Long-Term Insurance: Beware of Prescription
The recent Supreme Court of Appeal (“SCA”) judgment in Muller v Sanlam Life Insurance Limited has clarified the position in respect of prescription, and when a debt of a long-term insurer becomes due.
In terms of insurance, prescription refers to the loss or weakening of a person’s right to recover a debt as a result of their inaction and the passing of time. An insured that fails to lodge a claim or institute proceedings against their insurer can fall foul of prescription.
Most short-term insurance contracts contain time-bar clauses which require an insured to institute legal proceedings within a set time period, or run the risk of having their claim extinguished or rendered unenforceable. If an insurance contract does not contain a time-bar clause, then prescription is determined by the Prescription Act 68 of 1969. The usual prescription period is three years, although there are exceptions e.g.: prescription may be interrupted if the insurer expressly or tacitly acknowledges liability for the insured’s claim.
Prescription starts to run as soon as the debt is due, which is usually as soon as the event insured against has taken place. However, if the insured is unaware that they have suffered a loss, then prescription will only start to run once the insured learns of the loss. The aforegoing is qualified by a further provision that the creditor will be deemed to have such knowledge if he had exercised reasonable care.
Facts of the case
Mr Muller, the applicant, claimed from the respondent, Sanlam Life Insurance Ltd, payment of the benefits under four life insurance policies. The policies were all in respect of Muller’s former wife, Mrs Muller. They had divorced several years before her death. She had been killed in an alleged hijacking incident on 3 September 2006. The policies had been taken out in 2005 and 2006. Muller was the owner of two of the policies and the beneficiary in respect of the other two, which were owned by Mrs Muller. Muller proceeded by way of an application, instituted on 10 May 2011, in the Western Cape High Court, claiming payment of some R8 876 778. The application was thus brought almost five years after the death of the insured. Sanlam raised several defences, including that of prescription.
Muller contended that, until a claim had been repudiated/rejected by an insurer, the debt did not become due. The Court found that this contention had no grounding, especially considering that Sections 12(1) and 12(3) respectively of the Prescription Act provide that prescription starts to run as soon as the debt becomes due and that debt will not be due until such time as the creditor has knowledge of the identity of the debtor and the facts from which the debt arose.
Having analysed the facts and relevant case law, the Court not only found that Muller knew of the death of his ex-wife, but also that he was aware of the existence of the policies on the date of her death, the result being that his claim against Sanlam would have prescribed exactly three years later in terms of Section 11(d) of the Prescription Act.
Muller then argued that, because there had been a change to Rule 16 under Section 62 of the Long-Term Insurance Act in 2011 that affected the running of prescription, the new Rule ought to be applied retrospectively and that in his case, prescription had not begun to run because Sanlam did not reject his claim within a reasonable period.
The Court found that Muller’s contention in respect of the new Rules held no ground in his case for the following reasons:
- They do not purport to change the Prescription Act but rather enhance the interest and protection afforded to the insured and insurer;
- They provide for greater transparency and place certain obligations on the insurer to act reasonably promptly and to provide certain information; and
- Whilst the legislation governing the provisions of prescription are affected by the new rules, the Court found that it was not necessary to decide whether it would have applied to Sanlam’s debt, due to the fact that the debt had prescribed long before the new rule had been promulgated.
Muller then argued that Sanlam could not rely on prescription as a defence because it had falsely represented to him that the policy benefits were not yet payable as certain documents had not been made available. The Court disagreed and found that a request for documents does not amount to a representation that prescription would not be relied upon. The Court found that if Muller had obtained proper legal advice, he would have issued summons before September 2009 in order to avoid the issue of prescription.
Finally, Muller argued that Sanlam’s obligation to pay the death benefits was reciprocal to Muller’s obligation to pay the premiums. If that were correct, Section 13(2) of the Prescription Act would have delayed the running of prescription. The Court referred to various authorities and found his argument without merit, as an insurance contract is not reciprocal, particularly where an insured is required to pay the premiums in advance of the insurer’s obligation to pay out a benefit.
Everyone insured through policies governed by either time lapse clauses or the Prescription Act need to ensure they fully comprehend the time frame required in successfully claiming from their policies. In the same vain, insurers need to follow the letter of the law when both drawing up and executing on insurance policies to ensure they do not fall foul of prescription.