DON'T UNDERESTIMATE THE IMPORTANCE OF A VALID CONTRACT
Due to its nature, the insurance department is one of the most lucrative divisions for most of the insurance companies who offer short-term insurance policies. On the other hand if not handled properly by the insurance company concerned it is one of the riskiest and potentially could cost a company concerned huge financial losses. To this extent, the company concerned needs to structure this portfolio accurately to avoid undue losses.
On the other hand, there is a consumer who pays a premium on a monthly / or annual basis ( depending on how the policy is structured). It is necessary that the consumer must do the right thing when dealing with the insurance company in order to benefit well in the relationship that one has with a specific shortterm insurance company. The article has discussed the ‘ tricks of the trade’ that would benefit the insurance companies and also the consumers at the same time. This is so because if the consumer prevents loss and or damage to their vehicles, the insurance industry becomes stable financially which leads to the insurance sector not increasing the insurance premiums, or increasing the premiums with marginal levels. The result is that both parties benefit.
During the course of the relationship between the insurer and the consumer, both parties have a tendency to commit reckless errors which errors cause and result in prejudice to the relevant party. Sometimes an error that has been committed by one of the parties to an insurance contract may cause prejudice to both parties. Most of the times these errors can be prevented and should be prevented.
The insurance contract that is entered into between one person and his insurer differs from one company to another as such what the article has discussed are broad issues that occur generally in the course of this relationship between a consumer and an insurance company.
An insurance contract is defined as a contract whereby, for a specified payment, the insurer undertakes to compensate the insured for loss relating to a particular subject matter as a result of the occurrence of designated hazards.
The essence of this contract is that there must be utmost good faith between the parties to this contract. This duty of good faith is owed both by the insurer to the insured and by the insured to the insurer.
This position was clarified in a locus classicus case in Carter v Boehm ( 1766) 3 Burr 1905; ( 1766) 97 ER 1162. Lord Mansfield held that Carter had owed a duty of utmost good faith ( uberrimae fidei) to the insurer as he was required to disclose all the material facts to the risk thus;
“… Insurance is a contract based on speculation. The special facts, upon which the contingent chance is to be computed, lie most commonly in the knowledge of the insured only; the underwriter trusts to his representation and proceeds upon confidence that he does not keep back any circumstance in his knowledge, to mislead the underwriter into belief that the circumstance does not exist, and to induce him to estimate the risk as if it did not exist. Good faith forbids either party by concealing what he privately knows, to draw the other into a bargain from his ignorance of that fact, and his believing the contrary…”
Lord Mansfield went further to state that the duty is reciprocal. The duty of disclosure was defined by the court as follows… “either party may be innocently silent, as to the grounds open to both, to exercise their judgment upon… An underwriter can not insist that the policy is void because the insured did not tell him what he actually knew…The insured need not mention what the underwriter ought to know; what he takes upon himself the knowledge of; or what he waives being informed of…”
Lord Mansfield in that particular case found in favor of the policyholder on the basis that the insurer knew or ought to have known that the risk existed as the political situation was public knowledge.
The position that was set out in the aforesaid case had been used over the century with necessary changes but the basics remain valid even today.
Now, as promised, let's discuss the tricks of the trade.
TRICK # 1: A VALID CONTRACT A consumer who is looking for an insurance cover is advised to approach several insurers to find out which company would offer the best cover having due consideration to the position and the circumstances of the insured.
The insured must also peruse the schedules of the insurance contract to clearly understand what the company covers, under what circumstances. It is dangerous to only focus on a cheap premium that is being quoted to the applicant for cover because other terms and conditions may be unfavourable hence an applicant must look at the whole picture of the contract.
Once the applicant has decided which companies one may choose it is advisable that the applicant get a legal advice from a lawyer who ( a lawyer) will read and interpret the contract properly. Most of the cases that go to court for litigation arise from different interpretations that the parties to a contract attach once a claim has arisen. It is therefore advisable to prevent this potentially costly litigation by concluding a contract that one is fully aware of its legal implications. In South Africa, it costs about R1,000 ( one thousand rands) or so to have a lawyer peruse and interpret a basic Motor Insurance Contract.
On the other hand, the insurer must ensure that the insurance contract that is given to the applicants does not contain clauses that could be successfully challenged at court and eventually have the contract declared null and void, or voidable. Since 1994 South Africa introduced a democratic dispensation with a justiciable bill of rights. This new dispensation then radically shifted the legal order as it then was to such an extent that all contracts that were drafted during the era of apartheid need to be revised to ensure that each clause complies with the provisions of the National Constitution.
The insurer must keep up to date with the developments in insurance cases that are reported at High Court at least every three months. This is the duty of the Legal Department. The insurer must ensure that the party with whom the contract of insurance has been entered into complies with all the legal requirements to enter into a valid contract. Of most critical is that the insured does have a capacity to enter into a valid contract. This is one of the most important legal requirement before one enters into a contract. There is a long list of factors that prohibit someone from entering into a valid contract. Some of them include, but are not limited to inter alia; a minor, mentally ill persons, trustees must represent insolvent estates, trustees must represent the trusts like trust inter vivos and many more.
In our next issue, we will proceed to discuss other ‘ tricks of the trade..