Learning Unit 1
CONCEPTS OF INSURANCE, INSURANCE CONTRACT AND INSURANCE LAW;
INSURANCE IN AN ECONOMIC AND LEGAL SENSE; SOME CLASSIFICATIONS
OF INSURANCE CONTRACTS.
1.1. INTRODUCTION: INCIDENCE, MANAGEMENT, AND SPREADING OF
RISK
� Insurance is fundamentally about spreading risk. Individuals and
businesses face various risks, such as accidents, illnesses, or property
damage. Insurance offers a mechanism to mitigate these risks.
� This is achieved by pooling premiums from a large number of
individuals or entities exposed to similar risks. When an insured event
occurs, the pool of premiums compensates those who suffer losses.
� The concept of spreading risk underlies the entire insurance industry.
By transferring risk from individuals to a larger pool, insurance provides
financial protection and peace of mind.
1.2. INSURANCE IN AN ECONOMIC AND LEGAL SENSE; INSURANCE
CONTRACT AND INSURANCE LAW.
� Insurance in an economic sense can be seen as a financial intermediary.
It facilitates the transfer and distribution of risk among participants. This
system allows individuals and businesses to manage their exposure to
potentially devastating financial losses
� Insurance in a legal sense involves a contract where one party (the insurer)
agrees to indemnify or compensate another party (the insured) for a specified
loss or damage upon the occurrence of an uncertain event. In return, the
insured pays a premium to the insurer.
� It is important to distinguish insurance contracts from other types of
contracts, such as wagering agreements. This distinction is crucial to ensure
that the contract is legally enforceable and that the insured can receive the
intended benefits.
� Insurance law in South Africa has a mixed history, drawing from both
Roman-Dutch and English law traditions. While Roman-Dutch law forms the
foundation, English law has significantly influenced its development,
particularly through the historical application of English precedents in South
African courts.
1. The case of Mutual & Federal Insurance Co Ltd v Oudtshoorn
Municipality (1985) is particularly noteworthy. It clarified that while
English law is no longer binding in South Africa, well-established principles
of English insurance law that have been consistently applied in South
African courts are likely to remain influential.
2. Despite the historical influence of English law, it's essential to remember
that South African insurance law is ultimately rooted in Roman-Dutch legal
principles
,1.3. CLASSIFICATION OF INSURANCE CONTRACTS
Insurance contracts can be classified in various ways , including:
� Indemnity insurance: Aims to restore the insured to their financial
position before the loss. Examples include property and liability
insurance.
Practical Example: If a fire damages a homeowner's property, their
indemnity insurance policy would cover the cost of repairs or
rebuilding, bringing them back to the same financial position they
were in before the fire.
� Non-indemnity insurance: Provides a predetermined sum upon the
occurrence of an insured event, regardless of the actual loss. Life
insurance is a prime example of non-indemnity insurance.
Practical Example: A life insurance policy with a death benefit of
R1 million will pay out that amount to the beneficiary upon the
insured's death, regardless of the actual financial loss suffered by
the beneficiary.
OTHER CLASSIFICATIONS INCLUDE:
a) short-term insurance and long-term insurance:
� Short-term insurance covers risks that occur over a shorter period, like
car accidents or theft.
� Long-term insurance, like life insurance, provides coverage over an
extended period.
b) Property insurance, liability insurance and insurance on the person:
� Property insurance protects against damage to physical assets.
� Insurance on the person covers risks related to an individual's health or
life, such as personal accident insurance or health insurance.
c) First-party insurance and third-party insurance:
� First-party insurance benefits the policyholder directly, such as
coverage for their own property damage.
� Third-party insurance protects against claims from others, like liability
coverage for injuries caused to a third party.
d) Compulsory insurance and voluntary insurance:
� Compulsory insurance is required by law, such as motor vehicle third-
party liability insurance in South Africa.
� Voluntary insurance is taken out at the discretion of the individual or
business.
e) Domestic insurance and international insurance
� Domestic insurance applies within a specific country,
� International insurance provides coverage across multiple countries.
f) Mutual insurance and insurance for profit:
, � Mutual insurance companies are owned by their policyholders and
operate on a non-profit basis.
� Insurance for profit companies are owned by shareholders and aim to
generate profits for their investors.
g) Reinsurance and primary insurance:
� Reinsurance is insurance for insurance companies, helping to spread
their risk.
� Primary insurance is the initial insurance policy taken out by an
individual or business.
h) an insurance contract, a contract for the rendering of services and a
contract of suretyship:
� These are distinct legal agreements, each with its own characteristics
and legal implications.
i) An occurrence-based insurance contract and a claim-made insurance
contract:
� Occurrence-based policies cover incidents that happen during the
policy period, regardless of when the claim is made.
� Claims-made policies cover claims reported during the policy period,
even if the incident happened earlier.
j) a valued insurance contract and an unvalued insurance contract:
� Valued policies specify a pre-agreed amount to be paid out upon a
claim, such as in some life insurance contracts.
� Unvalued policies determine the payout based on the actual value of
the loss at the time of the incident.
k) Private insurance and social insurance:
� Private insurance is provided by commercial insurers.
� Social insurance is government-run insurance programs, like
unemployment or health insurance schemes.
Classification Type of
Description Examples
Criteria Insurance
Aims to restore the
insured to their financial
Nature of position before the loss.
Indemnity Property Insurance, Liability
insurer's The insurer's liability is
Insurance insurance
performance limited to the actual
financial loss suffered by
the insured.
, Provides a predetermined
sum upon the occurrence
Non-indemnity Life Insurance, Personal
of an insured event,
Insurance Accident Insurance
regardless of the actual
loss.
Covers risks that occur
Duration of Short-term Car Insurance, Homeowners
over a shorter period,
coverage Insurance Insurance, Travel insurance
typically less than a year.
Provides coverage over an
Long-term extended period, often for Life Insurance, Endowment
Insurance several years or even a Policies, Retirement Annuities
lifetime.
Homeowners Insurance,
Subject matter Property Protects against damage to
Commercial Property
of insurance Insurance physical assets.
Insurance, Vehicle Insurance
Public Liability Insurance,
Liability Covers legal responsibility Professional Indemnity
Insurance for harm to others. Insurance, Product Liability
Insurance
Life insurance, Health
Insurance on Covers risks related to an Insurance, Disability
the Person individual's health or life. Insurance, Personal Accident
Insurance
Benefits the policyholder
Beneficiary of First-party directly, such as coverage Homeowners Insurance, Car
insurance Insurance for their own property Insurance, Health Insurance
damage.
Public Liability Insurance,
Third-party Protects against claims
Motor Vehicle Third-party
Insurance from others.
Liability Insurance
Motor Vehicle Third-party
Legal Compulsory
Required by law. Liability Insurance, Workers'
requirement Insurance
Compensation Insurance
Taken out at the discretion
Voluntary Life Insurance, Homeowners
of the individual or
Insurance Insurance, Travel Insurance
business.
A car insurance policy
Geographical Domestic Applies within a specific purchased in South Africa will
scope Insurance country. typically only provide
coverage within South Africa.
A travel insurance policy
International Provides coverage across purchased for a trip to Europe
Insurance multiple countries. will provide coverage in the
countries visited.
Some medical aid schemes in
Ownership Mutual The insurance company is
South Africa are structured as
structure Insurance owned by its policyholders
mutual insurance companies.
CONCEPTS OF INSURANCE, INSURANCE CONTRACT AND INSURANCE LAW;
INSURANCE IN AN ECONOMIC AND LEGAL SENSE; SOME CLASSIFICATIONS
OF INSURANCE CONTRACTS.
1.1. INTRODUCTION: INCIDENCE, MANAGEMENT, AND SPREADING OF
RISK
� Insurance is fundamentally about spreading risk. Individuals and
businesses face various risks, such as accidents, illnesses, or property
damage. Insurance offers a mechanism to mitigate these risks.
� This is achieved by pooling premiums from a large number of
individuals or entities exposed to similar risks. When an insured event
occurs, the pool of premiums compensates those who suffer losses.
� The concept of spreading risk underlies the entire insurance industry.
By transferring risk from individuals to a larger pool, insurance provides
financial protection and peace of mind.
1.2. INSURANCE IN AN ECONOMIC AND LEGAL SENSE; INSURANCE
CONTRACT AND INSURANCE LAW.
� Insurance in an economic sense can be seen as a financial intermediary.
It facilitates the transfer and distribution of risk among participants. This
system allows individuals and businesses to manage their exposure to
potentially devastating financial losses
� Insurance in a legal sense involves a contract where one party (the insurer)
agrees to indemnify or compensate another party (the insured) for a specified
loss or damage upon the occurrence of an uncertain event. In return, the
insured pays a premium to the insurer.
� It is important to distinguish insurance contracts from other types of
contracts, such as wagering agreements. This distinction is crucial to ensure
that the contract is legally enforceable and that the insured can receive the
intended benefits.
� Insurance law in South Africa has a mixed history, drawing from both
Roman-Dutch and English law traditions. While Roman-Dutch law forms the
foundation, English law has significantly influenced its development,
particularly through the historical application of English precedents in South
African courts.
1. The case of Mutual & Federal Insurance Co Ltd v Oudtshoorn
Municipality (1985) is particularly noteworthy. It clarified that while
English law is no longer binding in South Africa, well-established principles
of English insurance law that have been consistently applied in South
African courts are likely to remain influential.
2. Despite the historical influence of English law, it's essential to remember
that South African insurance law is ultimately rooted in Roman-Dutch legal
principles
,1.3. CLASSIFICATION OF INSURANCE CONTRACTS
Insurance contracts can be classified in various ways , including:
� Indemnity insurance: Aims to restore the insured to their financial
position before the loss. Examples include property and liability
insurance.
Practical Example: If a fire damages a homeowner's property, their
indemnity insurance policy would cover the cost of repairs or
rebuilding, bringing them back to the same financial position they
were in before the fire.
� Non-indemnity insurance: Provides a predetermined sum upon the
occurrence of an insured event, regardless of the actual loss. Life
insurance is a prime example of non-indemnity insurance.
Practical Example: A life insurance policy with a death benefit of
R1 million will pay out that amount to the beneficiary upon the
insured's death, regardless of the actual financial loss suffered by
the beneficiary.
OTHER CLASSIFICATIONS INCLUDE:
a) short-term insurance and long-term insurance:
� Short-term insurance covers risks that occur over a shorter period, like
car accidents or theft.
� Long-term insurance, like life insurance, provides coverage over an
extended period.
b) Property insurance, liability insurance and insurance on the person:
� Property insurance protects against damage to physical assets.
� Insurance on the person covers risks related to an individual's health or
life, such as personal accident insurance or health insurance.
c) First-party insurance and third-party insurance:
� First-party insurance benefits the policyholder directly, such as
coverage for their own property damage.
� Third-party insurance protects against claims from others, like liability
coverage for injuries caused to a third party.
d) Compulsory insurance and voluntary insurance:
� Compulsory insurance is required by law, such as motor vehicle third-
party liability insurance in South Africa.
� Voluntary insurance is taken out at the discretion of the individual or
business.
e) Domestic insurance and international insurance
� Domestic insurance applies within a specific country,
� International insurance provides coverage across multiple countries.
f) Mutual insurance and insurance for profit:
, � Mutual insurance companies are owned by their policyholders and
operate on a non-profit basis.
� Insurance for profit companies are owned by shareholders and aim to
generate profits for their investors.
g) Reinsurance and primary insurance:
� Reinsurance is insurance for insurance companies, helping to spread
their risk.
� Primary insurance is the initial insurance policy taken out by an
individual or business.
h) an insurance contract, a contract for the rendering of services and a
contract of suretyship:
� These are distinct legal agreements, each with its own characteristics
and legal implications.
i) An occurrence-based insurance contract and a claim-made insurance
contract:
� Occurrence-based policies cover incidents that happen during the
policy period, regardless of when the claim is made.
� Claims-made policies cover claims reported during the policy period,
even if the incident happened earlier.
j) a valued insurance contract and an unvalued insurance contract:
� Valued policies specify a pre-agreed amount to be paid out upon a
claim, such as in some life insurance contracts.
� Unvalued policies determine the payout based on the actual value of
the loss at the time of the incident.
k) Private insurance and social insurance:
� Private insurance is provided by commercial insurers.
� Social insurance is government-run insurance programs, like
unemployment or health insurance schemes.
Classification Type of
Description Examples
Criteria Insurance
Aims to restore the
insured to their financial
Nature of position before the loss.
Indemnity Property Insurance, Liability
insurer's The insurer's liability is
Insurance insurance
performance limited to the actual
financial loss suffered by
the insured.
, Provides a predetermined
sum upon the occurrence
Non-indemnity Life Insurance, Personal
of an insured event,
Insurance Accident Insurance
regardless of the actual
loss.
Covers risks that occur
Duration of Short-term Car Insurance, Homeowners
over a shorter period,
coverage Insurance Insurance, Travel insurance
typically less than a year.
Provides coverage over an
Long-term extended period, often for Life Insurance, Endowment
Insurance several years or even a Policies, Retirement Annuities
lifetime.
Homeowners Insurance,
Subject matter Property Protects against damage to
Commercial Property
of insurance Insurance physical assets.
Insurance, Vehicle Insurance
Public Liability Insurance,
Liability Covers legal responsibility Professional Indemnity
Insurance for harm to others. Insurance, Product Liability
Insurance
Life insurance, Health
Insurance on Covers risks related to an Insurance, Disability
the Person individual's health or life. Insurance, Personal Accident
Insurance
Benefits the policyholder
Beneficiary of First-party directly, such as coverage Homeowners Insurance, Car
insurance Insurance for their own property Insurance, Health Insurance
damage.
Public Liability Insurance,
Third-party Protects against claims
Motor Vehicle Third-party
Insurance from others.
Liability Insurance
Motor Vehicle Third-party
Legal Compulsory
Required by law. Liability Insurance, Workers'
requirement Insurance
Compensation Insurance
Taken out at the discretion
Voluntary Life Insurance, Homeowners
of the individual or
Insurance Insurance, Travel Insurance
business.
A car insurance policy
Geographical Domestic Applies within a specific purchased in South Africa will
scope Insurance country. typically only provide
coverage within South Africa.
A travel insurance policy
International Provides coverage across purchased for a trip to Europe
Insurance multiple countries. will provide coverage in the
countries visited.
Some medical aid schemes in
Ownership Mutual The insurance company is
South Africa are structured as
structure Insurance owned by its policyholders
mutual insurance companies.
