Specific Aspects of Insurance Law (TB)

Question 1

Is good faith a general requirement for a valid contract?

Answer 1

No - Brisley v Drotsky

Question 2

Where is good faith applicable?

Answer 2

It is concerned with the pre-contractual duty of all the parties to disclose information to each other prior to the conclusion of the contract.

Question 3

Why must the insured disclose?

Answer 3

Due to the prospective insured’s intimate knowledge of all facts regarding the risk which he wants to transfer to the insurer, a legal duty requires him to disclose to the insurer all RELEVANT MATERIAL INFORMATION within his actual or constructive knowledge.

Question 4

What information must an insured disclose (generally)?

Answer 4

All information which could INCREASE the risk.

The insurer must then disclose to the insured all information which could DECREASE or exclude the risk.

Question 5

Discuss the general duty to disclose

Answer 5

• Consists of both a positive and negative duty
• Positive duty: Requires the prospective insurer to answer all questions put to him by the insurer, honestly and in good faith.
• Negative duty: Requires the insured to disclose all other material information of which he has knowledge or should have had constructive knowledge, even though it has not specifically been asked of him.
• If the insured gives false information, does not answer, or refrains from disclosing, he makes a misrepresentation which influences consensus and makes the contract voidable

Question 6

Which test must be used to determine whether or not information is material?

Answer 6

Our courts are divided, but the reasonable person test should apply.
Sec52 of the LTIA specifically states that it is based on a “reasonable, prudent person”.

Question 7

What must the insurer disclose?

Answer 7

• A duty of transparency and duty to inform of all relevant information rests on the insurer.
• All information to the insured which is to the latter’s benefit and could be used to the latter’s advantage.
• Insurer must inform of all the potential disadvantages pertaining to the insurance product and the ensuing rights and duties of the parties that might affect the insured’s decision to purchase.
• Unexpected or onerous provisions
• All information that might affect the insured’s decision in a clear, ambiguous and comprehensive manner.
• Insurers must comply with all requirements of FICA

Question 8

Discuss ‘when the information must be disclosed’

Answer 8

• Information must be disclosed to the insurer (or insured) to enable him to decide whether he is prepared to conclude a contract on insurance with the insured (and vice versa). This makes it a pre-contractual duty.
• This duty is created by operation of law and not due to a legal tie created between the parties.
• In the case of life insurance, the duty to disclose is a once-off duty, as these contracts are usually of a continuous nature, unless the parties agree otherwise.

Question 9

What need NOT be disclosed?

Answer 9

1. Facts of which the other party was, or should have been, aware. These include facts which are general knowledge or obvious;
2. Facts iro which a party has either expressly, or tactily, waived his right of disclosure;
3. Facts covered by a warranty in the insurance contract itself.

Question 10

Discuss the consequences of failure to disclose or inform

Answer 10

• Amounts to misrepresentation
• The misrep. can be made by positive actions or by an omission
• The misrep. can be intentional, negligent or innocent
• Misrep. influences consensus and so makes the contract voidable at the option of the prejudiced party
• If the contract is set aside, restitution has to take plac
• If the misrep. is intentional, the prejudiced party can also institute an additional action for damages based in delict
• Disclosing false or inaccurate information is prima facie wrongful and contrary to public interest, unless it is not a statement of fact.
• By statute an insurer’s remedies are limited. The insurer may only act on a misrep which could possible materially influence the assessment of the risk under the policy at the time of conclusion thereof.
• Cannot claim contractual damages where the contract is void ab initio
• An insurer’s failure to disclose info may also constitute an administrative offence or misconduct.

Question 11

Why do insurers use warranties?

Answer 11

Since they cannot claim contractual damages if there is misrep, they couch the replies made by prospective insureds in the form of contractual warranties and including these into the contract.

• The insured’s pre-contractual disclosures are therefore incorporated in the contract as continuous terms of the contract.
• A breach of warranty is a breach of contract

Question 12

Name 3 types of warranties

Answer 12

1. Affirmative warranties and promissory warranties
2. Warranties of fact, warranties of knowledge and warranties of opinion
3. Absolute or relative warranties

Question 13

What affirmative warranties and promissory warranties?

Answer 13

• Affirmative warranty: The insured confirms the correctness of a factual situation which refers to the present or to the past (i.e. X warrants he has never had epileptic fits)
• Promissory warranty: The insured warrants that a certain factual situation will be maintained after conclusion of the contract, or that he will act in a certain way while the contract remains in force.

Question 14

What is a warranty of fact?

Answer 14

The insured only warrants facts which fall within his field of knowledge.
He can only be held liable for the facts of which he had actual knowledge.
An insured who innocently and in good faith makes a faulty warranty, remains liable for breach of warranty.

Question 15

What is a warranty of knowledge?

Answer 15

The insured warrants the presence or absence of a certain fact, irrespective of whether or not the fact falls within his field of knowledge.
An insured can be held liable for breach of warranty, even if he in good faith warrants a fact that turns out to be incorrect.

Question 16

What is a warranty of opinion

Answer 16

The warranty given by the insured can amount to an estimate or the expression of an opinion.
Where the estimate or opinion proves to be excessive, it can amount to a breach of warranty.
The insured simply guarantees that the statement given contains his honest opinion or estimation.

Question 17

What is an absolute warranty?

Answer 17

An absolute warranty clearly states specific terms that the insured has to comply with to the letter.
Breach of warranty will occur even where the insured had no fault as to the non-compliance with the strict terms.

Question 18

What is a relative warranty?

Answer 18

A relative warranty is framed in general terms and does not specify in detail what the insured must do.
The insured has to comply with the warranty to a substantial degree, according to the standard of the reasonable person.

Question 19

Discuss the consequences of breach of warranty

Answer 19

• Where a fact which is warranted is incorrect, or where the insured did not fulfil his contractual warranty, he is guilt of breach of contract.
• In principle this mean that the insurer has the legal remedies for breach of contract available: specific performance, damages or cancellation.
• To protect the insured, the insurer may only cancel the contract due to a breach of warranty in limited circumstances.
• Where the insurer cancels a contract, restitution must take place. He has to return all premiums already received, unless the contract contains a forfeiture clause.
• The insurer may be entitled to other contractual remedies to which the parties specifically agreed (cancellation clause or penalty clause).

Question 20

What is a forfeiture clause?

Answer 20

It allows the insurer to retain all premiums already paid as liquidated damages where the insured commits breach of warranty,

Question 21

Discuss the statutory protection provided

Answer 21

• In Jordan v New Zealand Insurance court held that there are no relative degrees of truth. Only true or untrue.
• Provisions were introduced in to LTIA and STIA that states than an insurer cannot limit his liability in terms of an insurance contract or cancel the contract, or increase the obligations of the insured, based on a representation by the insured, unless the incorrect or false representation probably materially influenced the assessment of the risk covered by the policy.

Question 22

Discuss the realisation of risk by insured

Answer 22

• Where the insured realises the risk without having acted, or where there was no fault on his part, the insurer will still be liable, unless the contract expressly excludes his liability.

Question 23

If insured’s conduct was non-criminally negligent?

Answer 23

Insurer liable, unless expressly excluded.

Question 24

If insured’s conduct was criminally negligent?

Answer 24

The public interest will determine whether or not the insurer is liable, unless the cover expressly excludes it.
Usually excluded.

Question 25

If insured’s conduct was intentional and non-criminal?

Answer 25

The cover is excluded per se unless the cover expressly provides for cover.

Question 26

If insured’s conduct intentional and criminal?

Answer 26

No cover is ever afforded - even when the contract specifically allows it. It would be against public policy and would affect the legality of the contract.

Question 27

Discuss the Principle of Indemnity

Answer 27

• It forms the basis of indemnity insurance
• Entails that the insured can never recover more than the actual loss or damage suffered by him
• In certain situations (e.g. underinsured) he will not be able to recoup the full amount of his actual loss or damages from the insurer.

Question 28

According to which principles is loss quantified?

Answer 28

1. The burden rests on the insured to prove the extent of the loss
2. comparison must be made between the real and actual monetary value of the interest before the event insured against, and its value immediately after the event
3. The comparison must be made at the time of the loss or damage
4. The comparison must be made at the place where the damage or loss occurs
5. Only the intrinsic value of the insurable interest must be taken into account (i.e. not sentimental value); and
6. Consequential damages and lost prospective profits are not included in the calculation.
   - The contract may also expressly exclude specific losses from cover, even though they might actually materialise due to the event insured against.

Question 29

What happens when the insured can prove the loss/damage but not quantify the loss with mathematical exactness?

Answer 29

On best evidence available, the court may, upon such evidence assess the loss and allocate an amount of damages.

Question 30

What serves as the basis for calculating the real value of property?

Answer 30

Market value.

• It is an objective value based on the amount an article will fetch in a defined market, irrespective of the opinion of the insured.
• Usually proven by expert testimony or the actual sale price of such property
• Where the insurable interest is lost or totally destroyed, the insured is not entitled to the market value of such

Question 31

What does it mean that a contract creates a obligation as to the performance due?

Answer 31

It means that the insurer has the right to choose whether he wants to reinstate or rather pay.

Question 32

What is over-insurance?

Answer 32

Where an insurable interest is insured for more than its actual value.

Question 33

What is under-insurance?

Answer 33

The value of the object insured at the time of loss or damage exceeds the insured amount.
- The insurance cover is not sufficient to cover all the damages, should the object be completely destroyed or damaged.

Question 34

What is used to prevent over- / under-insurance?

Answer 34

An average clause may be incorporated into the contract.
- Where immediately prior to its loss or damage the market value of the property insured is greater than the sum for which it is insured, the insured shall be deemed to be his own insurer for the difference in the insurer’s liability shall be limited to that sum of loss that bears the SAME PROPORTION to the amount of the loss or damage. [I.e. if 50% under-insured, then even if just slightly damaged, insured will be liable for 50%]

Question 35

Discuss double-insurance (incl. requirements)

Answer 35

• Where an insured insures the same interest with 2 or more independent insurers against the same risks.
• Requirements:
  a. The policies must overlap as to the event insured against
  b. The policies must cover the same interest
  c. The policies must relate to the same object of risk; and
  d. The policies must be in force at the same time.
• Insurer cannot claim more than actual damages, but can claim full amount from any insurer, who then have a right of recourse against each other.

Question 36

What do insurance contracts usually include to avoid the tedious process of instituting claims against each other (in event of double insurance)?

Answer 36

A contribution clause.
- Each insurer is ito such a clause only liable to pay his pro rata share of the damages to the insured.
Requirements for contribution:
a. The insurer who claims contribution must have discharged his liability towards the insured;
b. The insurer must have paid more than his pro rata portion of the loss;
c. Payment must have been in respect of the interest which is the object of the double insurance at the time of the loss; and
d. The double insurance for the interest must have been for an amount exceeding the loss.

Question 37

What is subrogation?

Answer 37

Where the damage to the insured interest is caused by a 3rd party, the insured has a choice either to claim from his insurer ito the insurance contract, or from the 3rd party on the grounds of delict.

• If the insured does recover his damages from his insurer, the insurer by operation of law obtains the right to claim from the 3rd party the amount paid to the insured.
• The insurer institutes the claim in the name of the insured.
• Principle of indemnity still applies

Question 38

What is the effect of subrogation?

Answer 38

That the 3rd party is, in the end, held liable for the amount of the damage.

Question 39

Is formal cessation requird?

Answer 39

No. Because the insurer has indemnified the insured, the latter loses all economic interest in his claim against the 3rd part. This interest is transferred to the insurer.

Question 40

What are the requirements for subrogation to take place?

Answer 40

1. There must be a valid insurance contract
2. The insurer must have indemnified the insured
3. The insured’s loss must have been fully compensated
4. The right must be susceptible of subrogation

Question 41

Which 2 situations must be distinguished?

Answer 41

1. Where the insurer completely indemnifies the insured

2. Where the insurer only partially indemnifies the insured

Question 42

Discuss where the insurer completely indemnifies the insured

Answer 42

• The insurer becomes dominus litis of the claim against the 3rd party
• He has complete control over the claim, which is still instituted in the insured’s name
• The insurer is entitled to any amounts recovered from the 3rd party

Question 43

Discuss where the insurer only partially indemnifies the insured

Answer 43

• The insured does not lose his economic interest in the claim as he has to carry some of the losses himself or recoup them directly from the third party
• The insured remains dominus litis of the claim and has to co-operate with the insurer to successfully claim the loss from the 3rd party
• Any balance which the insured receives in total from the 3rd party and the insurer, which exceeds the amount of loss or damage, has to be repaid to the insurer as the insured may in total never claim more than his actual loss

Question 44

Can the action against the 3rd party be divided?

Answer 44

No, only one cause of action exists against the 3rd party.

Question 45

May the insured prejudice the insurer’s claim?

Answer 45

No, the insured may in no way prejudice or frustrate the insurer’s claim against the 3rd party (eg. by waiving the claim against the 3rd party, or by settling the 3rd party for a lesser amount)

Question 46

What are the insurer’s duties under subrogation?

Answer 46

1. The insurer must preserve the insured’s claim and not to prejudice the position of the insured by, for examples, accepting an unfavourable settlement offer by the 3rd party
2. Any costs awarded to the 3rd party regarding the proceedings are technically recoverable from the insured, yet as the action benefits the insurer, the position is that the insurer must bear these legal costs

Question 47

Discuss the right to salvage

Answer 47

• The insurer has the automatic right to salvage in cases of total loss or where what remains is no longer an object of the type as insured originally, or where the insured has merely been deprived of his interest and its return is uncertain or unlikely
• The insurer has to pay the insured for total loss before he has a right to salvage whatever remains of the affected interest

Question 48

What is an excess clause?

Answer 48

The insured has to bear a certain amount of the damages in respect of every successful claim instituted against the insurer
- Excess and premium fees may increase where the insured moves into a higher risk group or institutes multiple claims

Question 49

What are the 3 basic categories of life insurance?

Answer 49

1. Whole life insurance - insurer undertakes to pay a contractually agreed amount to the insured, irrespective of the time of death. The contract remains in force for the lifespan of the insured, and does not have to be repeatedly renewed.
2. Term insurance - The insurer is only liable to pay out an amount if the insured were to die within the contractually agreed period. Should the insured outlive such period, the contract lapses and the insurer’s liability comes to an end. The insured cannot claim any premiums paid back from the insurer.
3. Endowment insurance - Benefit lies in the ivestment potential it offers to the insured. With ordinary endowment insurance, the insurer has to pay a contractually agreed amount at the end of the insurance period, or upon death of insured. With pure endowment insurance, the insurer is only liable to pay the agreed amount if the insured is still alive at the end of the insurance term. Should the insured die at an earlier stage, only the life insurance component pays out.

Question 50

What is surrender value?

Answer 50

A life insurance contract usually has a surrender value after expiry of a certain period as determined in the regulations to the LTIA.
The insured may at some stage terminate the contract, and receive a certain amount from the insurer.