ICC-Insurance Claims Consultants

What is insurance

Insurance is a special type of contract between an insurance company and its client in which the insurance company agrees that on the happening of certain events the insurance company will either make payment to its client or meet certain costs.

For example, in a car insurance policy, the insurance company agrees that if the car is damaged, the insurance company will pay the cost of repairing it. Under an income protection policy, the insurance company agrees that if its client is unable to work, the insurance company will pay its client an agreed amount.

The reason we call an insurance policy a special type of contract is because there are certain characteristics that relate to an insurance policy that do not relate to most other contracts. In particular, an insurance policy is a contract of “utmost good faith”. This means that the insurance company and the insured person have certain very important obligations that do not exist in normal contracts. These include the duty of disclosure and the duty not to make any false statements in relation to a claim. This duty of good faith is why insurance companies can refuse to pay your claim if you have not told the insurance company all material information when you applied for or renewed the insurance. Some of the obligations that exist in an insurance contract can be very onerous on the insured person, and so over the years, the government has regulated the insurance industry.

The special nature of the insurance contract also places very important obligations on the insurance company. The insurance company has to act in good faith, and a failure to do so can expose the insurance company to special types of damages. In addition, because many insurance policies are contracts to provide comfort in stressful times, a failure by an insurance company to honour its obligations can result in general damages being awarded by the Courts.

Because an insurance policy is a type of contract, it is important to remember that the duties of the insurance company and the insured person are largely contained within that contract, often called a policy. So before jumping to conclusions about what the insurance company should or should not do, or what your obligations might or might not be, it is important to first read your insurance contract or policy. Ask the insurance company for a copy of the policy if one has not been provided to you, and read the policy carefully. Avoid generalisations. Whilst many insurance policies are similar, none are exactly the same, and slightly different words in an insurance policy may have different meanings. Many people express opinions about insurance policies or what should or should not be covered without actually reading the policy, and that must be avoided.

As well as the insurance contract itself, the law (called common law by lawyers) imposes all kinds of special obligations on insurers and insureds, and so when considering an insurance contract, it is important to do so in the context of the common law obligations that are imposed upon insurance companies.

Insurance according to LAWSA,

"Insurance is the result of man’s efforts to create financial security in the face of dangers to his life, person and estate. A typical desire of a man is to form and develop his estate [....] The object of forming and developing an estate may, however, be thwarted by dangers to which his present and future position is exposed: if these materialise they may bring about undesirable consequences which may affect his estate immediately or in the future. Even while a danger is still remote it creates an element of uncertainty, whether in relation to its actual occurrence, the exact time of its occurrence, or the extent of its undesirable consequences. This element of uncertainty creates insecurity. Accordingly, it may be said that man’s need for security arises from the tension between his desire to form and develop his estate, on the one hand, and the dangers threatening to thwart that desire, on the other. The most effective and obvious way of achieving security is to take direct precautionary measures against imminent or potential harm [....] One of the most satisfactory general methods of creating financial security against risks therefore seems to be that of spreading the risk among a number of persons all exposed to the same risk and all prepared to make a relatively negligible contribution towards neutralising the detrimental effects of this risk which may materialise for any one or more of their number. This is known as insurance."

The law of insurance in South Africa consists of

rules peculiar to insurance (like the rules on insurable interest, subrogation and double insurance);

rules applicable to all contracts (like the rules on offer and acceptance, and contracts in favour of third parties); and

general contractual rules that have undergone changes in the insurance context (like the rules on insurance warranties).

Broadly speaking, the law of insurance in South Africa is concerned with

the conclusion and consequences of insurance contracts;
general aspects of law of damages;
the rules on insurance intermediaries;
insurance tax law; and insurance company or supervision law.