SA Insurance update: good news - law on claims for indemnity clarified

​​The law regarding prescription of an insured's contingent right to claim indemnification from an insurer under an insurance policy has been clarified following a recent Supreme Court of Appeal (SCA) judgment. (See Magic Eye Trading 77 CC t/a Titanic Trucking and another v Santam Ltd and another (the Magic Eye Trading case) – handed down on 10 December 2019).

The SCA's Magic Eye Trading judgment is a welcome addition to the insurance jurisprudence, providing clarity on the nature of claims for indemnity under a liability policy (or indeed under a similar indemnity clause in any agreement) and the point at which the prescription period, in terms of the Prescription Act, begins to run.

The right is described in the judgment as contingent due to the indemnity only being required if a claim brought against the insured by a third party is proved. Prior to the decision, prescription only started to run in respect of a right to claim such an indemnity once the insured is legally liable for payment of a specific amount - either through an agreement with the claiming party or through the judgment of a court.

The latest SCA decision has removed the possibility of confusion in relation to the prescription of a claim for indemnity under an indemnity clause in an agreement created by the interpretations of a 2006 SCA decision, explained below.

While the judgment was given in the context of a dispute regarding an insurance policy, the Court's finding on the prescription of a conditional claim for indemnity will be equally applicable to an indemnity clause in any agreement in terms of which one party indemnifies another against any claims which are proved or any amounts which that party becomes legally liable to pay to a claimant.

Background

Magic Eye Trading 77 CC owned a truck which was driven my Mr Chetty (its employee) at the time of an accident which caused damage to another truck. Imperial Cargo (Pty) Ltd, the owner of the damaged truck, sued both Magic Eye Trading and Chetty in the High Court for the damages to its truck. At the time of the accident, Magic Eye Trading held an insurance policy with Santam which provided general cover for any amount which Magic Eye Trading became liable to pay as a result of material damage caused in an accident involving one of Magic Eye Trading's insured vehicles.

Magic Eye Trading joined Santam to the action as a Third Party, alleging that Santam, in terms of the insurance policy, was contractually bound to indemnify them against any amount for which they were found to be liable to Imperial. Santam raised a preliminary point in its defence, arguing that Magic Eye Trading's claim for indemnity had prescribed. 

It argued that the claim for indemnity must have arisen on one of the following three dates and had prescribed regardless of which:

  • the date of the accident, which was the defined event in terms of the insurance policy; or
  • the date of Magic Eye Trading's written notice to Santam that the accident had taken place; or
  • the date on which Santam rejected Magic Eye Trading's claim for indemnity. The claim was rejected because of Magic Eye's alleged non-compliance with various policy conditions.

The High Court found in Santam's favour. It relied on the Verulam case for the principle that the Magic Eye Trading's cause of action against the Santam (or the point at which the debt became due, for purposes of the Prescription Act) arose when the loss was suffered, which was at the time of the accident. Although the amount of the loss would be quantified later, the event giving rise to the loss was the accident.

On appeal to the SCA, Magic Eye Trading argued that the loss had not yet been suffered and would only be suffered if and when they were found to be liable to Imperial. This argument was based on the 1975 Appellate Division case of Pereira v Marine and Trade Insurance Co Ltd (the Pereira case). The Court in the Pereira case was faced with a dispute between an insurer and insured about whether the insured had disentitled itself to a claim against the insurer by failing to institute summons within the contractually-prescribed period following the insurer's rejection of the claim for indemnity. The insured argued that the claim against the insurer could not have contractually prescribed as the claim for indemnity did not exist yet and would only exist once the insured was found to be legally liable to the third party who had sued him. 

In siding with the insured, the Court held that:

  • a claim for indemnification must be for a fixed or specific amount. If the amount has not yet been determined, the claim does not yet exist; and
  • the contractual requirement to institute summons within a prescribed period following a rejection of a claim could only apply to a claim that had been made for a specific amount.

The SCA in its judgment in the Magic Eye Trading case confirmed that the principles from the Pereira case are still applicable and had not been affected by its decision in the Verulam case. The Verulam case, it held, was factually distinguishable from the Pereira case and the judgment in Verulam emphasised that its finding was fact-specific. The SCA in its Verulam judgment therefore was not intending to, and in fact did not, disturb the principles set out in Pereira.

As a result, the SCA found that Magic Eye Trading was correct in its argument that the claim for indemnification had not yet arisen, and therefore could not have prescribed in terms of the Prescription Act as Santam had alleged. It reversed the finding of the High Court and dismissed Santam's special plea of prescription.

Clearing up the confusion

The Verulam case had created some confusion in the context of a claim for indemnity by an insured under a liability policy. This resulted in the line of reasoning followed in the High Court. In order to avoid this confusion, it is necessary to separately analyse the claim in the underlying action (a claim by a third party against the insured) and a resultant claim for indemnity under an indemnity clause in an insurance policy (made by an insured against an insurer).

In Magic Eye Trading, the cause of action which gave rise to the claim in the underlying action was a truck accident. The claim was therefore based in the law of delict. However, the delictual claim did not directly give the insured a right to claim against its insurer. That right arose from the contract between insurer and insured. The claim for indemnity was therefore based in the law of contract - a separate cause of action.

It is also possible for some misunderstanding to be caused by the way we use the term 'prescribed'. Many contracts, insurance agreements included, contain a clause which provides that a party who wishes to claim under the contract must do so within a specified period or forfeit the claim. It is not uncommon for legal advisors to refer to a claim which falls outside the specified period as having prescribed. Although a party may, through the operation of such a clause, be contractually disentitled to its claim, this should not be confused with that same claim having met the criteria for prescription under the Prescription Act.​