South Africa: A practical overview of why the terms and conditions of insurance policies are important
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The insurance covers losses resulting from insured events that may occur in the future. For an agreed premium, the risk of an insured event occurring is transferred from the insured to the insurer.
In practice, the insured events triggering the reaction of insurance policies are not always clear. This is largely due to the complex formulation of insurance policies and the significant asymmetry of information between an insurer (company providing the guarantee) and the insured (individual / company benefiting from the guarantee). The examples below are intended to further illustrate this:
Company A’s truck was insured by Company B against theft. The truck was hijacked and later recovered. Upon recovery, it was determined that all of the cargo the truck was carrying had been stolen. Company A filed a claim for stolen property with Company B. The policy required that the truck be equipped with an installed and operational GPS satellite tracking and recovery system that must be in working order at all times . It later transpired that the GPS system had not worked for some time, leading Company B to reject the claim based on Company A’s breach of a term of the contract.
Company C’s building was insured by Company D. Company C leased the insured building to Company E. Due to a dispute over the lease, Company E vacated the building, leaving it unoccupied. Vagrants then entered the building, stripping it of all wiring and in the process causing extensive damage to the building. In terms of the insurance policy, Company C was required to notify Company D if the building became unoccupied for a consecutive period of 30 days. Indeed, an unoccupied building may attract unwanted attention from criminals, vandals or squatters. Unfortunately, Company C failed to notify Company D, which resulted in Company D dismissing the claim based on Company C’s breach of a term of the contract.
Company F had business interruption insurance with Company G. During the first three months of the strict lockdown, Company F, a liquor store, was unable to do business due to the ban on alcohol sales during strict lockdown period. As a result, Company F filed a claim with Company G for the loss of profit it suffered during the period it was unable to trade. The general principle is that an insured company should be placed in the same situation as if the insured event had not occurred. However, Company F’s sales increased dramatically in the months following the lockdown due to customer pre-orders, in anticipation of the lifting of the liquor ban. As such, limiting the revenue loss calculation to the three months of the hard lockdown would have resulted in Company F being overcompensated.
The wording of most insurance contracts remains difficult to understand despite the protection consumers now enjoy under consumer protection law. The old adage “ignorance of the law is no defence” is sadly as true today as it was in years past. If you do not carefully read or understand the terms and conditions of the insurance policies, the policies will not respond if certain conditions are not met. Consumers are therefore advised to read policies carefully and ask their insurer/broker to explain if they do not understand, in order to avoid falling under the terms of the policy.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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