Prescription and time-bar clauses - no time to snooze...
01 November 2012 | Magazine Archives FAnews & FAnuus | Short Term | Carol Holness, Norton Rose SA
If you have ever been hunted down by a debt collector over a forgotten student loan, you will probably know all about prescription. Prescription is a powerful defence for a debtor, who can wriggle out of the debt if enough time has lapsed. For someone owed money, prescription can be an unmitigated disaster. How is the concept applied in the insurance space?
Prescription, in the context of insurance, refers to the loss or weakening of a person’s right to recover a debt as a result of their inaction and the passing of time. An insured that fails to lodge a claim or fails to institute proceedings against their insurer, or an insurer who delays instituting recovery proceedings against a potentially liable third party, can fall foul of prescription.
It is often difficult to determine when prescription starts to run – or is interrupted – or what prescription period applies to a particular debt. It is even more difficult to deal with the concept in the short-term insurance environment. The easiest way to explain the matter is that an insured who fails to institute proceedings timeously may find their claim rendered unenforceable, while an insurer who is unaware of prescription may pay a claim where a valid defence exists.
Claim or else!
Most short-term insurance contracts contain time-bar clauses which require an insured (as creditor) to institute legal proceedings against an insurer (the debtor) within a set time period. If the insured fails in its obligation in this regard the insured’s claim may be extinguished or at least rendered unenforceable.
The Constitutional Court, in Barkhuizen v Napier 2007 (5) SA 323 (CC), confirmed that time-bar clauses in insurance contracts are permissible as long as the clause is reasonable and fair. If the clause provides for an unreasonably short period for the dispute to be referred to court, then the clause will be contrary to public policy and unenforceable.
Beyond policy wording
If an insurance contract does not contain a time-bar clause, then prescription is determined by the Prescription Act of 1969. The usual prescription period is three years although there are exceptions. For example, the running of prescription may be interrupted if the insurer expressly or tacitly acknowledges liability for the insured’s claim or if the insured serves any legal process on the insurer claiming payment of the debt.
When did the "trouble” start?
Prescription starts to run as soon as the debt is due. In the insurance context, a debt usually becomes due as soon as the event insured against has taken place. However, if the insured is unaware that they have suffered a loss, then prescription will only start to run once the insured learns of the loss – unless they would have known about the loss had they exercised reasonable care.*
For example, if damage to containerised cargo is only discovered when the container is unpacked, then prescription on the insured’s claim will only start to run when the damage is discovered.
For liability insurance, prescription can only start to run once the insurer’s liability has been determined. This occurs only once the insured has paid the determined claim amount or at least has committed firmly to doing so.**
New rules post-2010
The running of prescription in short-term insurance is also affected by other legislation. Policyholder Protection Rules for Short-term Insurance, which only apply where the policyholder is a natural person insuring personally, provide that any time-bar clause in an insurance contract cannot take into account the 90 day period within which the insured is entitled to make representations to the insurer on the insured’s decision to dispute or reject the insured’s claim or the quantum of the claim.
Any short-term insurance policy entered into after 1 January 2011 must provide for a period of not less than six months after the expiry of the representation period for the insured to institute legal action. Even if the policyholder fails to institute proceedings within the contractual time-bar period, the insured may ask a court to condone non-compliance if good cause exists for the failure to institute proceedings timeously and if the time-bar clause is unfair to the policyholder.
If there is no contractual time-bar clause in the insurance policy, then the rules provide that prescription under the Prescription Act will only start to run after the expiry of the 90 day representation period.
Game changing events
The running of prescription is also interrupted by the lodging of a complaint with an Ombud such as the Ombudsman for Short-term Insurance (OSTI). From the time that the complaint is lodged with the ombudsman until the complaint is finalised, a contractual time-bar provision in an insurance policy will not run.
It is only once the ombudsman has dismissed a complaint or made a ruling that the insured has either 30 days or the balance of the contractual time-bar period (whichever is greater) to institute legal proceedings.
Rules for Ombudsmen
Whilst OSTI terms of reference provide that the lodging of a complaint does not interrupt the running of prescription under the Prescription Act, the Financial Services Ombud’s Scheme (FSOS) Act, which governs both statutory and voluntary ombudsman schemes (including OSTI) provides that the lodging of a claim with an ombudsman suspends any applicable time-bar clause as well as the running of prescription under the Prescription Act. Voluntary ombudsman schemes may regulate themselves, but their terms of reference cannot conflict with the FSOS Act.
The bottom line is that prescription punishes supine behaviour. Neither the insured nor the insurer can afford to "fall asleep” on a claim.
