Chapter 19 Contract of Insurance

CHAPTER 19
INSURANCE CONTRACT
CHAPTER 19: INSURANCE
• DEFINITION OF INSURANCE
• An insurance contract is between an insurer and an insured, by which the insurer undertakes, in
return for the payment of a price (premium), to give the insured a sum of money or its equivalent,
on the occurrence of a specified uncertain event in which the insured has some interest.
• Contract of insurance will come into existence on the agreement of the following four essential
terms:
• 1 Identity of what is being insured.
• 2 The risk insured against
• 3 The amount of the premium payable.
• 4 The time period for which cover extends.
TYPES OF INSURANCE CONTRACT
• South African law recognizes two types of insurance contract.

• 1 Indemnity Insurance: The insurer undertakes to compensate the insured for an actual loss he or
she may suffer in future, for example for fire or theft insurance. The event must happen first
before the insurer can quantify the amount of the loss suffered.
• 2 Non-indemnity insurance: The insurer undertakes to pay an agreed specified amount on the
occurrence of a certain event. The amount payable is not related to the extend of the loss
suffered. For example a life insurance policy.
• FORMALITIES
• The regular law of contract applies. The general principle is that no formalities are required.
ESSENTIAL ELEMENTS
• There are four essential elements in any contract of insurance.

• 1 An obligation of the insurer to pay a sum of money or its equivalent.
• 2 An obligation of the insured to pay a premium
• 3 The occurrence of an uncertain future event: The event can be divide into two, it may be
uncertain that an event will happen, for example a car accident, or it may be certain that the
event will occur, but the moment of occurrence is uncertain, for example death
• 4 An insurable interest: If a person can show that he or she stands to lose something of an
appreciable commercial value by the destruction of the thing insured, he or she has an insurable
interest in the thing insured even when he or she does not necessarily have a personal or real
right in the thing.
• The test of whether one can show loss is a factual one.
Insurable Interest (continuation)…..
• The insured must prove an insurable interest existed at the time the event occurred in order to
prove loss.
• Four Classes of Insurable Interest
• 1 Real Rights
• 2 Personal or Contractual rights.
• 3 Legal Liability
• 4 Factual expectation of damage
• Insurable Interest for non-indemnity Insurance: An insurable interest must exist at the time of
the issue of the policy. A value must be placed o the insurable interest. A person will have an
insurable interest in the life of his or her spouse, or a creditor will have an insurable interest in the
life of a debtor. Partners have insurable interests in the life of the partnership.
CONCEPTS IN INSURANCE LAW
• 1 The proponent or proposer: This is the party who applies for insurance cover: He or she applies
for the cover by filling in a proposal form, at the end of which there is a clause called a
“declaration”. This declaration states that the answers to the questions on the proposal form are
declared to be the basis of the policy. The completed proposal form amount to an offer by the
proposer to be insured on the usual terms of the insurer.
• 2 The Insurer: The insure may accept the proposal by issuing a policy.
• 3 The policy: The policy together with the proposal form, forms the complete contract of
insurance.
• 4 Limitation on policy benefits page 249
• 5 The Consumer Protection Act an insurance may e covered under the Consumer Protection Act
Good Faith: The Duty of Disclosure:
• The Proposal Form: The insured parties must tell the insured all it needs to know about the risk. All
material facts must be revealed. To protect the insurer, law creates a duty of disclosure on the
insured, he or she is required to answer questions put to him or her in the proposal form both
truthfully and accurately, and is obliged to volunteer knowledge material to the risk. See
examples of information that could affect the decision of the insurer about whether or not to
enter into the contract of insurance, or to charge a higher premium. See page 252-253
• The duty of disclosure will arise at different times for indemnity and non-indemnity insurance
• Indemnity insurance:
The duty of disclosure recurs on each renewal
• Non-indemnity insurance:
The duty of disclosure arises only once, before the contract is originally entered into.
THE CLAIM FORM
• What will happen if the claim is fraudulent or only a part of the claim is fraudulent?
• Under Roman Law: Firstly refusal to allow an insured to profit by fraud, secondly, making the insured
liable for any loss or expenditure caused by fraudulent conduct, and thirdly, criminal sanctions entailing
vigorous punishment.
• Under English Law: Even if a policy contained no term providing for forfeiture of the entire claim, it is an
implied term of any policy of insurance that an insurer can repudiate an entire claim where it is tainted
by fraud.
• South African Law: Distinguishes three different types of fraud
• 1 Fabricated Claim:
Insurer suffers no loss or no loss covered by the insurance contract. The insurer here lies or even causes the
loss, and the fraudulently represents to the insurer that the loss was caused by an event specified in the
insurance contract.
Types of Fraud under South African Law
• 2 Exaggerated Claim:
This involves an exaggeration of the loss to enable the insured to claim more from the insurer than
would otherwise have been possible. The insure does suffer a loss, but claims for a larger amount.
• 3 Valid Claim accompanied by Fraudulent means:
This type of fraudulent claim involves a technical or petty fraud designed to reduce delay in
payment, for example forging a signature on a form to reduce a delay while someone is away on
holiday.
SPECIAL TERMS IN INSURANCE CONTRACT
• 1 Warranties: Two types of warranties:
1.1 Affirmative warranty: These are statements of fact or current knowledge for example that the driver is in possession of a valid driver’s licence.
1.2 Promissory warranty: These are undertaking by the insured pertaining to his or her future conduct during the period of the policy, for example
that he or she will not drive while intoxicated.
2 Incontestability clauses: These clauses have the effect that, after a certain period, the insurer may not avoid a claim because of any
misrepresentation, fraud or any material fact.
3 Average clauses: In indemnity insurances, in terms of this clause, the insured will bear a proportionate share of the loss to the extent that he or she
is underinsured.
4 Excess clauses: In indemnity insurance, the insured may be liable on the first portion of any claim. This amount is known as the excess
5 Forfeiture clauses: A term in the contract may provide that the insurer can avoid all liability in the event of any fraudulent misrepresentation by the
insured.
6 Time-bar clauses: This type of clause provides that once the insurer repudiates liability for a claim, the insured has only a specified period in which
to issue summonses against the insurer, failing which the insurer is released from liability
7 Contribution clause: This clause in an insurance policy may provide that an insurer that pays out the claim may require the other insurers to pay a
contribution. This applies where the insured has indemnity insurance policies with two or more insurers in respect of the same risk.
SUBROGATION
• Subrogation, is the right of an insurer who has paid the insurance money to the insured party, to receive the benefit
of all the rights of the insured against third parties that, if satisfied, will extinguish or reduce the ultimate loss
sustained. Subrogation applies only to indemnity insurance. The insured is entitled to be compensated for loss, but not
entitled to profit. The right cannot be enforced by the insurer until it has completely indemnified the insured to the full
extent permitted by the policy. Subrogation allows the insurer to sue in the name of the insured party.
• Two types of subrogation: Subrogation in a narrow sense, refers to the right of the insurer to enforce the unenforced
rights to the insured party against third parties. This right arises only if the insurer has compensated the insured in full
for the loss.
• Wide sense, this refers to the insurer’s right of recourse against the insured party to recover from the insured any
amount or benefit the insured has received in respect of the event. For example the insurance company claim from
insured party what the insured received from the third party, to the extent that the insurance company is out of
pocket.
• Subrogation can only operate if the insured in fact has a remedy against the third party/
LEGISLATION
• South African Law of Insurance is based on common law, but is regulated by the
• Long-Term Insurance Act 52 of 1998, which deals with Assistance policy, Disability policy, Fund
policy Health policy and Life policy.
• and the Short-Term Insurance Act 53 of 1998, which deals with Engineering policy, Guarantee
policy, Liability policy, Motor policy and Accident and Health policy, Property policy, and
Transportation policy

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CHAPTER 19

• South African law recognizes two types of insurance contract.

• There are four essential elements in any contract of insurance.

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