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The impact of the Consumer Protection Act on insurance

09 September 2009 Amelia Costa, Associate, Deneys Reitz Inc
Amelia Costa

Amelia Costa

THE ACT

The Consumer Protection Act (“CPA”) not only has socio-economic consequences, but more specifically, impacts on the insurance industry in a major way.

In evaluating the provisions of the CPA, it is necessary to take notice of the malpractices it seeks to address.

PURPOSE OF THE ACT

The CPA is aimed at establishing a uniform national benchmark for improved standards of consumer protection and at promoting historically disadvantaged market participants’ rights.

The CPA will come into operation in October 2010. In the meantime, suppliers such as insurers have an opportunity redraft their agreements and to offer the required insurance to the suppliers of goods and services.

APPLICATION OF THE ACT

The CPA applies to any goods or services nationally promoted or supplied.

Services” include services provided by insurance companies but the Short-term Insurance Act and Long-term Insurance Act (“the Insurance Acts”) are excluded from the CPA’s ambit, subject to these Insurance Acts being in line with the consumer protection measures stipulated in the CPA by April 2011.

There are two aspects of the insurance industry that will be affected by the CPA. The first is the relationship between the insurer and the policyholder in which event the insurer would be the supplier and the policyholder the consumer; and the second is the relationship between the policyholder and the third party, in which event the policyholder would be the supplier and the third party the consumer.

IMPORTANT PROVISIONS: SERVICES

The more important insurance services affected by the CPA:

· A policy would be interpreted in favour of the consumer, in the event of ambiguity allowing for more than one reasonable interpretation. This reflects the existing law, but is now an unalterable right. · Any exclusion within the insurance contract would be measured against whether a reasonable person in the position of the consumer would have expected such exclusion, taking into account the contract’s contents, the manner in which it was presented and the circumstances around concluding it. Policy exclusions may have to be drawn to the consumer’s attention. · Insurers will not be allowed to take advantage of the fact that the consumer is unable to understand the terms of the contract being concluded with it as a result of either physical or mental disability, illiteracy, ignorance or inability to understand the language of the contract. · Terms of the policy may be ruled as unfair, unjust or unreasonable if they are excessively one sided, contain terms so adverse to the insured as to be inequitable, or if the consumer was misled by the insurance company. · The terms of the contract must be in writing and in plain language. · Exclusions may still be utilised but the exclusions need to be in writing and in plain language, conspicuously presented to the insured allowing the latter a full opportunity to understand their terms.

IMPORTANT PROVISIONS: GOODS

The CPA’s provisions in respect of consumer protection for goods sold and delivered are manifold and focus will be placed on key provisions:

· A consumer may insist on quality service, failing which the supplier may be ordered to remedy any defect or to refund a reasonable portion of the price paid for the goods. “Quality service” includes timeous performance and completion of services by the supplier, services performed on a generally expected level of quality and goods that are defect-free.
· Any replaced and repaired goods are also subject to an implied warranty of quality, i.e. defect-free.
· A supplier needs to warn a consumer of potential risks if the goods are of an unusual character or nature or if the risks cannot be reasonably expected or could result in injury or death.
· The producer, importer, distributor or retailer of any goods is liable, without proof of negligence, for any harm which may be caused as a result of the supply of unsafe goods, product failure, defect or hazard or inadequate instructions or warnings accompanying such goods.
· The usual policy covering liability to the public contains a number of possible extensions, including product liability. It covers an insured in respect of events caused by goods or products sold or supplied by an insured in connection with its business.
· But the extension dealing with liability for defective workmanship specifically excludes cover for the costs of rectifying or recalling defective work and for defective design.
· Therefore, the possibility is apparent that an insured could be liable in terms of the CPA to a third party, although it may not be covered by insurance for such increased exposure.
· Insurers will have to devise broader cover but they will need to charge sufficient premiums. Commercial suppliers of goods and services should take notice that they may not be covered for all extended grounds of liability in terms of the CPA and they will have to pay more for the additional cover.
· The introduction of the CPA may also put an end to the age-old debate as to whether the standard exception dealing with “liability assumed by agreement” excludes liability to an insured in the event, for example, of the insured warranting goods sold and delivered, irrespective of fault on its part. The CPA introduces extended liability that would attach to the insured “notwithstanding such agreement” with a third party. Therefore, liability also assumed by the agreement may very well be covered.

CONCLUSION

Insurers will eventually have to align their services with the CPA. They should begin now by reconsidering their insurance contracts and advising their insureds to word indemnity terms and/or disclaimers so that they are in line with the provisions of the CPA. Furthermore, in respect of the supply of goods, insurers are encouraged to make their insureds aware of the extended exposure faced in respect of goods sold and delivered. Insurers should consider widening the net of their policy wordings on product liability (subject to higher premiums) for such extended liability exposure of their insureds. Policyholders should take note of their increased exposure towards third parties and should make provision for the additional insurance they will need.
 
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