Question

Sam has been diagnosed with stage 2 colon cancer and will probably not be able to pay the medical bills for his treatment. As a result he is currently shopping around for a medical aid.
Advise Sam on his duty of disclosure when contracting with a potential insurer.
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Assume that Sam is also looking to get home car insurance; advise him on the TWO (2) types of insurance contracts that exist in South African law. You are required to provide examples of each type of insurance.

Answer 1

Under the duty of disclosure, a person applying for insurance must disclose relevant information to the insurer before a contract is entered into. Life insurance is serious business. After all, it is designed to ensure that if you die or are permanently injured, you have the security of knowing that your life insurer will pay a claim allowing you to take care of your (and your family's) future financial needs.  

However, obtaining life insurance cover is not a simple matter of mindlessly filling out a form and sending it through to the insurer.  

The relevant section of the ICA dealing with an insured's duty of disclosure is found in section 21 ("The insured's duty of disclosure"). It says:

Subject to this Act [the ICA], an insured has a duty to disclose to the insurer, before the relevant contract of insurance is entered into, every matter that is known to the insured, being a matter that:

1. the insured knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms; or

2. a reasonable person in the circumstances could be expected to know to be a matter so relevant.

The insured must have actual knowledge of a matter the insured knows would be relevant to an insurer's decision on whether to agree to insure that person.

1. The type of insurance being sought. In the case of life insurance, any information which deals with your medical history is considered a relevant matter to an insurer.

2. If an insurer asks a particular question on a proposal form, then that will usually suggest that any information relating to that question would be a matter relevant to the insurer's decision.

3. If an insurer has asked certain questions on a previous occasion, such as in the course of completing a prior proposal form.

Insurance in South Africa describes a mechanism in that country for the reduction or minimization of loss, owing to the constant exposure of people and assets to risks (be they natural or financial or personal). The kinds of loss which arise if such risks eventuate may be either patrimonial or non-patrimonial. a contract between an insurer and an insured, in terms of which the insurer undertakes to render to the insured a sum of money, or its equivalent, on the occurrence of a specified uncertain event in which the insured has some interest, in return for the payment of a premium.

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.

Essential elements of an insurance policy

1. 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.

2. 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.

3. The existence of an insurable interest

“Insurable interest” as the insured’s interest in preventing the risk which he/she is insured against from materializing.

4. 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 materializes.

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.