A new approach to reasonable precautions
The reasonable precautions clause familiar to readers and used in the industry for the last seventy years or so is not dead but it is on life support.
A common wording is “the insured shall take all reasonable steps and precautions to prevent accidents or losses”.
It can be saved by appropriate intervention but that requires the re-wording of the clause.
Successful reliance on the current industry reasonable precautions wording is not unheard of but is rare.
In 1965, the Natal High court in Aetna Insurance v Dormer Estates held that if a person who is charged with the duty of taking reasonable precautions fails to take them, it is a failure by the insured to comply with the condition, entitling the insurer to reject liability.
The insured carried his wallet in the rear back pocket of his trousers, and lost the then significant sum of R220.00. The pocket had lost its button. The wallet was a bulky one. In the past, when the insured carried the wallet in the same pocket, he found it on a number of occasions having fallen out whilst he was driving his car. The court said that the insured should have appreciated both that the wallet could fall out without his noticing and that the large bulge in the back of his trousers constituted a temptation to any thief.
In 2002 in Roos v SA Eagle Insurance Company, the insurer successfully raised breach of the policy requirement that the insured must take all steps to safeguard the insured vehicle from loss. The insured had entered into an agreement of sale with a third party who had absconded with the vehicle without making payment. The buyer’s cheque, purportedly bank guaranteed and deposited into the insured’s account, was subsequently dishonoured after the insured had allowed the buyer to take possession of the vehicle and disappeared.
However, a number of judgments, culminating in the matter of Santam Limited v CC Designing CC 1999 have explained the reasonable precautions clauses in holding that:
- to construe the condition as an exclusion of liability for the negligence of the insured in a policy covering negligence would take away a significant part of cover;
- taking of reasonable precautions as between insured and insurer is not necessarily the same thing as the absence of negligence;
- for an insurer to be successful in using the clause, it essentially had to show the insured acted recklessly;
- the test relates to the reasonable precautions taken by the insured itself as opposed to its employees who are not the directing mind of the insured.
There is, however, no need for insurers to throw up their hands and abandon the reasonable precautions clause. What insurers do need to do is to review the current reasonable precautions clause wording.
The reasonable precautions clause can be resuscitated by:
- ensuring that the definition of the insured in the context of that clause includes, where appropriate, the relevant level of staff or agents of the insured dealing with the insured risk;
- avoiding wherever possible the use of a standard reasonable precautions clause and, with a proper appreciation of the risks underwritten, formulate a reasonable precautions endorsement which specifies the prevention of loss steps which the insured (including its staff) is required to take.
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What brokers need to know about the CPA
The Consumer Protection Act (CPA) has been in force since 31 March 2011. Almost a year since the effective date it is worth reassessing how and to what extent the legislation affects insurance brokers.
Insurance brokers are affected by the CPA, but the extent to which the legislation impacts their business depends on the functions they perform.
FAIS exempted relationships
The CPA regulates the supply of goods and services throughout South Africa. However, if the service constitutes advice or an intermediary service subject to the Financial Advisory and Intermediary Services (FAIS) Act, it is exempt. A broker’s advice or intermediary services rendered usually fall under the FAIS definitions and the CPA does not apply.
But a broker may, for instance, provide risk management services which do not amount to financial services under the FAIS Act, but independent services for a fee (such as value added or outsourced services). In that case, the CPA would apply.
Insured / insurer relationship
The CPA definition of “service” also contains a limited exemption on services regulated by either the Long-term or Short-term Insurance Act. If, 18 months after the CPA implementation, either of the Insurance Acts is found not to be in line with the consumer protection measures introduced by the CPA, then the provisions of the CPA will apply.
Until October 2012, the relationship between insurer and insured and services regulated by the Insurance Acts are not governed by the CPA. A commission, court or tribunal will therefore not yet scrutinise insurance policies, rejection letters, statutory notices, disclosures and general service delivery of the insurer to the insured with CPA spectacles. In theory, insurers and the industry have a window period to get their house in order and align protection measures in the insurance industry with general consumer protection measures. But we all have to wait and see what legislation is introduced. There is clearly not enough time to enact new Insurance Acts.
The broker’s duty
Brokers must be wary. Just because their primary services are regulated by FAIS and not the CPA, and although the Insurance Acts are (for the time being) exempt, it does not mean that they escape all of the CPA obligations. If brokers advise clients on risk management and risk exposure or perform other services for an additional fee, certain general CPA provisions will apply. Brokers also need to advise clients on their risk exposure and the appropriate insurance against risks and must:
- Understand the policyholder’s business (services and/or products) to ascertain to what extent the CPA may apply.
- Explain to and guide the policyholder that they may face an increased exposure to risk as a result of the CPA.
- Provide cover advice to the policyholder and establish whether they have adequate and suitable cover for their CPA related risks.
The CPA has a wide ambit. The following are some examples of the CPA provisions a broker should be aware of:
- Documents, notices and representations such as disclaimers provided or displayed to a consumer must be in plain language. This means that a person with average literacy skills and little experience must be able to understand the contents of the document.
- Contractual terms must be fair, just and reasonable. Terms and conditions must not be excessively one-sided in favour of the supplier, and may not be inequitable. This applies to pricing as well.
- Any risk limitation clauses must be in writing, in plain language, conspicuous and drawn to a consumer’s attention.
- If a policyholder produces, imports, retails or distributes goods, it may face liability for damage caused by goods that are unsafe, or which failed, or which are accompanied by inadequate instructions. Liability is not dependant on proof of negligence. Even if the policyholder was not negligent in producing, importing, retailing or distributing the goods and even if it did not deal with the end user, it could still be liable if the goods were defective in that sense when they left the insured. Brokers need to consider obtaining not only adequate public liability cover, but also product liability cover for policyholders. A broker should also suggest to their clients to consider agreements with their suppliers, which provide an indemnity in favour of the client, depending on the relative negotiating strengths of the parties.
- If there are reasonable grounds to believe that goods are unsafe, or pose a potential risk to the public, the producer or importer of those goods may be required to carry out a recall programme. In most instances, separate cover or at least an extension to an existing policy could be necessary to cover product recall.
An important role
Although brokers are FAIS regulated, they have an important role to play in the CPA arena. This role has two sides. On the one hand they must reassess clients’ needs and exposures, taking the CPA’s provisions into account. On the other hand they need to compare insurers’ cover packages, to ensure that clients’ needs and exposures are best protected. In order to provide the most comprehensive and reliable advice, brokers must have a good understanding of the provisions of the CPA.
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Demystifying passenger liability insurance
Aircraft passenger liability insurance is often misunderstood. As a consequence, the significant emotional and physical effect of an aircraft crash is compounded by uncertainty whether insurance cover will be met.
Two broad themes
There are two broad themes in aircraft passenger liability insurance, namely the difference between private and commercial operators, and the role of the policy of insurance. Complex legislation requires certain operators to hold minimum passenger liability insurance cover of R1million per seat. This insurance relates to claims of passengers or their dependants against the operator. In light of the increasing costs of medical treatment and the impact injuries may have upon a person’s earning capacity, R1million is not sufficient. Whilst this minimum cover is prescribed in the regulations to the two licensing Acts, not every operator in South Africa is required to carry this cover. Only commercial operators are under a legal obligation to carry this cover. Private or licensed operators who do not fly passengers for reward are not legally obliged to have passenger liability insurance cover, and often don’t. Passengers and their families should therefore be aware that when flying with an unlicensed operator at no cost, there is a possibility that there is no insurance cover aimed at covering passengers for injury or death.
No direct passenger claim against insurer
An insurance policy is a contract between an insured (such as an operator) and its insurer. Any obligation on an insurer to indemnify or cover an operator is an obligation that is owed to the operator only. Generally, in the absence of insolvency, a passenger or their dependents have no right to claim directly against an insurer. The passenger liability cover is written as a benefit to the insured, not as a stipulatio in favour of a passenger. The rights of the passenger or their dependents are limited to making a claim against the direct wrongdoer, who may be the operator, pilot, maintenance organisation, etc. Once a passenger or their dependents make a claim against the wrongdoer, it is for the latter to then claim indemnity from their insurers.
Insurers grant cover to operators, including liability cover, on certain conditions. These are set out in the policy. As with any contract, these terms and conditions must be complied with before obligations detailed in the contract are created. If an operator fails to comply with any condition, an insurer may reject the claim for indemnity resulting in no payment being made by the insurer. In this instance, an operator will still be liable to a passenger or their dependents, but it will not have the benefit of insurance cover. One can liken the situation to a person who has caused damage to another person’s motor vehicle. The fact that the responsible person does not carry motor vehicle third party liability insurance does not vitiate the claim of the person whose car was damaged. The innocent party is however exposed somewhat in that the financial position of the uninsured person may not be sufficient to cover the claim.
Commonly, in terms of an insurance policy an operator would be obliged to comply with all air navigation and airworthiness orders, to give ongoing notice to their insurer of any change to their operations that may vary their risk profile, to give their insurer immediate notice of any event that may give rise to a claim and to operate only within set boundaries both geographical and with regard to the type of flights. If an operator breaches any condition of their insurance policy, the insurer may be entitled to reject the claim.
Passengers should also be aware of any ticket conditions which would form a contract between the passenger and the operator. Operators often seek to enforce limitations on their liability to a passenger or their dependants when issuing tickets. Most insurance policies require commercial operators to limit their liability to passengers to the equivalent of R100 500 (a limit prescribed in the Warsaw Convention). In South Africa, subject to provisions of the Consumer Protection Act being met, it is possible for parties to agree contractually to exclude or limit the claim of one party against another for domestic carriage. International carriage from South Africa is slightly different in that it is governed by a different set of rules set out in the Montreal Convention. Where tickets are issued or terms and conditions are agreed to online or otherwise, passengers must be aware of and look out for any limitation or exclusion of claims that they may make against the operator. Any insurance cover may also be adversely affected or limited where an operator fails to issue tickets limiting their liability towards passengers as required by the policy.
One last point worth mentioning is that where passenger liability cover is held by an operator, it is generally placed together with third party liability cover in what is called a combined single limit. The third parties in the third party liability cover would be persons whose property is damaged or who themselves are injured as a result of an aircraft accident, or any object falling from an aircraft. These parties would have a claim against the operator for the repair or replacement costs of their property, or medical expenditure, etc. related to their injuries. In the event that the operator carries third party liability insurance, they would look to their insurers to indemnify them for these types of claims. The result of the third party liability and passenger liability cover being placed as a combined single limit is that where an operator faces claims from both passengers and third parties, and looks to their insurer to indemnify them for these claims, there is only one pot from which these claims will be paid. This pot may not be sufficient to cover all the claims and will be paid on a first come first served basis. In the event that the pot is depleted by other claims by the time a party (be it a passenger, their dependents or a third party) makes a claim against the operator, the operator is essentially uninsured. The R1million per seat requirement on commercial operators does not ring fence liability cover placed on a combined single limit basis for the benefit of passengers only. Whilst it is possible that passengers may hold personal accident cover, many life, disability and heath policies exclude aviation events.
Passengers and others would be wise not to simply assume the existence of insurance coverage given the numerous factors impacting upon it. Steps such as negotiating conditions of carriage, and appreciating the category the flight and operator fall into are within the control of the passenger to consider. A better appreciation of the circumstances surrounding a particular flight and the role and interplay of insurance coverage in the event of any claim may alleviate the anxiety and frustration of a person facing the aftermath of a crash.
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