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Consumer Protection Act: Impact on the insurance industry

01 February 2011 Danny Joffe, Hollard Insurance Company

While the Consumer Protection Act (CPA) has brought a great deal of uncertainty to the insurance industry, personal lines insurance policies should remain unaffected until October 2012. Liability insurance, however, will be affected from day one – the 1st

The CPA provides that any provision or consumer agreement which purports to limit in any way the risk or liability of a supplier, must be drawn to the attention of the consumer in writing and plain language that explains the fact, nature and effect of the provision.

Exclusions, disclaimers under fire

This means all major exclusions in a policy will have to be drawn to the attention of the consumer, who must be given adequate opportunity to receive and comprehend the provisions. It may explain why exclusions are now colour-coded in many insurance policies.

But the CPA is far more relevant to disclaimers and indemnity forms where a contracting party attempts to limit its risk or liability. The CPA clearly states that one cannot disclaim out of gross negligence. Liability insurers rely very heavily on disclaimers and indemnity forms when assessing liability to a third party and it may be that many more claims will have to be paid out as a result of this.

Products liability

The consumer now has a right to purchase goods that are free of defect and thus the principle of “buyer beware” or “voetstoets” will be watered down considerably.

Products liability, as covered in the normal MultiMark policy, will be affected significantly, even though it is a commercial policy. The CPA states that whenever a product, sold to an individual consumer, causes damage or injury, the importer, manufacturer and retailer will be on the hook together, even though there was no negligence. This liability can be attracted even through inadequate instructions.

This means that comprehensive instructions or manuals must be provided and all parties in the supply chain have the same responsibility to make sure the consumer gets the manual.

Class actions

Class actions are also permitted in terms of the CPA, so large liabilities may arise even though strictly there is no negligence. Retailers specifically are at risk here as they did not put the product together or import it. They will need to have contracts in place with their suppliers to ensure they can join them in an action. Remember, if they try and recover without a contract, the CPA will not protect them as they are not an individual consumer. Thus, the whole issue of negligence arises.

A knock-on effect is that liability policies exclude liability by agreement so any supplier that signs a contract like this may find they have no liability cover on the products side. It may be that a proper broad form liability policy is required that takes all this into account. The only exception is where it is unreasonable to expect that supplier or distributor to have picked up the defect having regard to their role in marketing the product.

Uncertain times

The uncertainty is the main concern for insurers and the legal profession. How will the courts rule? Will the legislature agree that the Insurance Acts are consumer-friendly enough by October 2012? Will the new strict liability on products create a run on liability claims? Will the possible increase in volume of claims affect the capacity of liability insurers? Will the quantum of the claims increase greatly as negligence no longer has to be proven?

Time is the greatest teacher and hindsight will prove to be the exact science here.

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