THE LAW OF INSURANCE

1.1 Definition and Nature of the Contract of Insurance

The generic definition of insurance is the following:

Insurance is a contract in terms of which one party (the insurer) undertakes, in return
for payment of a premium by the other (the insured), to pay to the insured a sum of
money or render him its equivalent on the happening of a specified uncertain event
in which the insured has an interest.

Some old Roman-Dutch authorities have defined insurance as follows:

Hugo Grotious: defines insurance as a contract in terms of which one person takes
upon himself an uncertain risk apprehended by another, in terms of which the person is
bound to pay to the other a sum of money.

Van Leeuwel (writing on maritime insurance): Insurance is a transaction by which a

person for specified monetary gain, paid at the time of the transaction, takes upon
himself the risk of the sea, water, wind, enemies, pirates and other dangers on the ship.

Decker and Leeuwel: Assurance or insuring is a contract by which one of the

contracting parties takes upon himself for a certain fixed period of time, the uncertain
risk to which the other party is or will be exposed, and for which the latter is bound to
pay him the stipulated sum of money or premium.

Van Der Kessel (1884): Insurance is a contract nominate, consensual and of good faith
whereby, in consideration of a certain price or premium, the losses which may arise
from unforeseen danger to the property of another are undertaken to be made good.
This price or premium may consist of other things besides money, and is fixed by the
consent of both parties in proportion to the extent of the risk undertaken. By loss is
understood not only the destruction but also the deterioration of the thing, an
unforeseen danger is that of which both the contracting parties are ignorant; for either
of them is aware that a loss has already occurred, the contract is ipso jure void.

Although originally, insurances related chiefly to things exposed to the dangers of

navigation and transport, they have since been extended to buildings and goods which
are liable to destruction by fire, and indeed to everything wherein anyone has an
interest, provided it be accurately defined in the contract.

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See the case of Prudential Insurance Co. v Commissioners of Inland Revenue (1904) 2
KB 658 [MUST READ] - In this case Justice Channel gave a brief but useful outline of
the contract of insurance. He pointed out that-

“when one insures a ship or a house, one can not insure that the ship cannot be lost or the
house burned. What one insures is that a sum of money shall be paid upon the happening
of a certain event”.

That is the first requirement of a contract of insurance. He then went on to point out
that-

“Insurance is a contract whereby for some consideration, usually but not necessarily for
periodical payments called premiums, one secures for one’s self some benefit, usually but
not necessarily the payment of a sum of money upon the happening of some uncertain
event”.

The next thing that is necessary is that the event should be one which involves some
amount of uncertainty. There must be either uncertainty whether the event will ever
happen or not, or if the event is one of which must happen at some time, there must be
uncertainty as to the time at which it will happen.

A contract which will otherwise be a mere wager may become an insurance contract by
reason of the assured having an interest in the subject matter. That is to say, the
uncertain event which is necessary to make the contract amount to an insurance
contract must be an event which is prima facie adverse to the interests of the assured.
The insurance is to provide for the payment of a sum of money to meet a loss or
detriment which will or may be suffered upon the happening of the event.

A contract of insurance then must be a contract for the payment of a sum of money or
for some corresponding benefit such as the re-building of a house or repairing of a
ship, to become due on the happening of an event, which event must have an amount of
uncertainty about it, and must be of a nature more or less adverse to the interests of the
person effecting the insurance.

Note carefully that the definition of insurance accepted today by the courts differs from
those given by the Roman-Dutch writers in that the former contains an additional
element not found in the Roman-Dutch authorities. This is the element of ‘INSURABLE
INTEREST.’ This essential element is considered to be an important distinction
between contracts of insurance and other aleatory agreements.

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1.2 Sources of Insurance Law

(a) Common law – not all legal rules are set out in statutes. There are many which were
received/inherited from other legal systems or developed by our courts. Many rules of
insurance law derive from common law. Much of our common law of insurance also
derives from English law.

(b) Statutes: There is also a body of insurance law set out in legislation

 The Insurance Act, 2005

 The Insurance Regulations, 2008
 The Consumer Protection Act, 2016
 The Financial Services Regulatory Authority Act No. 2, 2010

(c) The insurance contract – The terms of the agreement / policy.

1.3 Types of Insurance

Note that the definitions by the Roman-Dutch authorities (above) related solely to
‘indemnity insurance’ because this was the only type apparently known to them. In
indemnity insurance, the insured becomes entitled on the happening of the event
insured against to the intrinsic value of what he has lost thereby. In other words, he is
compensated. Examples are fire, theft and marine insurance.

On the other hand, there is also today ‘non-indemnity’ insurance a.k.a sum-insurance.
In non-indemnity insurance (such as life insurance or some other sickness and accident
policies), the insurer undertakes to pay an agreed (i.e. liquidated or calculable) sum
which may bear no relation to the actual loss sustained on the happening of the event
insured against.

Insurance policies are normally classified as:

 All risk policies – covers los, damage or destruction to property from any cause
not specifically excluded;
 Comprehensive motor vehicle policy – covers loss, damage or destruction to a
motor vehicle, and liability of the insured for damage to the property of any third
party where such damage arises out of an accident involving the insured vehicle;
 A fidelity policy – insures against loss of money and stock-in-trade occasioned by
employee dishonesty;

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  A public liability policy – covers liability incurred by the insured to members of
the public; and
 A life policy – which provides for the payment of a sum of money on the death of
a person, to his estate or a third party.

Note however that insurers use a variety of labels to describe the policies they offer to
the general public. In each case, the precise extent of the cover provided depends on the
terms of the policy, not on the name-tag.

1.4 Formation of the Contract

Insurance is a contract, and the common law rules relating to capacity, offer and
acceptance etc. apply. No rigid formalities are required, and the contract is complete
and enforceable by both parties once they agree upon the essential terms. In practice,
insurance policies are invariably reduced to writing.

Offer and Acceptance - A contract of insurance is usually concluded in the following

way: The party wishing to take out insurance completes and submits to the insurer a so-
called „proposal form‟. The submission of this form amounts to an offer to take out
insurance cover on the terms fixed by the insurer for that type of insurance. The
proposer is, therefore, the offeror. The insurer is the offeree. This will be the case even
where the initial approach is made by the insurer.

Note that the purpose of a proposal form is to provide the insurer with the information
that it needs to decide whether or not to undertake the insurance sought, and at what
premium. Therefore, the proposal form will usually contain factual statements on which
the insurer bases its decision whether or not to enter into the contract. The proposer is
therefore required to warrant the truth of his/her answers in the form and agree that
they form the basis of the contract. The importance of this is that the statements
warranted become material terms of the contract, and if answered incorrectly, the
insure may avoid liability under the policy.

Parties- there are usually two parties to an insurance contract. These are the ‘Insurer’
a.k.a. the underwriter who accepts the risk in return of the payment of the premium;
and the ‘Insured’ (in life insurance the insured is referred to as the „assured‟). Where a
third person is nominated as the beneficiary to the policy, the contract is a stipulatio
alteri – therefore the third person, by accepting the „benefit‟ of the policy (offer), may
bring about a 2nd contract which is between him/her self with the insurer.

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Role of the Broker – licensed insurance brokers normally act as intermediaries between
the insurer and the insured. A broker is independent in that, unlike an agent who
canvasses for policies, a broker not contractually bound to any particular insurer. For
the statutory control/regulation of brokers see Part III of the Act.

1.5 Terms

The case of British Oak Insurance Co Ltd v Atmore 1939 TPD 9, illustrates the simplest
terms of the insurance contract. Shreiner J mentioned the following: the nature of the
indemnity, the period of insurance, and the amount of the premium. Generally
however, in a contract of insurance, agreement must be reached as to the following:

 Article(s) insured e.g. a house, car, the contents of a house;

 The risk insured against e.g. loss, damage by fire, burglary;
 The cover granted e.g. loss so suffered up to E20 000;
 The amount of the premium payable e.g. E7.50 per E1000 insured;
 The term or period for which the cover extends e.g. 10 years;
 Any other conditions e.g. immediate notice of the loss, and the submission of a
written claim within a specified number of days.

1.6 Essential Elements of a Contract of Insurance

1.6.1 Payment of a Premium

For the contract to be one of insurance there must be agreement to pay a premium. A
premium is consideration in return for which the insurer undertakes its obligation to
compensate the insured. The premium may be payable as a lump sum or in
installments, in advance or in arrears. There is no rule that the premium must actually
be paid before the contract becomes binding – An undertaking by the insured to pay a
premium is enough to render the contract complete. Moreover, performance of the
insurer must be made subject to the payment of a premium.

British Oak Insurance Co v Atmore 1939 TPD 9, Schriener J observed @pg.13

that
“… Once the parties have agreed upon the nature of the indemnity, the period and
the amount or the method of fixing the amount of the premium, reciprocal
obligations to pay the premium and to indemnify in the event of loss come into
existence, unless there is something in the documents that expressly or impliedly
provides otherwise.”

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Note that in order to protect its interests, an insurer will generally adopt a policy of
ensuring that the insured pays the premium before the insurer assumes the risk („no
premium, no cover‟). The insurer may achieve this in one of two ways:

(a) It may refuse to issue the policy (withhold acceptance of the offer) until it has
received the premium (the parties have no contract until the premium is paid).
See African Guarantee & Indemnity Co Ltd v Couldridge 1922 CPD 2
(b) It may include in the policy a provision to the effect that it will be liable to pay
out under the policy only if the premium was paid prior to the materialization of
the risk. In this case an enforceable contract exists, but the insurer is under no
obligation to compensate the insured if the relevant event occurs while the
premium is unpaid. See Parsons Transport (PTY) Ltd v Global Insurance Co. Ltd
2006 (1) SA 488 (SCA)

Payment for premiums must be acknowledged by the insurer. Receipts for premiums
paid in cash must be issued – see s.51 of the Insurance Act.

1.6.2 Insurer Undertakes to Pay or Render some Performance

The contract must provide for the payment of a sum of money, or the rendering of an
equivalent by the insurer if the risk materializes. The content of this undertaking varies
according to whether the insurance is indemnity or non-indemnity or valued.

(a) Indemnity insurance policy – In the case of an indemnity policy the insurer
promises to compensate the insured for the actual loss suffered as a result of the
happening of the event insured against - A sum of money equal to the amount of
the loss (usually up to a specified sum) – Or render him/her an equivalent to
monetary compensation e.g. repair or replace the insured property and
pecuniary losses. In this type of insurance there are rules against under-
insurance, double recovery, subrogation etc. which exist because of the nature of
the policy.
(b) Non-indemnity insurance – in the case of non-indemnity insurance, the insurer is
bound to pay a specified sum of money to the insured on the happening of the
specified event. Life, personal accident, and sickness policies fall under this
category. In this type of insurance there is no limit to the amount for which one
can insure his/her own life or that of a spouse or one‟s health. There is also no
restriction as to the number of policies one may take out to protect such interests.

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 (c) Valued policy – This is where the value of the thing insured is pre-agreed with
the insurer, and the insurer undertakes to pay the agreed value or a portion
thereof if the thing is damaged due to the stipulated event occurring. This type
falls somewhere between indemnity and non-indemnity insurance: It is not 100%
indemnity because it allows the insured to recover more than his/her actual loss
where the thing is over-valued – and it cannot be classified as non-indemnity
insurance because to be able to recover under the policy the insured must
establish that he has suffered some loss as a result of the risk materializing.

1.6.3 On the Happening of an Uncertain Event (Risk)

Indemnification must be subject to the happening of an uncertain event. An event is

uncertain if the parties do not know “if” it will occur, or, if it is known that it will occur,
the parties should not know “when”. The primary object of an insurance contract is the
transfer of risk from the insured to the insurer. Risk refers to the possibility of harm
occurring as a result of an event/peril.

Risk must Attach- Before there can be any claim against a policy, there must be a loss
falling within the scope and limits of the policy.- in other words the risk must attach to
the subject matter. If the risk does not attach to the subject matter there can be no loss.
See in this respect the case of London and Lancanshire Insurance Co Ltd v Puzyna 1955
(3) SA 247.

1.6.4 Insurable Interest

It must be emphasized that an insurable interest is required for all contracts of

insurance- whether indemnity or non-indemnity. Note again that this requirement is
based on considerations of public policy which condemn as wagers all agreements in
which the parties have no interest. It is this insurable interest that distinguishes an
insurance contract from a gambling or wagering agreement. The leading South African
case on insurable interest is LittleJohn v Norwich Union Fire Insurance Society 1905 TH
374 [MUST READ]. Wessels J found in this case that the plaintiff had an insurable
interest. In his view, the principle to deduce from the cases appears to be this:

“if the insured can show that he stands to lose something of an appreciable
commercial value by the destruction of the thing insured, and hence benefit from
its continued existence, then, even though he has neither a jus in re (right in a

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 thing) nor a jus ad re (right to the thing) to the thing insured, his interest will be
an insurable one.”

Applying these principles, the judge went on to ask himself the question whether the
husband was in a worse position (economically) after his wife‟s property insured by
him had been burnt, and whether he had suffered any loss thereby. The judge answered
the question in the affirmative and concluded that it is in the interest of the husband
that the property should be replaced exactly as it was before the fire, and that the
business should be conducted in the future as it had been in the past.

Note that in the case of LittleJohn, the learned judge referred to the English leading case
on Insurable interest: Lucena v Crouford 1806 Bos. & P.N.R. 269 [READ]. In this case it
was observed that a man is interested in a thing to whom advantage may arise or
prejudice may happen from the circumstances which may surround it; to be interested
in the preservation of the thing is to be so circumstanced with respect to it as to have
benefit from its existence and prejudice from its destruction. This then is the essence of
insurable interest.

See also the case of Refrigerated Trucking (Pty) Ltd v Zive NO (Aegis Insurance Co ltd,
third party) 1996 (2) SA 361 [MUST READ]. Here Hartzenberg J defined insurable
interest as follows; “an insurable interest is an economic interest which relates to the
risk which a person runs in respect of a thing which, if damaged or destroyed, will
cause him to suffer an economic loss. It does not matter whether he personally has
rights in respect of that article, or whether the event happens to him personally, or
whether the rights are those of someone to whom he stands in such a relationship that,
despite the fact that he has no personal rights in respect of the article, or that the event
does not affect him personally, he will nevertheless be worse off if the object is damaged
or destroyed, or the event happens.

It is clear from these two cases that the insured need not be the owner of the article that
he insures. It is however IMPORTANT WHEN INSURING TO DISCLOSE THE
NATURE OF ONE‟S INSURABLE INTEREST, IF IT IS LESS THAN OWNERSHIP. For
example, it was held In Steyn v Malmesbury Board of executors 1921 CPD 96 that a
lessor had insurable interest against fire in certain stacks of chaff belonging to the lessee
which the latter was obliged by the terms of the lease not to remove from the lease farm.
This was so because if the stacks burnt, the lessor‟s soil; would lose the fertilizing
element of the chaff as well as the chance that there would be chaff left over at the end
of the lease. Watermeyer J however held In this case the fact that the plaintiff failed to
disclose that he was not the owner of the stacks amounted to a material non-disclosure

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entitling the company to avoid liability, since the nature of the plaintiff‟s interest was
material to the risk.

Note that in recent times the SA courts have expressed the view that prior leading cases
adopted too narrow an approach to the question of insurable interest. For example, in
Philips v General Accident Insurance Co. SA (ltd) 1983 (4) SA 652 De Villiers J after
referring to some of the old authorities and cases went on to express the following view:
“I am of the view that Gerald Gordon: The South African Law of Insurance, places too
much emphasis on the issue of insurable interest, and loses sight of what the real
inquiry is, namely, whether the contract, having regard to all the surrounding
circumstances and especially the intention of the parties, amounts to a betting or
wagering agreement. If there is any doubt, the benefit should be given to the insured,
having regard to the fact that normally the company has throughout the period of
insurance accepted the insurance premiums and that such a defence is rarely a technical
one.”

The following points must be noted:

 In non-indemnity policies, the insurable interest must exist or be present only at

the date of commencement of the policy (Rixon v Southern Life Association)
 On the other hand, to support a claim under an indemnity policy, the insurable
interest must “still” exist when the loss occurs (Van Der Westuizen v Santam 1975
(1) SA 236).
 An example: M insures the life of his wife W. Later they are divorced. On W‟s
death, H is entitled to be paid the sum assured even though there are no children
to support and no property obligations between them. Again, where M insures
his own life, nominating W as his own beneficiary, and they are later divorced,
Was the named beneficiary is entitled on the death of M to payment unless he
has revoked the nomination. See Ex Parte Mackintosh No; In Re Barton (1963) 3
SA 51, and Ex Parte Calderwood No; In Re Estate Wixely 1981 (3) SA 727

Now consider the following example:

6 months after insuring his house against fire, X sells the house for cash against
transfer. 3 months later the house was razed to the ground by fire. If transfer has
not been affected, the policy is still valid. However once X has been paid and
ceases to be the owner, he has no further pecuniary interest to the house. Thus,
neither X nor the buyer can enforce the policy for lack of insurable interest, even
though Mhad paid the premium for the whole year.

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This in effect means that in cases of indemnity insurance there must be a
“continuing insurable interest.” READ: Commercial Insurance Co v Kem No 1944
EDL 215 and Van Der Venter v Erasmus1960 (4) SA 100.

 Note also that upon renewal, indemnity policies are treated as fresh policies.
This means that an insurable interest must be present at the time of the
renewal and until a claim arises.
 Note also that the interest insured, however valuable, must be a lawful one.
Thus, if the interest is illegal or against public policy, the insurance is as
invalid as if there was no interest at all. READ Richards v Guardian
Assurance Co1907 TH 24 - It was held in this case that the insurer was not
liable where the property insured, described in the proposal as a dwelling
house, had in fact been used as a brothel. It was the opinion of the court in
this case that a contract to insure a brothel against fire tends to promote
immorality and is therefore illegal and unenforceable. Wessels J pointed out
that “an agreement to commit an illegal act is void; all contracts which tend to
assist in the carrying out of illegal acts must be regarded as equally void.”

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