Insurance is an integral part of the functioning of society. It is designed to protect people against the occurrence of undesirable risk, in that the insurer renders to the insured payment of a sum of money, or the equivalent to a sum of money if the risk materialises. Insurance is not only for rich people, as it cuts across income brackets, countries and cultures. This article simplifies the complexities of South African Insurance Law and summarises the formation of insurance policies, including the elements required to be present in an insurance policy.
Insurance is a contract in terms of which the insurer undertakes, in return for the payment of a price or a premium by the insured, to render the insured a sum of money, or the equivalent to a sum of money, on the happening of a specified and uncertain event in which the insured has some interest. The insurance contract is also referred to as an “insurance policy”. The rationale behind insurance is to protect oneself against the occurrence of undesirable risk.
Types of insurance
In South African law we have two types of insurance, namely indemnity insurance and non-indemnity insurance.
Indemnity insurance is taken out to indemnify oneself against a loss. In other words, insurance is taken out so that one is reimbursed if one suffers a loss. Non-indemnity insurance, on the other hand, is taken out to indemnify oneself against the occurrence of a future uncertain event such as death or disability.
There are two statutes dealing with insurance in South Africa, namely the Short-term Insurance Act 53 of 1998 (hereinafter “SITA”) and the Long-term Insurance Act 52 of 1998 (hereinafter “LITA”).
The abovementioned Acts control the insurance industry and aspects of insurance policies with the view of protecting the interests of those insured. The Acts also provide for the registration and control of insurance companies in South Africa.
The SITA focuses on indemnity insurance. For example, motor vehicle policies and health policies. Whereas, the LITA focuses on non-indemnity insurance. For example, life policies, disability policies and health policies.
The Minister has also enacted Policyholder Protection Rules for the respective Acts.
How is an insurance policy created?
There are two parties to an insurance policy: the insured and the insurer. There may also be instances where a third party is nominated as the beneficiary of a policy.
The Acts refer to the person entitled to be provided with the benefits of a policy as the “policyholder”.
At common law, no formalities are required for the conclusion of an insurance policy. In practice, however, insurance policies are generally reduced to writing.
Essential elements of an insurance policy
i.The obligation to pay a premium
First, there must be an obligation on the insured to pay a premium.
“Premium” is defined in section 1(1) of LITA and SITA as “the consideration given or to be given in return for an undertaking to provide policy benefits”.
There is no rule that the premium must be paid before the contract becomes binding on the parties. However, there must at least be an undertaking by the insured to pay a premium to render the contract “complete”.
Generally, insurers will adopt a policy of ensuring that the insured pays the premium before they take on the risk.
ii.The happening of a specified uncertain or unplanned event
For risk to exist, the event must be in the future, and it must be uncertain as to whether it will occur, when it will occur and how much harm it will cause.
In the case of Sydmore Engineering Works v Fidelity Guards (Pty) Ltd 1972 1 All SA, it was held that the insurer must have no control over whether the event will occur.
iii.The existence of an insurable interest
The case Lorcom Thirteen (Pty) Ltd v Zurich Insurance Company South Africa Ltd 2013 4 All SA 71, defines an “insurable interest” as the insured’s interest in preventing the risk which he/she is insured against from materialising.
iv.The obligation of the insurer to render compensation
The contract must provide for the payment of a sum of money or render to the insured an equivalent to the payment of money, by the insurer if the risk materialises.
The obligation on the insurer varies depending on whether the insurance is indemnity or non-indemnity insurance.
If it is indemnity insurance, the insurer undertakes to compensate the insured for the actual loss which he/she has suffered as a result of the happening of the event.
If it is non-indemnity insurance, the insurer undertakes to pay a specified sum of money (or to make periodic payments of specified amounts of money) to the insured on the happening of an event, regardless of the extent of the actual monetary loss which was incurred.