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LEGAL LIABILITY INSURANCE: AN OVERVIEW

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Published Date: December 13, 2022

In South Africa, legal liability insurance plays a pivotal economic role in the allocation of risk and maintenance of financial security and financial stability of its citizens.  Legal Liability or Third Party insurance focuses on the negative elements in the form of liabilities which the insured may be exposed to, whereas first party insurance, in contrast is concerned with the insured’s patrimony.[1] Liability may arise due to various reasons such as contract, delict, unjustified enrichment, administration or statue.

Legal Framework for legal liability insurance:

There is little authority in the form of law reports and statutory regulation. Jacobs, W notes that statutory provisions are fragmented and that common law and judicial decisions remain our principal source of liability insurance contract law in South Africa[2]. The Short Term Insurance Act, the definition section for which has since been revoked,[3] defines a “liability policy” as a contract in terms of which, “a person, in return for a premium, undertakes to provide policy benefits if an event, contemplated in the contract as a risk relating to the incurring of a liability, otherwise than as part of a policy relating to a risk more specifically contemplated in another definition in this section, occurs,” inclusive of a reinsurance policy.

Liability insurance is classified as a class of non-life insurance and is contained in Schedule 2 Table 2 under The Insurance Act.[4] Table 2 further lists various sub classes of liability, namely, director’s and officers, employer liability, product liability (inclusive of product guarantee and product recall), public liability, aviation, engineering (including environmental impairment liability), marine, motor, rail, transport, personal and other. An undertaking to pay a premium against an undertaking to indemnify against legal liability is central. The liability insured against, Reinecke, submits, is that of the insured towards a third-party (and not as against the insurer).[5]

Trade usages and customary insurance law, that have developed into a rule of law may be enforced by courts. The Constitution of the Republic of South Africa, 1996, and its underlying values, as supreme law, remains central.

Other legislative provisions, such as Section 156 of the Insolvency Act[6], provides that third parties may under certain circumstances on sequestration of the insured recover the amount of the insured’s liability directly from the insurer. Liability insurance may be voluntary or involuntary. Certain pieces of legislation further make the obtaining of liability cover compulsory, such as the Safety at Sports and Recreational Events Act,[7] and the Public Accountants and Auditors Act.[8]

2018 Policyholder Protection Rules[9]  and the Code of Conduct under the FAIS Act[10] incorporate market conduct rules giving effect to the treat customer fairly (TCF) and consumer protection principles. There is a duty to disclose material factors which may be relevant to the assessment of the risk to the insurer (such as existing liabilities of the insured) and conversely, terms which are to be brought to the attention of the insured in the form of exclusions and conditions which may apply.

Liability insurance is still subject to your general governing principles of insurance. The insured may not be unduly enriched. Requirements for the valid conclusion of a contract and essentialia for an insurance contract apply.

Additional underlying principles applicable in liability insurance include:

  1. The quantification of the insured’s loss normally correlates to the quantification of the liability incurred.[11]
  2. Multiple insurers may provide cover for a single liability, in which event the principle of sharing of losses applies.
  3. Cover provided under liability insurance, may be limited in various way, with regards to the identity of the insured, the activity from which the cover sought is to arise, the type of third party loss or the identity of third parties.[12] The insured may be required to carry as an excess an initial part of the liability incurred or the insurer may set a maximum cover limit which, if exceeded, will be for the insured’s own account.
  4. Limitations may further be placed with reference to a claim or occurrence.[13]
  5. An insured who has been indemnified also has a right of subrogation against joint wrongdoers or to institute claims against third-parties.[14]
  6. The event which gives rise to the liability which is insured against must be uncertain.
  7. Where conduct is criminal or liability has been incurred by the insured for his own intentional conduct, he will not be covered and will be unable to recover any losses from the insurer.[15]
  8. The insured has a duty to mitigate his liabilities (not losses) towards third parties.
  9. An insured is normally precluded from admitting liability or entering into settlements with a third-party, without the express prior consent of the insurer.

When does the insurer incur liability on a policy?

It is normally not required for the insured to have actually paid the third-party claimant, for the insurer to be liable, in absence of an express clause to the contrary (termed as a “pay to be paid” clause).[16]  The rationale behind this principal is to safeguard against the insured having to first make payment himself or borrow money where he is unable to meet the financial obligations imposed by his liability incurred.[17] There are two opposing views as to the time when the insurer in fact becomes liable:

  1. The narrow view, in absence of an express provision to the contrary, first requires that the insured’s liability towards the third party be ascertained, ie established and quantified, by way of action, arbitration or agreement in the form of a judgment, a binding arbitral award or a final and binding settlement with the third party.[18] This view was originally followed by our courts. In Shraga v Chalk 1994 (3) SA 145 (N)[19] the courts followed a narrow view as highlighted above. The Defendant indemnified the Plaintiff against any claim made arising out of the operation of a bank account. The Plaintiff was sued for the overdraft by the Bank and elected to pay the bank and to claim reimbursement from the Defendant. The Defendant pleaded prescription. It was held that the Plaintiff’s cause of action was incomplete until such time as the Plaintiff had paid the bank. On assessment of when prescription was to start running, it was held prescription ran from the date of payment by the Plaintiff to the bank only.
  2. In Truck and General Insurance Co Ltd v Verulam Fuel Distributors CC[20] the narrow view was criticised by the Supreme Court of Appeal. It was held that the insurer incurs liability to indemnify the insured “as soon as the insured suffers a loss”, namely when an event has occurred which gives rise to the insured’s liability to a third party, even though the liability itself has not yet been ascertained and determined or quantified.[21] Reinecke notes that, legal liability is thus incurred when the third party’s complete cause of action arises. This case serves as authority for the current position in our law. Reinecke is of the view that the wider view is more appropriate when the insurers liability towards the insured must be determined. The narrow view ought to be preferred, where in terms of statute, for example, the third party has a direct claim against the liability insurer of an insolvent estate. [22]
  3. Insurers often also require notification of any occurrence against which liability is covered which has materialised, alternatively, claim instituted, before the contractual payment by the insurer becomes due.

As consumer protection awareness improves, so too will the regulatory framework surrounding legal liability insurance. Liability insurance serves to ensure financial stability is maintained and serves to combat personal and economic hardships which may follow, should third party liabilities be unable to be met.

R WIERS

LLB (UP)
Senior Associate – ADAMS & ADAMS

Specialising in insurance law, medical malpractice and personal injury law.

 

[1] Reinecke, MFB, van Niekerk, JP and Nienaber, PM South African Insurance Law Durban Lexis Nexis 2013 538.

[2] Jacobs, W Selected Legal Aspects of Liability Insurance 2020 UNISA PhD at 73.

[3] S1 Act 53 of 1998.

[4] 18 of 2017.

[5] Supra 1.

[6] 24 of 1936.

[7] 2 of 2010.

[8] 51 of 1951.

[9] GNN 996 Policyholder Protection Rules (Short Term Insurance Act), 2017; GN 997 Policyholder Protection

Rules (Long Term Insurance Act), 2017.

[10] Financial Advisory and Intermediary Services Act: General Code of Conduct for Authorised Financial Services

Providers and Representatives (as amended Board Notice 43 of 14 May 2008).

[11] Supra 1 541.

[12] Supra 1 540.

[13] Supra 1 541.

[14] Supra 1 542.

[15] Supra 1 543.

[16] Supra 1 544.

[17] Supra 1 544.

[18] Supra 1 544.

[19] 1994 (3) SA 145 (N).

[20] 2007 (2) SA 26 (SCA).

[21] Supra 1 545.

[22] Supra 1 545.

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