Section 3: Legally binding insurance contract

This section looks at:

Principles of an insurance contract;

Legally binding contracts.

3.1 Principles of an insurance contract

Insurance is about the transfer and distribution of the financial consequences of a risk.
It is an arrangement under which an insurer contracts to do something of value to the
insured (pay, replace, reinstate or repair) on the happening of a specified harmful
and chance event. The insurance policy is the written evidence of this contract.

Note that, with a short-term contract, the purpose of the insurance is compensation
for a determinable loss and not the unnecessary enrichment of the insured. In the
case of a long-term insurance contract this takes the form of a cash payment (or
payments) to assist the insured or his or her beneficiaries in overcoming the trauma
associated with death, illness, injury or disablement. Cover is usually unrelated to any
specific value placed on the life of the insured. This requirement relates to the
capacity of the parties to the contract.

As previously mentioned the essentials of a valid contract can be listed as follows:

consensus (agreement);

capacity;

physical possibility;

legality;

formalities.

Note that if any one of these components is lacking a valid contract does not come
into existence and the purported agreement is said to be void. The first four elements
have been discussed in previous sections. In order for an insurance contract to be
legally binding certain formalities must be adhered to.

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3.2 Formalities
Most contracts are equally valid, no matter that they are entered into verbally or
impliedly and not in writing. In a number of cases, however, the law requires
compliance with certain formalities. For example some contracts, particularly those
dealing with the sale of land, must be in writing and signed by the parties thereto,
otherwise they are of no force or effect. Contracts under the Credit Agreement Act of
1980 are also required to be in writing, but failure to do so does not affect their
validity. There are some contracts that have to be notarially executed, which means
they must be attested by a notary.

Other examples of where contracts must be in writing in order to be enforceable are

with donations where the object has not yet been given, or suretyship contracts. Long
leases (in excess of 10 years) must also be in writing and must be registered in the
Deeds Office in order to be binding on third parties. It is necessary here to distinguish
between a contract of suretyship which must be in writing in order to be valid and
an indemnity, which need not. A surety promises to answer for a debt, default, or
misappropriation of another person. There are three parties concerned in a suretyship,
namely the creditor, the debtor and the surety. In simple terms, the surety says to the
creditor, If the debtor does not pay you, I shall. Under the contract of indemnity
there are only two parties and the indemnifier in effect says to the creditor, Let
him/her have the goods and I shall see that you are paid.

3.3 The insurance contract

Insurance policies are legally binding contracts between Insurers and Insureds, based on
good faith between the parties. Insurance is a risk transfer mechanism; under this
arrangement an insurer agrees to indemnify or compensate an insured for a specified loss
after receiving the payment of a premium by the insured. Under South African law,
payment of a premium is not essential for life insurance policies, but is usual. All the
common law rules of contracts apply to a contract of insurance such as consensus,
possibility, legal capacity, possibility, sound mind, no cohesion.

The basis of the contract is the original application form, completed in the insureds own
hand, or the original voice logging record used instead of an application form. Disputes at
a later stage are always referred back to the original application. The original application
by the insured to the insurer (via written form or voice log) therefore constitutes the
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disclosures by the insured and for this reason should have as little intervention from the
intermediary as possible. (I.e. offering to complete the form on behalf of the insured as a
service. Should a dispute arise, the insured is bound to cast blame on the intermediary.)
The insured should sign every page of the application, indicating his understanding of
items on that page. Should s/he want to change anything on the form, full signature and
date is required where the change was made.

The evidence of a contract is the printed insurance schedule or policy, and policy
wording, sent to the client 30 days after conclusion of the contract.

Agreement / consensus must exist on the following points:

Who the insured person is;

The insured risk full description of items being insured as well as the value of all
items being insured;

The total sum insured for each item being insured;

Due monthly /annual premium and conditions of premium payment;

The period of insurance / term of contract and renewal date;

Conditions pertaining to the subsections;

Additional documentation required by the insured in addition to the application

form / voice log (declarations required, valuation certificates, Id documents.)

Claims procedure;

Recourse available to the insured in case of bad service / claims repudiation.

(details of the insurance ombud);

The contract is only complete and valid on unconditional acceptance by the

insurer of terms proposed;

The contract cannot be altered after acceptance, except by agreement of the

parties. Alterations are noted by endorsement;

By law, a copy of the agreement must be supplied to the insured within 30 days.
The copy referred to is the policy schedule /policy wording evidence of contract
existence.

Insurance contracts are enforceable from date of issue, unless the insurer binds its
obligation by insisting on a premium being paid first. Once the insured has paid a
premium, whether to the insurer or an intermediary, the contract obligations have been
met.
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When interpreting an insurance contracts it is important to remember that when a printed

policy has an endorsement attached that the endorsement always overrides the policy
wording. The technical terms are interpreted as having meaning attached to them
normally in the course of business and an ambiguous phrase in policy wording are
interpreted as more favourable to the insured, and also favours the insured in that the
insurer suffers the consequences of uncertainty for which they are responsible.

3.4 The Parties to an insurance contract

Any person who is legally competent to enter into a valid contract in terms of the law on
contracts may take out a policy. People with limited mental capacity, insolvent persons,
minors without assistance from parent / guardian and so on cannot take out a policy,
unless under guardianship.

3.4.1 Parties to a life insurance contract:

Insurer

This is the party who accepts the risk and will pay a sum of money when an insured event
such as death, injury or accident causing permanent disability occurs, as stipulated in the
insurance contract.

Policyholder

The policyholder is the owner of the policy. The policyholder can deal with the policy in
any way including ceding it, appointing a beneficiary, surrendering it and making
withdrawals there from.

Life Insured

This is the party whose life is covered by the insurer (the insurer carries the risk on his/her
life). The insured life and owner could be the same person.
N.B. In order for a policy to exist there HAS to be a life insured. It is quite common to
nominate a second life or even a third life insured in order to insure that the plan will
continue in the event of the first life insured dying.

Contribution payer

This is the party who agrees to pay a contribution for a specific term or until such time it is
no longer required. The life insured and the contribution payer can be the same person.

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Beneficiary

This is the party who has been nominated by the plan holder (owner) to receive the
proceeds in the event of the life insureds death. Where no beneficiary is nominated, the
proceeds will be payable to the estate.

Cessionary

There are two types;

1. Outright cessionary: This occurs when the policyholder also referred to as the cedent,
cedes or transfers all his/her rights to the policy to a third party. This cession can be in the
form of a donation or in terms of an agreement.

2. Security cessionary: This occurs when the policyholder cedes the policy to a third party,
normally a financial institution, as security for a loan. The policyholder does not cede all
the rights to the policy to this cessionary. The cessionary may only keep the policy as
security until the debt has been redeemed. In the event that the debt is not redeemed
prior to death of the cedent, the financial institution may only surrender a portion of the
policy equal to the outstanding balance.

The policy, provided it still has value, must be reverted to the original owner. The same
applies in the event of death of the cedent prior to settling the debt.

3.4.2 Parties to a short term insurance contract:

Insurer

This is the party who accepts the risk and will pay a sum of money when an insured event
such as fire, theft, storm, collision, accident happen and the item affected was insured
and premiums paid.

Policyholder

The policyholder is the owner of the policy. The policyholder must have insurable interest
in his own capacity and must stand to lose financially in case of loss. The loss must be
measurable in money terms.

Insurer

This is the party who accepts the risk and will pay a sum of money when an insured event
which leads to loss occurs, as stipulated in the insurance contract.
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Premium payer

This is the party who agrees to pay the premium. The insured and the payer can be the
same person.

3.5 Contracts with Illegal Purposes

3.5.1 Gambling Transactions
Gambling transactions are regarded as against public policy and therefore gambling
debts are unenforceable. However, if A requests B to place a bet for him the contract
between A and B is not illegal and B is obliged to pay over the winnings to A as he
acted as agent in terms of a legal agency contract. Only the gambling debt itself is
unenforceable.

3.5.2 Agreements in Restraint of Trade

In the past the view was held that a person should be entirely free to enter into any
contract s/he wishes, and if a contract restricted his or her freedom of trade it would
be void. This view has undergone considerable development over the years and the
position today is that a person must, on the whole, do what s/he has agreed to,
irrespective of whether his or her contractual freedom is restrained or not.
However, the question as to whether a restraint can be enforced must be decided in
the light of the possible harm to the public interest. In order to decide this question,
the reasonableness of the restraint is considered, especially as to the area and time
period.

3.6 Breach of Contract

Parties enter into contracts for the purpose of having obligations performed, but in
some cases the obligations arising from the contract are not always fully appreciated
and may thus not be fulfilled. This is known as breach of contract and gives the
innocent party the option to cancel, so creating a further means whereby a contract
may be discharged. State of mind (e.g. fault or intent) is not considered relevant.

There are a number of ways in which a party can be considered to be in breach of a

contract:

Late performance by the debtor (mora debitoris);

Late performance by the creditor (mora creditoris);

Repudiation;
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Prevention of performance;

Defective performance.

To determine whether the debtor is late in his or her performance it will be necessary
to determine when this is due. There are three possibilities:

Time for performance is stipulated in the contract (mora ex re);

From the nature of the contract it is clear that although not stipulated time is of
the essence and performance must be on or before a given date. Alternatively
there should be no undue delay.

Time for performance has not been determined in the contract and is not
therefore of the essence: here the debtor has to be given reasonable notice to
perform (mora ex persona).

In a case where the time for performance is stipulated, the contract is breached if the
specified date arrives and the debtor fails to perform. If there is a cancellation (lex
commissoria) the creditor is entitled to invoke it and cancel the contract, otherwise
s/he may only cancel when time is of the essence. Where no date for performance
has been fixed by the parties in the contract the creditor may place the debtor in
mora by demand, giving him or her a reasonable time to perform, failing which it will
be regarded as a breach (mora ex persona). This entitles the creditor to cancel and
use the other remedies available on breach of contract.

Where the parties to a contract are required to perform simultaneously, or where the
plaintiff is obliged to perform before the defendant, the latter can raise the so-called
exception non adinipleti contractus if s/he is sued for an alleged breach of contract.
By raising this defence the defendant admits that s/he has not performed, but alleges
that the plaintiff also has failed to do so - it is the "exception of the unfulfilled
contract".

A creditor is in breach if s/he should delay fulfillment of the debt when performance
completion is possible. This is also the case where the debtor offers to perform but the
creditor refuses to cooperate. It is a fundamental duty of the creditor to co-operate
and his or her failure to do so constitutes a breach of contract.

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Breach of contract by repudiation is said to arise when one party, either expressly or
by implication, indicates that s/he does not intend to perform his or her obligations or,
having performed part thereof, does not propose to complete performance. In
Hochster v de la Tour (1853) the defendant agreed to employ the plaintiff as from 1
August, but before that date, repudiated the agreement. The plaintiff immediately
brought an action for damages, and it was held that he was entitled to do so, and did
not need to wait until the time for performance. However, the innocent party may
ignore the repudiation and wait for the day set for performance, at which time, if the
other persists in his or her refusal to perform, there will be a breach of contract in the
form of mora debitoris. Repudiation may be made by words or conduct, provided it is
clearly made. The test of an intention being sufficiently evinced by conduct is whether
the party repudiating has acted in such a way as to lead a reasonable person to the
conclusion that s/he does not intend to fulfill his or her part of the contract.

3.7 The Difference between Short Term Insurance Contract and other contracts
1. Insurance contracts differ from other contracts in that in insurance contracts, it is the
insured who makes an offer to the insurer in effect the buyer making an offer to the
seller. In other contracts, the seller makes an offer to the buyer.
2. Insurance contracts are based on good faith. Other contracts based on let the
buyer beware. The nature of this difference with other contracts requires that the
seller (proposer) provide the buyer (insurer) with all relevant facts at his/her disposal, to
prevent the contract being declared void. Other business contracts require the seller
to disclose all facts to the buyer.
3. Insurance contracts may be cancelled immediately and at any time by the insured.
Other contracts may only be concluded at the full term of the contract or by mutual
agreement between parties.
4. Insurance contracts can be altered at any time items may be added, removed or
have values altered any time in the contract period. Other contracts cannot be
altered in any way, except with penalty payments to the buyer.
5. Should non payment occur in an insurance contract, the insured is allowed to make
double payment at end of the next month and the policy will only lapse after 3
consecutive non payments. Non-payment in other contracts results in legal action
being taken by the seller against the buyer.
6. No legal action is taken against a client for non-payment of insurance and his credit
record is also not affected. Breach of other contracts results in legal action against the
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buyer and reporting to a central credit bureau for bad debt which is difficult to
reverse, and affects all future credit applications.
7. Insureds are assisted in appealing against a decision the insurer makes and full
disclosure need to be made of the process an insured can follow to do this. In other
contracts the buyer makes his own arrangements against the seller and he is not
assisted in any way.
8. Full disclosure on all aspects of the insurance contract need to be made to the insured,
including all fine print and conditions. Other contracts require the seller to ensure
understanding of fine print and detail of contract.
9. Insurers may not alter, add items or cancel a policy without a 30 days notice to client
in writing. In other contracts, changes may be made without written notice to the
client and with immediate effect.
10. In insurance contracts, clients have legislated protection in terms of disclosures made
and recourse in case of bad service /advice/disputes. Other contracts provide limited
protection and usually at cost to the client

3.8 Difference between Short term and Long term insurance contracts
1. Long term insurance focuses on the life events, such as death or retirement of a person
(non-indemnity insurance/compensation),
2. Short term insurance focuses on the replacement value of objects (e.g., a motor
vehicle) in the event of a loss (indemnity insurance), with personal accident and
sickness also covered.
3. Long term insurance covers people. Short term insurance covers things
4. 4. Life contracts have as subject events that MUST happen. (Death retirement) Shortterm contracts have as subject events that MIGHT happen. (Burglary, theft, accidents)
5. Long-term policies run continuously for more than a year and are never renewed.
Short-term policies run for short periods of time never more than 2 years and are
renewed annually.
6. A long-term policy is rarely altered and remains as agreed upon at inception of the
policy. Short term policies are altered as required
7. Long-term policies cannot be cancelled, and will continue to run for as long as there is
value attached to the policy, or until the insured dies, when the policy ceases to exist
after pay out. Short-term policies may be cancelled at any time, and a policy may
even continue to exist in the name of the deceased.

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3.9 Summary
Requirements for the offer and acceptance:
OFFER

ACCEPTANCE

a) Undertaking made with the intention

a) Undertaking that the offeree will be

that the offeror will be legally bound.

legally bound.

b) Complete

b) Unconditional.

c) Clear and Certain

c) Clear and Certain.

d) Usually made in words or by conduct.

d) Usually made in words or by conduct.

Legal requirements (eg, sale of

land).

land).

If the offeror specifies as a term of

the offer that the offer must be

accepted in a specified manner.

acdepted in a specified manner.

e) Accepted by the following:

A specific person or persons (eg, Mrs

Mrs Jones or Mrs Joness authorised

agent.

Jones)

If the offeror specifies as a term of

the offer that the offer must be

e) Addressed to the following:

Legal requirements (eg, sale of

Unknown persons (eg, all teachers).

Any teacher (ie, a member of this

restricted group).

This class of offerees has several

members, but as a restricted group
it is not as numerous as the general
public.

The general Public - anyone who is

willing to do what the offer requires

Any member of the public who does

what the offer requires

(eg, in the case of a reward)

Here it is important that the offeree

must know about the offer. Take the
example of a reward: Will offers a
reward for information; Jim does not
know about Wills offer but gives Will
the information. No contract arises
between Will and Jim, so Will has no
legal duty to pay Jim the reward.

f) Communicated

f) Communicated

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An additional explanation of the differences between void and voidable contracts:

VOID CONTRACTS

VOIDABLE CONTRACTS

No contract exists at all. It may help

to indicate this fact by putting
inverted commas around the word
contract.

The contract does exist. But because

consent to the conclusion of the
contract was improperly obtained the
consensus is flawed, defective.

The contract does not give either

party contractual rights. The contract
is a nullity. Neither party has the right
to enforce the contract.

The party whose consent was improperly

obtained may set aside the contract if his
or her consent was obtained by
misrepresentation, duress, or undue
influence.

The contract cannot be ratified. It

cannot be given validity afterwards,
that is with retrospective effect.

Until that party does set the contract

aside the contract remains current, with
concomitant rights and duties on either
side.

Both contracting parties may

disregard the contract, as though the
contract was never concluded.

The party whose consent was improperly

obtained has a choice whether he or she
will uphold the contract or whether he or
she will rescind the contract.
If a party upholds the contract he or
she recognises the continued
existence of the contract;
but if he or she rescinds the contract
he or she does away with the
contract. So the party that exercises
the choice must choose one of these
courses he or she may not choose
both courses. The alternatives are
mutually exclusive: that is, if one is
chosen, the other one is
automatically lost and can
afterwards never be chosen again.

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