When does a claim under a liability policy prescribe?
A claim for indemnification under a liability insurance contract only arises when liability to a third party for a certain amount has been established. For purposes of prescription, the debt becomes due when the insured is under legal liability to pay a fixed and determined sum of money. Until then a ‘claim’ for indemnification under the policy doesn’t exist and cannot prescribe.
The insured in Magic Eye Trading 77 CC v Santam Limited had been sued by a third party for damage to his vehicle allegedly as a result of the negligent conduct of the insured’s employee. The insured joined the insurer to the proceedings as a third party based on their insurance policy which included indemnity insurance against loss suffered by the insured by way of liability to third parties. The insurer alleged that the claim for indemnity had prescribed, alleging that upon the occurrence of the defined event, or when the insured and its employee became aware of the event, or when the insurer rejected the claim, the right to indemnity against the contingent future monetary consequences of the accident became vested in the insured. And because the insured hadn’t instituted proceedings within three years of any of those events the claim had allegedly prescribed.
The courts stressed the distinction between a claim and a contingent claim. An insured is only entitled to indemnity against loss or damage when they become legally liable to a third party. An insured can only become legally liable to pay once that sum due by them is fixed by a court or by agreement. Until then no claim for indemnification can arise.
The corollary also applies. In the event of a rejection of liability by the insurer requiring institution of any action within a certain period after the rejection, that condition doesn’t permit the general rejection of future claims at a stage when a precise claim in a fixed amount is not and cannot be made by the insured.
In the circumstances the insurer could not rely on the statutory prescription period, nor any time bar provisions in the policy.
The position is different where first party insurance is concerned. In the normal course of events, whether it be a life or non-life insurance policy, the debt owed by the insurer becomes due as soon as the event insured against has taken place. In the case of life insurance for example the debt is due on the death of the life insured. Prescription commences to run against the beneficiary if at that stage the existence of the policy, the identity of the insurer, their nomination as beneficiary and the death of the deceased are known to the beneficiary. The beneficiary doesn’t have to wait for the insurer’s decision whether to pay or not and any delay by the insurer in making a decision doesn’t delay the commencement of prescription. See for example Danielz NO v De Wet and Van der Westhuizen v Hollard Life. The same principle applies where for example the insured claims for theft of a motor vehicle or damage or destruction of the insured property by fire. Prescription starts running when the loss event occurs.
Prescription can be interrupted by service on the insurer of a summons or by an express or tacit acknowledgement of liability on the part of the insurer.
Also bear in mind that in terms of the Ombud Rules and the Policyholder Protection Rules the running of prescription or time bar provisions will be interrupted or suspended in certain circumstances.
The Supreme Court of Appeal in Magic Eye Trading 77 CC v Santam Limited dealt authoritatively with the question of when a contingent right to claim an indemnity prescribes. The principles are not new but the judgment contains a useful review and discussion of the relevant case law.
Donald Dinnie Director Norton Rose Fulbright South Africa Inc
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