The Legal Approach Towards Time Barring Clauses in Insurance Contracts

The Constitutional Court, in the case of Barkhuizen v Napier 2007 (5) SA 323 (CC), dealt with the issue of “time-barring clauses” in contracts entered into between private persons.

The salient facts of the case are as follows:

The Applicant had entered into a short-term insurance contract with the Respondent for insurance of his motor vehicle. On 24 November 1999 the motor vehicle was involved in an accident which caused the vehicle damages beyond economic repair. The Applicant thus claimed the insured sum, i.e. R181 000 from the Respondent. The respondent repudiated the claim on the grounds that the Applicant had used the vehicle for business purposes despite the insurance agreement providing that the vehicle must be used for private purposes only.

On 8 January 2002, two years later, the Applicant instituted legal proceedings against the Respondent claiming payment of the insured sum together with interest thereon. The Respondent responded to the action with a special plea, claiming that they were released from liability due to the Applicant’s failure to adhere to the time-limitation clause which formed part of the contract. The relevant clause read as follows: “if we reject liability for any claim made under this policy we will be released from liability unless summons is served… within 90 days of repudiation”. In essence the Applicant was time barred from instituting proceedings to pursue his claim.

The Applicant argued that the time-limitation clause was unconstitutional as it was contrary to public policy and thus invalid. The basis of the Applicant’s contentions in this regard was that the clause sought to prescribe an unreasonably short period of time within which to institute legal proceedings and as a result it infringed on the right to seek redress from the Court and the right to access the Court.

The Court, inter alia, considered whether public policy tolerates time-limitation clauses. The Court held that it did, subject to the considerations of reasonableness and fairness. Furthermore, the Court reiterated that the Constitution recognises that the right to seek legal redress may be limited in certain instances.

Relying on the Mohlomi decision the Court held further that the general test for enforceability is whether the provision affords the Applicant an “adequate and fair opportunity to seek judicial redress. Notions of fairness, justice and equity, and reasonableness cannot be separated from public policy”. The Court also formulated a test for fairness viz, firstly, whether the clause itself is unreasonable and secondly, if the clause is reasonable whether it should be enforced in the circumstances.

The Court found that in respect of the first leg of the test two considerations would need to be weighed up against one another. One being the maxim, pacta sunt servanda and the other being the right to seek legal redress. The Court found that clauses of this type are reasonable and thus operational within our law. The Court thereafter moved on to examine the circumstances in which the clause would operate, in order to assess whether same should be enforced.

The Court ultimately found that the clause should be enforced in this matter because the Appellant failed to show why he had failed to act in accordance with the provisions of the time-bar clause. The Court explained that had the Applicant been unaware of the time limitation clause or the consequences thereof, or failed to act in accordance with same due to factors outside of his control then the clause would operate unfairly and the Court would not enforce same. However, the appellant seemed to be fully aware of the clause and the effect of same. Thus, in the circumstances, the Court found that the clause operated reasonably.

This decision opened the door for the Courts to refuse enforcement of certain, unfair clauses in contracts between private persons and laid the foundation of the grounds on which to do so.

 

The Policyholder Protection Rules

On 01 January 2018 the amended policyholder protection rules came into force. Various Rules have been in place regarding time barring since 2011, which the new Rules amplify. The rules build on the position laid down by the Court in Barkhuizen v Napier.

The Rules firstly provide that insurers must accept, repudiate or dispute a claim or the quantum thereof within a reasonable period of time. Thereafter, insurers must give written notice of their decision to the claimant within 10 days of making same.

In the event that an insurance claim is rejected or disputed by the insurer, the Rules provide for a rather stringent set of disclosure obligations which the insurer must fulfil. This ensures that claimants are equipped with the necessary information to properly pursue claims which they feel have been wrongly rejected. Insurers are required to inform the insured of the following:

 

  • The reasons for the decision “in sufficient detail to enable the claimant to dispute such reasons if the claimant so chooses”;
  • That the insured party may within 90 days make further representations in respect of its claim;
  • Details of the internal claim escalation and review process required by Rule 17.5. Rule 17.5 provides that an insurer must establish and maintain an appropriate internal process for claim decision escalation and/or review and for resolution of claim related disputes;
  • That the insured party has a right to lodge a complaint against the insurer with the relevant Ombudsman, together with the relevant contact details of same, any applicable time limitations, and other relevant legislative provisions relating to the lodging of such a complaint; and
  • Of any time limitation provision for the institution of legal actions contained in the policy, as well as the implications thereof or, in the absence of same, of the operation of the Prescription Act, the prescription period applicable and the implications of the Act.

 

It is also clear that mere notification of the clauses and processes is insufficient. Insurers must also ensure that claimants are made aware of the relevant details and implications thereof in order for them to be well equipped to deal with such clauses and/or to pursue such processes successfully. It is thus the obligation of the insurer to provide information regarding the protection provided by the rules available and accessible to their clients – which provides some redress to the unequal positions private persons find themselves in when dealing with insurance companies.

   

   The Rules further state:

“ 17.6.8      Any time limitation provision for the institution of legal action that may be provided for in a policy entered into on or after 1 January 2011-

(a)   may not include the period referred to in rule 17.6.3(b) in the calculation of the time limitation period; and

(b)   must provide for a period of not less than 6 months after the expiry of the period referred to in rule 17.6.3(b) for the institution of legal action.

 17.6.9   Despite the expiry of the period allowed for the institution of legal action in a time limitation clause provided for in a policy entered into before or after 1 January 2011, a claimant may request the court to condone non-compliance with the clause if the court is satisfied, among other things, that good cause exists for the failure to institute legal proceedings and that the clause is unfair to the claimant.

 17.6.10 For the purposes of section 12(1) of the Prescription Act, 1969 (Act 68 of 1969) a debt is due after the expiry of the period referred to in rule 17.6.3(b).”

 

The Rules confirm the Court’s power to condone non-compliance with time-limitations should they operate unfairly, as well as in circumstances where the policyholder can show their failure to institute legal proceedings timeously was due to a good cause. It is submitted that the test for fair operation of such a clause remains as decided by the Court in Barkhuizen. It must also be noted that the above requirements must be fulfilled in conjunction with one another. However, what exactly “among other things” refers to in this provision is currently unclear.

Insurers are also precluded from imposing unreasonably short time-limitations, as the Rules state that any time-limitation imposed in a policy entered into after 2011 may not be shorter than six months.

The Rules now require insurers to ensure that the policyholder is well aware of the existence of the time-limitation clause, as well as the implications thereof. This protects policyholders from being prejudiced by clauses which they previously would not have been made aware of, or fully understood. It also provides the policyholder with ample opportunity to dispute repudiated claims and follow the correct processes in order to have their claims reconsidered.

Should an Insurer fail to act in accordance with the Rules, a policyholder may lay a formal complaint against the insurer. As a result, the Rules have created a more onerous position for the Insurer and this should ensure that they act in accordance therewith.

The Rules provide some welcome redress to the unequal power that insurance companies hold over policyholders. Furthermore, the new amendments to the Rules obligate Insurers to inform policyholders of the protection in place which makes it more accessible to the policyholder and easier to follow.

 

Claire Wolmarans