South Africa: Corporate Insurance And Risk Management: Consumer Protection Act

Last Updated: 18 March 2010
Article by Donald Dinnie

This article was originally published by

Insurers doing business in South Africa will now have to acquaint themselves with the workings and ramifications of the Consumer Protection Act, 2008 which comes into effect in October 2010.

The Act:

  • Will affect the operations of insurers directly and indirectly;
  • Regulates the relationships between consumers and suppliers in respect of defined services.

Consumers will include insureds, to the extent that the insured is not the State or juristic personalities whose asset value or annual turnover at the time of the transaction which is the subject of any complaint equals or exceeds a threshold value still to be determined by regulation.

Accordingly, personal lines policies and low value commercial and corporate insurance will be affected.

The Act's broad definition of service includes "... the undertaking, underwriting or assumption of any risk by one person on behalf of another... ". That service is, however, excluded to the extent that it:

  • Constitutes advice or intermediary services that are subject to a regulation in terms of the Financial Advisory and Intermediary Services Act, 2002;
  • Is regulated in terms of the Long-term Insurance Act, 1998 or the Short-term Insurance Act, 1998.

The important qualification of the exemption is the phrase "to the extent that". There is no blanket exclusion of insurance services from the ambit of the Act. Schedule 2 of the Act assumes the exclusion of the Short-term Insurance Act and Long-term Insurance Act from the ambit of the Act but is subject to "... those sector laws being aligned with the consumer protection measures provided for in this Act within a period of 18 months from the commencement of this Act, failing which, the provisions of this Act will apply".

Unless the insurance legislation is aligned with the consumer protection measures by April 2012, the default position will require compliance with the Consumer Protection Act.

One way or the other, insurers cannot ignore the provisions of the Act.

It is likely that some amendment of the insurance rules and regulations will be necessary. The Short-term Policyholder Protection Rules, for example, provide some protection to personal lines policyholders in the context of policy format and prohibitions against ambiguity. Those provisions are, however, not as extensive as the plain and understandable language provisions of the Act which provides that a written policy must be in plain language. The National Consumer Commission, created by the Act may publish guidelines for assessing whether a document satisfies the plain language requirements and guidelines may be published for public comment.

The document is in plain language if it is reasonable to conclude that an ordinary consumer (policyholder):

  • Of the class of persons for whom the document is intended;
  • With average literacy skills; and
  • Minimal experience as a consumer of insurance services;
  • Could be expected to understand the content, significance and import of the document without undue effort, having regard to: (i) the context, comprehensiveness and consistency of the document; (ii) organisation, form and style; (iii) vocabulary, usage and sentence structure; and (iv) the use of any illustrations, examples, headings or other aids to reading and understanding.

The requirement is one of plain language, not plain English. It is unconscionable for a supplier (insurer) to take advantage of an insured who is substantially unable to protect their own interests because of physical and mental disability, illiteracy, ignorance, inability to understand the language of an agreement or any other similar factor.

Accordingly, an insurance product marketed to a consumer base whose language is not English will need to be marketed and transacted with those insureds in their own language.

The prohibition against unfair, unreasonable or unjust contract terms, or a price that is unfair, unreasonable or unjust or marketing, negotiating or administering a transaction in a manner that is unfair, unreasonable or unjust formally introduces a test of equity into our law (a concept with which both the voluntary insurance Ombudsmen already have been grappling) and will expand the basis for challenging policy terms and conditions.

Amongst other things, a term or condition is unfair, unreasonable or unjust, if:

  • It is excessively one-sided in favour of any person other than the consumer; or
  • The terms and conditions are so adverse to the consumer as to be inequitable;

A provision in the policy which limits the risk or liability of the insurer (for present purposes, read exemptions and exclusion clauses in policies) must:

  • Comply with the plain language provisions of the Act; and
  • The fact, nature and effect of that provision must be drawn to the attention of the insured: (i) in a conspicuous manner and form that is likely to attract the attention of an ordinary, alert insured, having regard to the circumstances; and (ii) at the time when the transaction is entered into or the insured was required to make or offered consideration for the transaction; and
  • The insured must be given adequate opportunity in the circumstances to receive and comprehend those provisions.

The Act provides for class actions and in so doing exposes insurers to increased challenges. Power is given to accredited consumer protection groups to initiate actions to protect the interests of consumers individually or collectively. Contravention of the plain language requirement and prohibition against unfair, unjust or unconscionable terms and provisions will not only create the basis for a successful challenge by the insured of a particular policy or policy term but will also expose the insurer in cases where there has been prohibited or required conduct (for example, where there has previously been a complaint about policy wording which is not in plain language and a directive issued that conduct cease) a potentially substantial administrative fine.

The Act now completely alters the South African common law of product liability and removes the requirement of establishing fault of the manufacturer, importer, distributor and supplier in causing harm.

The provision significantly increases the risk of exposure to liability of producers, importers, distributors and retailers for harm caused wholly or partly for:

  • Supplying any unsafe goods;
  • A product failure, defect or hazard in any goods;
  • Inadequate instructions or warnings provided to consumers pertaining to the hazard arising from or associated with the use of any goods;
  • Irrespective whether the harm resulted from negligence on the part of any of those persons.

Concomitantly, the underwriting risks of exposure for product liability insurers will increase.

The no-fault product liability provisions, and the safety monitoring and recall provisions of the Act do not fall within any exemptions under the Act and apply whether the consumer is a juristic person with asset value or turnover exceeding the promulgated threshold or the State.

There are very limited bases for escaping liability under the no-fault provisions. Probably the most commonly used defence will be that the distributor or retailer can establish that it is unreasonable to expect them to have discovered the unsafe product characteristic, failure, defect or hazard, having regard to their role in the marketing of the goods to consumers.

The National Consumer Commission can require a producer to conduct a product investigation or a product recall (subject to an appeal to the tribunal) even where the producer has investigated and declined to institute a recall.

Accordingly, product liability insurers should re-assess the underwriting risks under the no-fault product liability and recall provisions of the Act and take steps to ensure that those insureds who have significant exposure are alert to and understand the ramifications of the provisions, have in place appropriate quality control and risk control procedures and where possible, obtain appropriate indemnities from those in the supply chain.

Indemnities and disclaimers of liability cannot, in the context of product liability provisions be imposed upon the user of the goods since that would amount to an impermissible avoidance of those provisions of the Act.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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