INTRODUCTION TO

COMMERCIAL LAW
(LAWS1IC) 2022
THE LAW OF
INSURANCE
PART 1
 Part 1:
THE LAW OF INSURANCE
• The Relevance of Insurance
• The Economic Function of Insurance
• Insurance Defined
• Insurance Law and Insurance Business
• Sources of South African Insurance Law
• The Three Branches of South African Insurance Law
• Different Types of Insurance
 THE RELEVANCE OF INSURANCE
• When loss occurs and in order to help reduce the risk businesses
insure their premises, equipment and stock by taking out insurance.
• In such an event the payment from an insurance company may
enable the business to survive.
• One’s business may depend on the skill of a particular person who
may be difficult to replace if he dies.
• If a business partner dies his interests may have to be bought by
remaining members
• Insurance is a way for people and businesses to protect themselves
against the risk of loss.
 THE ECONOMIC FUNCTION OF INSURANCE
• The concept of risk is central to insurance.
• Risk is the possibility that a peril or danger may occur and cause harm
to the person exposed to it.
• Harm may be caused by perils, such as natural disasters or
unemployment.
• The harm one suffers is patrimonial or non-patrimonial.
• A patrimonial loss can be measured in economic terms but non-
patrimonial refers to pain and suffering.
THE ECONOMIC FUNCTION OF INSURANCE
• Example: Salesperson who works on commission is injured in a motor
vehicle accident.

Patrimonial loss:
• Medical expenses
• Loss of income for the time that he or she is off work
• The loss in the value of the motor vehicle
• Expense of repairing vehicle

Non-patrimonial loss:
• Pain and suffering
 THE ECONOMIC FUNCTION OF INSURANCE
• Uncertainty produces risks therefore they are evaluated with
reference to the probability that an event will occur and the impact it
will have if it does (if it is certain there is no risk).

• Direct measures can be taken to prevent the materialisation of

risks(eg. Secure premises, maintain vehicles) but this is inadequate as
there is an inability to control the environment sufficiently.

• In order to manage risk the entire risk or part of it may be transferred

to others.
 INSURANCE DEFINED
• Insurance is a means of transferring risk by means of contract.

• The risk is transferred and the contract determines that the insurer
will indemnify or otherwise perform a benefit to an insured if a risk
defined in the contract occurs.

• In exchange for the transfer of the risk the insured must pay an
amount to the insurer (premium) must also be established
contractually.
 INSURANCE LAW AND INSURANCE BUSINESS
• Insurance law governs the transfer of risk through insurance.
• Market forces will place significant constraints on the activities of
insurers.
• An insurer may be prepared to indemnify an insured even if he could
not be legally compelled to do so if it would make business sense.
• However market forces sometimes also work against insured parties.
• In these circumstances the protection of the law will be essential to
insured parties although the law has to respect market forces.
• The market will ultimately determine when and on what terms risk is
transferred ito insurance policies.
 SOURCES OF SOUTH AFRICAN INSURANCE
LAW
• The common law
• Inherited from other legal systems
• Developed by South African courts
• Statutes
• The Long Term Insurance Act 52 of 1998 & The Short Term Insurance Act 53 of
1998
• The Financial Advisory and Intermediary Services Act 37 of 2002
• The Financial Services Board Act 97 of 1990
• The ‘Hard’ and ‘Soft’ Insurance law and alternative dispute resolution
 THE THREE BRANCHES OF INSURANCE LAW
• Insurance law consists of three branches :

• Insurance contract law

• Statutory regulation of insurers

• The law of insurance intermediaries

 THE THREE BRANCHES OF INSURANCE LAW
Insurance Contract Law
• A contract between the insurer and insured, referred to as a policy,
forms the basis for the relationship between them.
• The law determines what will constitute an insurance contract; when
it will be concluded, how its terms should be understood, and what
will happen, if a particular situation is not covered by the explicit
terms of the contract.
• General principles of contract also apply to insurance contracts.
• In the past insurance contract law strongly favoured the protection of
insurers but now there is a body of law which is aimed at protecting
insured parties as consumers of insurance.
 THE THREE BRANCHES OF INSURANCE LAW
The Regulation of Insurers
• The law regulates insurers to reduce the risk that they will renege on
their promises.
• Insurers must be registered with a supervisory body – Financial
Services Board – types of insurance which they perform.
• They must hold assets which will allow them to perform their
obligations to insured parties.
• They must report periodically to the Financial Services Board.
• They must be well managed or comply with the high standards of
corporate governance.
 THE THREE BRANCHES OF INSURANCE LAW
Intermediaries
• Insurers seldom deal directly with insured parties.
• Intermediaries ordinarily intercede between them and facilitate the
conclusion of policies, collect and account for premiums on behalf of
insurers and process claims.
• Most important types of intermediaries: representatives and
independent.
• Representative acts on behalf of a certain insurer (insurance agents or
canvassing agents).
• Independent intermediaries - do not act for a particular insurer
(insurance brokers).
 THE THREE BRANCHES OF INSURANCE LAW
Intermediaries
• Brokers facilitate the conclusion of insurance contracts on behalf of
the insured but will sometimes perform other intermediary functions
for insurers.
• Brokers should be independent and find insurance on the most
favourable terms for clients.
• Brokers often collect insurance premiums on behalf of the insurer-
sometimes difficult to distinguish if insurer or broker.
• The broker accordingly may be the public face of the insurer.
 THE THREE BRANCHES OF INSURANCE LAW
Intermediaries
• Where private persons and businesses use brokers to deal with
insurers on their behalf brokers are required to act with reasonable
care and skill.
• Where an insurer refuses an insured’s claim in circumstances where
the broker could have prevented the refusal by taking reasonable
steps the broker can be liable for the insured’s loss.
• The broker will be liable either ito the contract between the broker
and insured or on the basis of delict.

• Lappeman Diamond Cutting Works (Pty) Ltd v MIB Group (Pty) Ltd
see page 347 of the prescribed textbook.
 THE THREE BRANCHES OF INSURANCE LAW
Intermediaries

• Since 2002 insurance intermediaries and persons who give advice on

insurance have also become subject to regulatory system provided by
the Financial Services Advisory and Intermediary Services Act (FAIS
Act).
• A person may only provide advice or perform services on behalf of
financial product providers if they are licenced.
• Will only be licenced if he is a fit and proper person.
 DIFFERENT TYPES OF INSURANCE
• Types of insurance can be distinguished on different grounds, such as:

• The interest being protected

• The duration

• The peril or event insured against

 DIFFERENT TYPES OF INSURANCE
The Interest being Protected
• The most fundamental difference is indemnity and non-indemnity
insurance.
• Indemnity insurance is intended to make up in whole or in part for a
specific financial loss of the insured.
• The insurer undertakes to indemnify the insured for an economic loss
to his patrimony.
• The value of the indemnity will be determined with reference to the
actual financial loss caused by the insured event.
 DIFFERENT TYPES OF INSURANCE
The Interest being Protected

• A common form of indemnity insurance – property insurance.

• May be for reduction in the value or positive elements of his property

(property damaged, destroyed or stolen).

• Corporeal (vehicle, ship or contents of building) or incorporeal (claim

which insured has against others for money).
 DIFFERENT TYPES OF INSURANCE
The Interest being Protected

• Liability insurance – another common form of indemnity insurance.

• Protect insured against an increase in his liabilities or the negative

elements of his patrimony.
 DIFFERENT TYPES OF INSURANCE
The Interest being Protected
• Non-indemnity insurance – capital insurance – not aimed at
indemnifying the insured for economic loss.
• It simply provides for the payment of a specified amount on the
happening of the insured event.
• The amount of the insurance is determined when the policy is taken
out not with reference to the happening of the insured event.
• The losses covered by this form of insurance cannot be measured in
precise monetary terms.
• Life insurance is non-indemnity insurance.
 DIFFERENT TYPES OF INSURANCE
The Duration
• The distinction between short-term and long-term insurance is
important and regulated by different pieces of legislation.
Relationship closely related to indemnity and non-indemnity.
• Short Term Insurance Act – short term insurance - equates to
indemnity insurance.
• Indemnity insurance normally concluded short periods – one year –
allow for re-evaluation of risks.
• Long Term Insurance Act – non-indemnity insurance.
• These policies will not necessarily endure for a long time but usually
persist for longer than a short-term policy – eg. Life Insurance
 DIFFERENT TYPES OF INSURANCE
The Peril or Event Insured Against

• Insurance cover is frequently defined with reference to the peril or

event which will cause harm central to determining the risk insured
against.

• Harm caused by events such as fire, death, theft, political instability

etc covered by insurance policies.