Insurance law in 2007

Some groundbreaking legal cases where concluded this year and in many cases, the courts held in favour of the insurers. Brokers will do well to take note of the judgements and ensure their clients will not run into similar situations.

In the most important insurance judgment of 2007, the Constitutional Court dealt with the question whether a time bar provision in a policy, requiring the insured to issue a summons against the insurer within 90 days of a claim being rejected, was unconstitutional by reason of limiting access to the courts.

Unreasonable and offensive?

As with any other contract, the provisions of an insurance policy must be considered with reference to the values that underlie our constitutional democracy in the Bill of Rights including human dignity, equality and freedom. If a contractual term is contrary to public policy it will be unenforceable. But an important aspect of public policy is that parties should comply with contractual obligations that have been freely and voluntarily undertaken assuming the provisions are not manifestly unreasonable and do not offend against public policy.

Time bar provision upheld

Where there is a time bar clause in a policy requiring the insured to take action within a certain time (to report the claim or to issue the summons for instance) the court will look at the particular circumstances of the case. There may be situations where the unequal bargaining power between contracting parties prohibits the one party from imposing unreasonable terms on the other. In the present case it was held that 90 days to institute an action from the date of rejection of the claim was not too short. When the insurance claim is lodged, the insured has sufficient information to make a claim and therefore to issue a summons.

Flexibility required

What the Constitutional Court did encourage is time bar clauses that are not inflexible. Provisions should be built into time bar clauses so that as a matter of fairness, justice and reasonableness the courts can come to the assistance of someone who is unable to comply with the provision because of factors beyond his or her control.

The message for insurers is that their time bar clauses should not be manifestly unreasonable and should allow flexibility. In this particular case it was found there was no explanation for the insured motorists failure to issue the summons within three months and the court was unable to come to his assistance.

Legal liability

The Supreme Court of Appeal decided in an important issue regarding the nature of a loss that can be indemnified under a liability insurance policy. In Truck & General Insurance Co Ltd v Verulam Fuel Distributors CC a truck belonging to the insured had overturned and dumped its load of diesel fuel in a public area where it caused ecological damage to an area of land and potentially polluted a watercourse.

As it was required to do so by law, the transport company immediately undertook cleanup procedures and incurred considerable cost in doing so. The question was whether the clean-up costs constituted 'legal liability' for the purposes of the liability policy with the insurer. The court had no difficulty in finding that there is no distinction between ecological damage and damage to property of any other kind.

If the insurer wished to exclude ecological damage there should have been a special exception in the policy. The National Environmental Management Act, 1998 imposed a legal obligation on the transport company to contain and minimise the affect of the incident. That legal obligation constituted a legal liability covered by the liability policy.

Business interruption

In Mutual & Federal Insurance Company Limited v Chemalum (Pty) Ltd the court interpreted the complicated provisions of a business interruption policy. Business interruption policies pay loss of profits due to a reduction in turnover resulting from damage to insured premises.

The consequence of the court's finding that adjustments had to be made to the turnover to take account of the particular financial circumstances of the insurer was that the insured found itself heavily underinsured at the rate of 58%. This reduced the insured's claim by more than R1,5 million. The case once again highlights the need to insure for the full value of any potential loss. If clients are under-insured, they may save premiums, but when there is a claim they will bear a large proportion of the loss in terms of the 'average' clause.

Sudden and unforeseen losses

The insured was also not fortunate in African Products (Pty) Ltd v AIG South Africa Ltd. An electrical cable had failed because the insulation within the cable had deteriorated over a period of time. Eventually the insulation deteriorated to such an extent that it failed altogether and a massive short circuit caused substantial damage. The policy covered "sudden and unforeseen" loss. The insured sought to contend that the loss was sudden because when the insulation failed altogether there was a sudden event causing it to suffer a loss.

The court found that the actual cause of the loss was the failure of the insulation over a period of time. In the context of the policy, the word 'sudden' has to be given meaning in relation to the cause of the loss and the final event leading to the loss is not the decisive incident. The insured failed in its claim.

This is in line with the general insurance principle that a loss which is inevitable because of a gradual failure of the insured property over a period of time, because of, for instance, wear and tear, is not insured.

Clients get what they pay for

The cases in 2007 should make it clear to insured parties that they will get the cover they paid for, the bargain they agreed to and only the insurance of fortuitous events. Clients must and comply with the claim's requirements carefully when they have a loss. Insurers, on the other hand, will learn that general wording covering such things as 'legal liability' will be broadly applied and if they want to exclude events from cover they must say so specifically. Insurers and insureds will have to take time bar clauses seriously to ensure that they operate fairly in all the circumstances.