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Full and final settlement not so final, the impact of section 156 of the Insolvency Act on insurance claims

19 February 2024 Ayanda Nondwana, Partner & Jade Werner, Candidate Attorney at Eversheds-Sutherland (SA) Inc.

In NF v Santam Limited [2024] ZAWCHC 12 (26 January 2024), the Court warned an insurer against trying to “thwart” the provisions of section 156 of the Insolvency Act (“the Act”) by concluding a contract that limit their liability in terms of proceeds of the policy payable to a third party. Especially where there is pending litigation between the third party and the insured which has a bearing on the limit of indemnity.

As a general rule, South African law does not make provision for a third party to claim delictual damages to recover such damages from anyone other than the offending party. However, section 156 of the Act creates an exception to this general rule insofar as it relates to an insurance relationship between the insured and insurer. Section 156 of the Act states that:

Whenever any person (hereinafter called the insurer) is obliged to indemnify another person (hereinafter called the insured) in respect of any liability incurred by the insured towards a third party, the latter shall, on the sequestration of the estate of the insured, be entitled to recover from the insurer the amount of the insured’s liability towards the third party but not exceeding the maximum amount for which the insurer has bound himself to indemnify the insured.

Section 156 of the Act has the effect of allowing a third party to take the place of the insured and directly claim the amount of indemnity from the insurer upon the sequestration or liquidation of the insured’s estate. Furthermore, section 156 of the Act thus differentiates the third party from other creditors of the insolvent insured estate, in that, it permits the third party to have a direct right of recourse against the insurance company instead of having to prove a claim in the insolvent estate in the same manner as other creditors would have to.

This matter involved an application seeking condonation for the late filing of a replication to Santam’s plea which was delivered five (5) years after the close of pleadings. The plaintiff in the main action claimed delictual damages for injuries suffered by her minor child as a result of alleged medical negligence during the child’s birth in January 2011 which has resulted in long term effects such as cerebral palsy. The child was born in St Mary’s Mission Hospital which was owned and operated by The Saint Mary’s Catholic Mission Hospital Trust (“the Trust”). The plaintiff originally instituted action against the Trust in April 2013.

While the plaintiff was pursing action against the Trust, the Trust was operating at a loss. Prior to becoming insolvent, on 20 May 2015, the Trust and Santam agreed that the limit of indemnity covering the plaintiff’s claim was R5 000 000.00 (5 million), determining that the claim fell within the ambit of indemnity for negligence arising from “midwifery duties”. Santam agreed to pay R5 560 175.01 to the Trust in full and final settlement of the plaintiff’s claim, despite the plaintiff’s contention that the negligence was not only confined to “midwifery duties”. The plaintiff asserted that the negligence arose out of “medical malpractice” which would increase the limit of indemnity from R5 million to R25 million, in terms of the policy. The Trust was liquidated on 13 May 2016. The plaintiff instituted legal proceedings against Santam in June 2017. The plaintiff delivered his replication to Santam’s plea in August 2022, hence, the application for leave to condone the late filing of the replication.

In the replication, the plaintiff contended that the agreement of loss was concluded to thwart the provision of section 156 of the Act, as at the time, the Trust and Santam were aware that the Trust was carrying on business in insolvent circumstances and that liquidation in the near future was inevitable. In the circumstances, the plaintiff asserted that, upon the liquidation of the Trust, the plaintiff’s claim would be against the insurance company in terms of section 156 of the Act. The plaintiff asserted that this amount of indemnity ought to have been ringfenced to settle the liability of the claim and not to fell into the insolvent estate.

In resisting the application, Santam contended that the agreement of loss between it and the Trust has no bearing in this matter. Firstly, Santam asserted that it was entitled to pay the amount of maximum indemnity to the Trust in terms of the policy. And, on making that payment, it would be under no further liability to the Trust in connection with the claim. Secondly, Santam asserted that there is no provision in law allowing for the amount of the indemnity to be ring-fenced as a payment for the plaintiff’s claim so as to fall outside an ensuing insolvency. Lastly, Santam asserted that in any event, section 156 of the Act does not allow an action directly by a claimant against an indemnity insurer, but only to the extent that the obligation to indemnify remains and would otherwise be enforceable by the insured. The Court did not agree.

The Court held that it is incomprehensible for Santam to assert that the plaintiff is not a beneficiary of anything and that they were not compelled to ring-fence this amount. When the agreement of loss was concluded, Santam knew that this amount was claim specific and not to defray the insolvent estate’s costs. Therefore, the Court agreed that the plaintiff had raised triable issues for the trial court to consider. The triable issues included the agreement of loss between the Trust and Santam to reduce their losses in the face of the plaintiff’s claim as well as whether the plaintiff’s right of recourse in terms of section 156 of the Act remained operational. The court stated that the purpose of the agreement of loss was to extinguish the litigation between the Trust and the plaintiff but evidently, the proceeds of the policy did not serve that purpose.

Pertinently, the Court also remarked that insurance policies aimed at indemnifying the insured for third-party claims allow the third party to act as an “indirect beneficiary” of the insurance policy. Accordingly, the plaintiff was granted leave to deliver her replication.

At first blush the findings of the court appears untenable. However, on closer scrutiny, the preliminary findings of the court on the specific facts of this matter are not far-fetched. On proper construction of the plaintiff’s claim made out in her replication, is a claim for damages as a disappointed beneficiary. Such a claim is available to a third party not privy to a contractual relationship between two parties. The potential impact of the judgment, pending the finding of the trial court, is that insurance companies may be held liable twice for a single claim. As such, insurance companies should be cautious when attempting to reduce their liability in the context of the insolvency of the insured, to ensure that the proceeds of the policy are utilized solely for the purposes for which, the agreement of loss is concluded. As the right of recourse under section 156 of the Act may remain operational despite the settlement of a claim for indemnification.

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