Having Insight Into the History and Origin of Insurance

TABLE OF CONTENTS

Content

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Page

Section 1 / Nature and Importance of Insurance / 1
Overview / 3
1.1 / The concept of Insurance / 5
1.2 / History and origin of Insurance / 8
1.3 / Nature of Insurance / 10
1.4 / Essentials of an Insurance Contract / 12
1.5 / Duty of good faith / 17
1.6 / Parties to an Insurance Contract / 19
1.7 / Summary / 21

Overview

Learning Outcome
/ The following is the Learning Outcome of this Section:
1.  Realise the Nature and Importance of Insurance.
Learning Objectives / The Learning Objectives are as follows:
On completion of this Section, you will be able to:
1. / Realise the Nature and Importance of Insurance by:
·  Comprehending the concept of Insurance
·  Having insight into the history and origin of Insurance
·  Comprehending the nature of Insurance
·  Realising the essentials of an Insurance Contract
·  Comprehending the duty of good faith
·  Comprehending the parties in an Insurance Contract
Assessment Criteria / To demonstrate the achievement of the Learning Objectives, you are required to meet the criteria and/or provide the following evidence:
Comprehending the concept of Insurance
·  Define the concept of Insurance
·  List the types of Contracts

Having insight into the history and origin of Insurance

·  Describe the origin of Insurance
·  List the Acts that regulate the South African Insurance business

Comprehending the nature of Insurance

·  Describe the nature of Insurance
·  Differentiate between Indemnity and Non-indemnity Insurance
Assessment Criteria, continued
Realising the essentials of an Insurance Contract
·  List the essentials of an Insurance Contract
·  Define the concept “insurable interest”

Comprehending the duty of good faith

·  Describe misrepresentation in an Insurance Contract
·  Describe the concept “non-disclosure”
·  Differentiate between misrepresentation and non-disclosure

Comprehending the parties in an Insurance Contract

·  Identify the parties to an Insurance Contract
·  Differentiate between an Insurance Broker and an Insurance Agent
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1. / Nature and Importance of Insurance

1.1  The concept of Insurance

/ Before you start with this Section, answer the questions below.
What is Insurance and what do you think is the purpose of Insurance?
Do you think it is important to have Insurance (Long- and Short-term)?
Is yes, why do you think it is important?
If no, why do you think it is not important?
What do you think are the benefits of Insurance?
Introduction / Sipho’s timber shop was one of the best built and best stocked shops in his community. It was his pride and joy. All his money went into his shop. Late one night, a fire broke out, in half an hour, his shop was reduced to ashes, and he lost everything.
While building his shop, Sipho thought of taking out Fire Insurance with some of the money that he used for the building of the shop. But, he thought, he is a very careful man and if there never is a fire, Insurance will be a waste of money. But, fate took over and there was a fire. If he had taken out the fire Insurance, he could have rebuilt his shop – without Insurance, he could not.
What is Insurance? / Insurance is not an investment from which you expect to get your money back. It is not gambling either. A gambler takes risks, while Insurance offers protection against risks that already exist. Insurance is a way to share risks with others.
Do you need Insurance? / In some countries certain kinds of Insurance are compulsory. In other countries, Insurance is practically unknown.
The cost of Insurance and the type of coverage varies widely from country to country. However, the principle of Insurance, namely sharing risk, remains the same.
Obviously, the more property a person owns, the more he/she has to lose. Likewise, the more family responsibility a person has, the greater the impact if he/she dies or becomes disabled.
Having Insurance can ease a person’s concern about the possibility of suffering a loss of property or a disabling injury/accident.
Types of Insurance / Most of the Insurance purchased falls into the following categories:
·  Property
·  Liability
·  Health
·  Disability
·  Life Assurance (Long-term Insurance)
Property Insurance: Insuring against the loss of property, namely, home, business, car, or other possessions, is one of the most common forms of risk management.
Liability Insurance: Anyone who drives a car, owns a home or real estate, operates a business, employs other people, runs the risk of liability for an accident. Such an accident may result in damage to property or the death of another person. The driver of a car or the owner of a business may become liable to pay for damages and/or medical treatment of another person.
Types of Insurance, continued / Health Insurance: Some countries have some form of state sponsored Insurance that provides benefits for pensioners, for example pensions and medical care. However, with the rise in medical costs, people obtain additional private health Insurance. In some companies, workers may receive health Insurance as a condition of their employment.
Disability and Life Assurance: Disability assurance provides income if a person is injured and cannot work. Life Assurance provides financial assistance to a person’s dependants in case of his/her death.
/ Revisit the activity in the beginning of this Section.
Can you change some of your answers?
If you can, motivate why.

1.2  History and origin of Insurance

Introduction / Insurance is a business with a long history and has existed for many thousands of years.
Origin of Insurance / The Contract of Insurance originated in trade usages, which existed in the medieval Italian states, to provide for the risks attached to sea transport.
Ship owners obtained loans from investors to finance their trading expeditions. If a ship was lost, the owners were not responsible for paying back the loans. Since many of the ships returned safely, the interest paid by the numerous ship owners, covered the risk to the lenders.
It was in a maritime setting that one of the world’s most famous Insurance providers, Lloyd’s of London was born. In 1688, Edward Lloyd was running a coffee house where London merchants and banks met informally to do business.
The financiers who offered Insurance Contracts to seafarers wrote their names under the specific amount of risk that they would accept in exchange for a certain payment or premium. These Insurers came to be known as underwriters.
In 1769 Lloyd’s became a formal group of underwriters that in time grew into the foremost market for marine risks.
At first, marine Insurance was the only type of Insurance concluded, but with time, other forms of Insurance have developed.
Transport played a very important role in the development of the European continent, and as a result, the Contract of Insurance spread to other countries where it was adopted and developed.
Today, the Insurance Industry is developed to such an extent that there is hardly any risk that you cannot be Insured against.
When you buy Insurance, you are sharing your risk. The Insurance companies study statistics that show the frequency of past losses. For example, losses from shop fires to try to predict what losses their clients may experience in the future. The Insurance companies use the funds paid by clients to compensate the clients who suffer losses.
South African Insurance law / The South African Insurance law is primarily governed by a combination of Roman-Dutch and English law.
The Roman-Dutch writers of Insurance law discuss only Marine Insurance, but the principles of Marine Insurance can be extended to and developed for other types of Insurance.
Where the Roman-Dutch law does not provide an answer to a problem, the courts do legal research on the applicable law in other legal systems. In this way a South African law of Insurance can develop.
The first act to regulate Life Assurance (also known as Long-term Insurance), and Short-term Insurance was the Insurance Act 27 of 1943.
Today, the Long-term Insurance Act, 52 of 1998 and the Short-term Insurance Act, 53 of 1998 mainly regulate and control the Insurance business.
These acts also contain provisions, which apply to the Insurance Contract and provide some measure of protection to Insurance consumers.

1.3 The nature of Insurance

Introduction / An Insurance Contract serves to protect the formation, preservation and development of the Insured’s estate against risks.
You contribute to a fund together with other people who are exposed to the same risks. The risks that endanger the formation, preservation and development of the Insured’s estate are therefore distributed amongst a group of people who are equally at risk.
/ The law recognises two types of Insurance Contracts, namely:
·  Indemnity Insurance.
·  Non-indemnity Insurance.
Indemnity Insurance / With Indemnity Insurance the Insurer undertakes to cover the damage, which the Insured may suffer through the occurrence of the event the Insurer, is Insured against.
EXAMPLE: Burning Timbers Fire Insurance Company agrees with Sipho that they will make good the loss Sipho may suffer if his shop burns down. If Sipho’s shop burns down, and he can prove that is was worth R350 000,00, he can recover R350 000,00 from Burning Timbers Fire Insurance Company.
Examples of Indemnity Insurance are Property Insurance, for instance:
·  Marine
·  Fire
·  Theft
·  Motor vehicle Insurance
Non-indemnity Insurance / With Non-indemnity Insurance the Insurer undertakes to pay the Insured or the beneficiary a fixed sum of money if the event Insured against, takes place. Non-indemnity Insurance includes life and personal accident Insurance.
EXAMPLE: We Care Life Insurance Company agrees with John that they will pay R130 000,00 to John’s wife when he dies. John dies and his wife can claim the R130 000,00 from We Care Life Insurance Company.
/ Some of the important concepts discussed on the previous pages are hidden in the word grid below. See if you can locate the words listed below:
Compensate English Law
Indemnity Insurance Act
Lloyds Long-term
Non-indemnity Preservation
Risks Risk sharing
Short-term Underwriters
The words are written from top to bottom, left to right, diagonally and backwards. Some of the characters are used more than once. The word “Short-term” is used as an example.
On completion ask your Coach for the model answer.

1.4 Essentials of an Insurance Contract

Introduction / The essentials of a Contract are those characteristics that a particular Contract has which distinguishes it from other Contracts.
The essentials of an Insurance Contract includes the following:
·  An undertaking by the Insured to pay a premium
·  An undertaking by the Insurer to pay a sum of money or its equivalent
·  A particular uncertain future event upon which the Insurer’s obligation to pay depends (risk)
·  An insurable interest

Premium

/ The Insured undertakes to pay a sum of money – a premium. The actual payment of the premium is not a requirement for the creation of a Contract. The undertaking to pay is sufficient grounds for the creation of the Contract. The payment is usually a (suspensive) condition for the policy to take effect.
When a premium is paid, the recipient (Insurer) must give the Insured a written receipt (Section 47, Long-term Insurance Act).
/ In The Law of Contract, we discussed a suspensive and a resolutive condition.
Can you remember what a suspensive condition is?
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1. / Nature and Importance of Insurance
Amount payable by Insurer – Non-indemnity Insurance / With Non-indemnity Insurance the sum payable is predetermined.
For example, a person insures his/her life for R50 000,00 (Insured amount). The Insurer will have to pay that amount to the estate of the Insured or the beneficiary.
Amount payable by Insurer – Indemnity Insurance / With Indemnity Insurance, the Insurer is obliged to pay a determinable amount of money. This amount is determined after the occurrence of the event Insured against, by determining the extent of the damage.
The value of the claim is determined by its value at the date and place of the loss – not by its cost. The Insured must be placed in the same financial position he/she was in before the event Insured against took place – not in a better financial position.
The present value of the objective is considered, irrespective of whether its value has increased or decreased since the conclusion of the Contract.
EXAMPLE: Your house is valued at R300 000,00 and Insured against fire. At the time of the house’s destruction by fire, it is worth R350 000,00. The loss, which you may recover from your Insurer, is R350 000,00.
However, normally a maximum value of compensation is stipulated in the Contract. In such a case, the Insurer is liable only for the amount of the Insured’s loss or the maximum Insured value, whichever is the lesser.
Where the object Insured only suffered damage, the Insurer will be liable for the amount of the partial loss, which is normally the cost of repairing the object.
Insurable interest / Insurable interest is the financial interest a person has in the object/subject matter that is being Insured.
In Short-term Insurance, this is usually the financial interest that a person has in an asset, for example a motor vehicle. If the vehicle is stolen, the Insured suffers a financial loss.
In Long-term Insurance, the insurable interest is in a person’s life, health or other well-being.
Insurable interest in a Life Policy / In the case of a Life Policy the insurable interest is only required at the time the policy is effected. The continued existence of an insurable interest is not required. There is also no requirement that an interest must exist at the death of the person who’s life is Insured.
For example, a creditor who has Insured his debtor’s life may, on the death of the debtor, recover the full amount of the policy proceeds, even though the debt has already been repaid.
Similarly, a wife may recover the full amount of the policy proceeds under a policy owned by her on her husband’s life, etc.
Insurable interest on a person’s own life / A person has an unlimited insurable interest on his/her own life. Therefore, a person can insure his/her own life as many times and for as much as he/she can afford.
This is the case even where a person insures his own life solely for the benefit of others. Most Insurers provide that in the event of suicide within a defined period, normally two or three years, their Contractual liability is suspended.
Where the insurable interest required, a person may insure the life in which he/she has an interest without the consent of the life Insured. However, in practice the Insurer requires the consent of the Insured. The insurable interest required in these cases is a financial interest.
The person effecting the Insurance must show that he/she would suffer financially by the death of the life Insured.
Insurance on a child’s life / Section 55 of the Long-term Insurance Act provides a statutory limitation on the right to insure a child’s life.
An Insurer may not ensure the life of a child under 14 years of age for any sum which, or when added to any other amount payable on the child’s death by any other Insurer, Short-term Insurer or a friendly society, exceeds:
·  R10 000 if the child is under 6 years
·  R30 000 if 6 years and older
Examples of insurable interest / Creditors: A creditor has an insurable interest in the life of his/her debtor. Any Contractual relationship where one person has a real expectation of deriving some benefit from another’s continuance of life will support a Contract of Insurance. Insurance is allowed at least to the amount of the debt with interest thereon at the time of effecting the Insurance.
Partners: A person has an insurable interest in the life of his partner. This also applies to members of a close corporation and shareholders in a company – assuming they have a buy-and-sell agreement upon the death of a partner, co-shareholder or member.
This interest arises from the obligation created in the Contract to buy the deceased’s interest. Our courts have accepted that a person has an insurable interest in the life of his/her partner even without the Contractual obligation.
Company/director and employer/employee: Where the prosperity of a company depends on the services and skill of a director/employee and where the death of this person would cause financial loss to the company, an insurable interest is created. The extent of the insurable interest will depend on:
·  The function performed by the director/employee
·  Their particular skills
·  The financial loss that their death would cause
/ Read carefully through the topic “Essentials of an Insurance Contract” and discuss any concerns and uncertainties with your Coach.
Use the space below and compile 6 questions relating to the topic. Give the questions to a learning partner to complete and in turn, collect your learning partner’s questions for completion.
Once you have answered the questions, ask your Coach to check your answers for correctness.

1.5 Duty of good faith