an insured risk. Example:
Insured involved in a motor vehicle accident due to failure to stop at a four
way stop.

• Intentional : Insurer not liable to pay. Example: Insured burns his own house.

• Suicide: not liable to pay unless insurance contract provides.

• Unlawful: Criminal negligence - each case determined on its own facts.

Factors considered are; wording of the policy, the nature, facts and
circumstance of the crime, public policy; and the maxim : “ an offender
against criminal law should not be entitled to derive from his own
behaviour”. (Shooter / Lloyds Case pg. 266)

Insured causes loss through both criminal and intentional conduct = NO

CLAIM FOR LOSS. Example: Wife takes out an insurance policy on
husband and hire someone to teach him a lesson and it resulted in his
death.
Indemnity and Non-Indemnity
insurance
• Indemnity insurance: Insured is insured for actual financial loss suffered
as result of the occurrence of an insured uncertain event. (insured restored
to position prior to occurrence of uncertain event) Example: Motor Vehicle
accident, insurer repairs the car/ Home – insurance, housebreaking – insurer
replaces goods stolen.

• Non-indemnity insurance: the insurer undertakes to pay a specified sum

of money on the occurrence of an insured event relating to the person’s
mind or body, such as Life, personal injury or illness. Example: Life policy.

• When can the inured claim:

• Indemnity insurance = when risk occurs and compensated for actual
loss only. (Can insure for replacement value but must be agreed at
conclusion of the contract)
• Non-Indemnity insurance = on the occurrence of the risk, irrespective
of the actual loss suffered and will be paid the agreed lumpsum.
Indemnity and Non-Indemnity
insurance
• 4 PRACTICAL DIFFERENCES:
1. Insurable interest:
a) Indemnity insurance – exist at the time of loss.
b) Non-Indemnity insurance – exist at the time of conclusion
of the contract.
2. Rule of Subrogation:
a) Only applicable to indemnity insurance.
3. Rule of Contribution between co-insurers:
a) Indemnity insurance – double insured, can choose from
which insurance to claim. Insurer can call on other insurer
to contribute proportionate share.
b) Non-indemnity insurance – double inured, can claim full
amount of each policy from each insurer.
4. Liability:
a) Indemnity insurance – liability is limited to loss suffered.
Average & Subrogation.
• Average
 Under-insurance = the insured insures the property for less
than its true value.
 Insurer only pays pro rata share of claim.
 Example of under insured property. Goods insured for
R100 000 but the actual value is R 300 000. Only a third of
the value of the goods insured. Insured claims R90 000. Only
aPro Rata share will be paid and the insured will only receive
R30 000. So the Legal concept will be the Law of Average.
 Over- insurance = insures property for more than its actual
value. Insured will only receive the actual value of goods.
• Subrogation
• Insurer pays the full extent allowed by the policy to Insured.
Insurer steps into the shoes of the insured and……..
May sue the actual wrongdoer to recover the money paid.
Insurer uses insured’s name to institute action.
Like cession: insured gives insurer the right to sue.
Termination
• Expiry.
• Cancellation / contract voided.
• Agreement.