Chapter 1 - CONCEPT OF INSURANCE, INSURANCE CONTRACT AND
INSURANCE LAW, INSURANCE IN ECONOMIC AND LEGAL SENSE,
SOME CLASSIFICATIONS
1.1. INTRODUCTION: INCIDENCE, MANAGEMENT AND
SPREADING RISK
The purpose of insurance is “spreading the risk” among various
persons.
1.2. INSURANCE IN ECONOMIC AND LEGAL SENSE. INSURANCE
CONTRACT AND INSURANCE LAW
An Insurance Contract can either be concluded voluntarily or
imposed statutorily on the parties.
The main aim of the contract is “transference of the risk”.
At Common Law private individuals could be insurers and enter
into Insurance Agreements. However, it is now law that only a
registered insurer can conclude Insurance Agreements.
The following definition of insurance was provided in Lake v
Reinsurance Corporation Limited (1967)(W): “A contract between an
insurer (or assured) and an insured (or assured) whereby the insurer
undertakes, in return for the payment of a price or premium to render to
the insured a sum of money or its equivalent, on the happening of a
specified uncertain event in which the insured has some interest”.
(However, this definition has been criticised as being vague).
General principles of the Law of Contracts apply to Insurance
Contracts.
1.3. CLASSIFICATION OF INSURANCE CONTRACTS
Classification is important because certain legal principles apply to only
some types of Insurance Contracts and not others. However, one type
of contract may belong to difference classes at the same time.
LML4805 – Course Pack 2016 Tutorial Pack of Boston City Campus Acknowledgement UNISA Page 3
,1. For Profit Insurance and Not for Profit Insurance
Profit/Premium Insurance – Insurer ( mainly Insurance companies)
carries on insurance business to make a profit. Premiums are fixed so
that after claims and expenses are paid – a distributable profit (amongst
shareholders) remains.
Mutual Insurance ( Non-profit)– Usually burial and other mutual aid
societies. Members of a group/community make contributions/payments
either before or after an undesireable event affecting ones of its
members occurs This type if Insurance is not for gain – any amount left
over is repaid to members or is used to create an emergency
fund/reduce future contributions. –( if there is a shortfall , the
insured’s will need to make good the shortfall).
2. Consumer Insurance and Commercial Insurance
The nature or status of insured can be classified as either
consumer(individual) insurance or commercial(business) insurance.
The distinction between them is usually just for regulatory purposes.
(-“personal lines business” means insurance business in respect of
which the policyholder is a natural person.)
3. Indemnity and Non-Indemnity (Capital) Insurance
Indemnity Insurance – This type of contract provides that” the insurer
will indemnify the insured for patrimonial loss/damages suffered as a
proximate result of the happening of an event insured against”.
It restores the insured to his position prior to the loss (quo-ante) . The
insured CANNOT make a profit.
LML4805 – Course Pack 2016 Tutorial Pack of Boston City Campus Acknowledgement UNISA Page 4
, Non-Indemnity / Capital – the insurer undertakes to pay a specified
amount or periodical amounts to the insured on the happening of the
insured event. e.g. RX if he dies/loses a limb.( does not affect his
patrimony)
-It generally relates to the (mind/body) person of the insured/third
party
-Therefore the difference between the two is that In indemnity – the
interest must be of a patrimonial nature. Whereas In Capital – the
interest must be of a non patrimonial nature.
NOTE! Need to distinguish because :-
a. Capital insurers are not allowed to claim a proportionate
contribution by other insurers or demand subrogation of insureds.
b. the doctrine of imputation(benefits from an insured event) of
benefits does not apply to capital insurance (e.g. X house burns
down, friend may give him money but insurers don’t deduct the
money from any payment in terms of the policy)
4 Property of Liability Insurance (Personal Insurance and Liability
Insurance)
Indemnity - insurance contracts can be divided into
Property (or asset) insurance
Liability insurance
Property - deals with the positive elements (assets) of the insured’s
estate (e.g. ownership of a house/ life /disability)
Liability – deals with the negative elements (liabilities) of insured’s
estate. e.g. insurance against medical expenses It often covers delictual
liability of insured to third party e.g. from diving car
5. Classification according to Nature of Event Insured Against
e.g. marine/fire/personal accident insurance can be under
indemnity/capital.
LML4805 – Course Pack 2016 Tutorial Pack of Boston City Campus Acknowledgement UNISA Page 5
, 6. Short Term and Long Term Insurance
-A distinction is made between them in the definitions in the Insurance
Acts.
Short Term Insurance Business – provides policy benefits under defined
short term policies e.g. Liability policy/Motor policy/Accident and
health policy etc. (or a combination of these).
Long Term Insurance business – policy benefits under defined long
term insurance business e.g. :Disability policy/Life policy (or a
combination of these).
The distinction between long and short term insurance is usually for
administrative purposes.
7. Private and Social Insurance
Private – concerned with individual interests.
Public – serve the general interests of organised society and profit for
basic needs of its members.
Social – Implemented by the state on a compulsory basis (e.g. C.O.I.D.
Act U.I.F).
LML4805 – Course Pack 2016 Tutorial Pack of Boston City Campus Acknowledgement UNISA Page 6
INSURANCE LAW, INSURANCE IN ECONOMIC AND LEGAL SENSE,
SOME CLASSIFICATIONS
1.1. INTRODUCTION: INCIDENCE, MANAGEMENT AND
SPREADING RISK
The purpose of insurance is “spreading the risk” among various
persons.
1.2. INSURANCE IN ECONOMIC AND LEGAL SENSE. INSURANCE
CONTRACT AND INSURANCE LAW
An Insurance Contract can either be concluded voluntarily or
imposed statutorily on the parties.
The main aim of the contract is “transference of the risk”.
At Common Law private individuals could be insurers and enter
into Insurance Agreements. However, it is now law that only a
registered insurer can conclude Insurance Agreements.
The following definition of insurance was provided in Lake v
Reinsurance Corporation Limited (1967)(W): “A contract between an
insurer (or assured) and an insured (or assured) whereby the insurer
undertakes, in return for the payment of a price or premium to render to
the insured a sum of money or its equivalent, on the happening of a
specified uncertain event in which the insured has some interest”.
(However, this definition has been criticised as being vague).
General principles of the Law of Contracts apply to Insurance
Contracts.
1.3. CLASSIFICATION OF INSURANCE CONTRACTS
Classification is important because certain legal principles apply to only
some types of Insurance Contracts and not others. However, one type
of contract may belong to difference classes at the same time.
LML4805 – Course Pack 2016 Tutorial Pack of Boston City Campus Acknowledgement UNISA Page 3
,1. For Profit Insurance and Not for Profit Insurance
Profit/Premium Insurance – Insurer ( mainly Insurance companies)
carries on insurance business to make a profit. Premiums are fixed so
that after claims and expenses are paid – a distributable profit (amongst
shareholders) remains.
Mutual Insurance ( Non-profit)– Usually burial and other mutual aid
societies. Members of a group/community make contributions/payments
either before or after an undesireable event affecting ones of its
members occurs This type if Insurance is not for gain – any amount left
over is repaid to members or is used to create an emergency
fund/reduce future contributions. –( if there is a shortfall , the
insured’s will need to make good the shortfall).
2. Consumer Insurance and Commercial Insurance
The nature or status of insured can be classified as either
consumer(individual) insurance or commercial(business) insurance.
The distinction between them is usually just for regulatory purposes.
(-“personal lines business” means insurance business in respect of
which the policyholder is a natural person.)
3. Indemnity and Non-Indemnity (Capital) Insurance
Indemnity Insurance – This type of contract provides that” the insurer
will indemnify the insured for patrimonial loss/damages suffered as a
proximate result of the happening of an event insured against”.
It restores the insured to his position prior to the loss (quo-ante) . The
insured CANNOT make a profit.
LML4805 – Course Pack 2016 Tutorial Pack of Boston City Campus Acknowledgement UNISA Page 4
, Non-Indemnity / Capital – the insurer undertakes to pay a specified
amount or periodical amounts to the insured on the happening of the
insured event. e.g. RX if he dies/loses a limb.( does not affect his
patrimony)
-It generally relates to the (mind/body) person of the insured/third
party
-Therefore the difference between the two is that In indemnity – the
interest must be of a patrimonial nature. Whereas In Capital – the
interest must be of a non patrimonial nature.
NOTE! Need to distinguish because :-
a. Capital insurers are not allowed to claim a proportionate
contribution by other insurers or demand subrogation of insureds.
b. the doctrine of imputation(benefits from an insured event) of
benefits does not apply to capital insurance (e.g. X house burns
down, friend may give him money but insurers don’t deduct the
money from any payment in terms of the policy)
4 Property of Liability Insurance (Personal Insurance and Liability
Insurance)
Indemnity - insurance contracts can be divided into
Property (or asset) insurance
Liability insurance
Property - deals with the positive elements (assets) of the insured’s
estate (e.g. ownership of a house/ life /disability)
Liability – deals with the negative elements (liabilities) of insured’s
estate. e.g. insurance against medical expenses It often covers delictual
liability of insured to third party e.g. from diving car
5. Classification according to Nature of Event Insured Against
e.g. marine/fire/personal accident insurance can be under
indemnity/capital.
LML4805 – Course Pack 2016 Tutorial Pack of Boston City Campus Acknowledgement UNISA Page 5
, 6. Short Term and Long Term Insurance
-A distinction is made between them in the definitions in the Insurance
Acts.
Short Term Insurance Business – provides policy benefits under defined
short term policies e.g. Liability policy/Motor policy/Accident and
health policy etc. (or a combination of these).
Long Term Insurance business – policy benefits under defined long
term insurance business e.g. :Disability policy/Life policy (or a
combination of these).
The distinction between long and short term insurance is usually for
administrative purposes.
7. Private and Social Insurance
Private – concerned with individual interests.
Public – serve the general interests of organised society and profit for
basic needs of its members.
Social – Implemented by the state on a compulsory basis (e.g. C.O.I.D.
Act U.I.F).
LML4805 – Course Pack 2016 Tutorial Pack of Boston City Campus Acknowledgement UNISA Page 6
