In 2007, the South African Constitutional Court put to an end the long debate about the constitutionality of contractual policy provisions which provide that where the insurer rejects liability for any claim made under the policy, the insurer is released from liability unless summons is served within a limited period of the rejection.
The access to courts provision of the Constitution provides that everyone has a right to have any dispute resolved by the application of law decided (section 34) in a fair public hearing before a court or, where appropriate, another independent and impartial tribunal or forum. In Barkhuizen v Napier, 2007 (5) SA 323 (CC) the insured had argued that a 90 day time-bar clause unlawfully deprived him of his right to seek redress in the Courts, that the time-bar provided no useful or legitimate purpose and was contrary to public interest since the 90 day period was unreasonably short. The insured served summons more than 2 years after the rejection.
The Constitutional Court held that:
- The principle of sanctity of contract is not a sacred cow that should transform other considerations and is subject to constitutional control;
- Questions of public policy are rooted in the Constitution and its underlying values;
- Public policy does not deny, but can limit, the application of the principle of sanctity of contract;
- Section 34 gives expression to a fundamental value of the right to seek judicial redress and also constitutes public policy; and
- Public policy requires parties to comply with their enforceable contractual obligations voluntarily and freely undertaken.
The time-bar clause did not deny the right to judicial redress but limited the time within which that could be done. Both the Constitution and public policy recognise that there may be circumstances in which it is reasonable to limit the right to seek judicial redress.
If the objective terms of the contract are not consistent with public policy, a second enquiry is directed at whether the terms are contrary to public policy in light of the situation and circumstances of the contracting parties, including inequality of bargaining power.
The Constitutional Court found that the 90 day period was neither unfair nor inadequate. The insured had all the information necessary to institute action timeously.
On the second enquiry there was no evidence to indicate that there was unequal bargaining power or the contract was not freely entered into. The insured had not provided reasons, why he did not comply with the time-bar clause and why he delayed instituting the action for two years.
Short-term insurance personal lines policies are governed by policyholder protection rules promulgated under the relevant insurance Act, which ameliorate the effect of time-bar provisions in policies. The effect of the rules is to add an additional 90 day period to any time-bar provisions contained in the policy. Where an insured rejects a claim or disputes the quantum of the claim then the insured has 90 days within which to make representations regarding the rejection. The running of any time-bar periods is interrupted for the duration of that period. While the Long-term Policyholder Protection Rules (related to life and similar policies) provide for a 90 day representation period, there is no express provision dealing with interruption of any time-bar periods.
In the judgment of Dealernet (Pty) Limited v Mamahlodi, the High Court in discussing the short-term rule dealt with limitations and found that:
- The rule is peremptory in providing that the policyholder must be informed of the right to make representations directly to the insurer.
- The policyholder needs to be informed who the insurer is so that they can make representations to the insurer.
- The 90 day period within which representations are to be made is not to be included in any time-barring period in the policy.
- In the absence of notification to the policyholder in compliance with the rule, the insurer is not entitled to rely on the time-barring clause contained in the policy. The ordinary time periods for prescription of claims in terms of the Prescription Act of 1969 (a basic three years) would then apply.
- Where an insurer receives representations and rejects those, that does not result in the lapsing of the remainder of the 90 day representation period. The policyholder is entitled to make subsequent representations.
In all circumstances, the 90 day period for making representations must be added to any time-barring period provided for in the policy.
There is no room for reducing the 90 day representation period and there is nothing preventing a policyholder from making further representations during that period if the first representations are rejected.
Further identical amendments have been proposed to both the Long-term and Short-term Insurance Protection Rules.
The newly proposed rules provide for:
- Timeous decision-making by insurers;
- Policyholders to be informed of the reasons for a claim being rejected or the quantum of a claim being disputed;
- The policyholder must be afforded a minimum period of 90 days within which to make representations relating to a rejected claim or disputed quantum;
- Policyholders must be informed of alternative dispute resolution mechanisms available to them;
- Policyholders to be informed and reminded of specific contractual provisions included in their policies that may impact on the right to approach the Courts;
- The exclusion of the minimum 90 day period within which representations may be made by a policyholder from any time limitation provision for the institution of legal action;
- Any time limitation provision for the institution of legal action which may be provided for in a policy entered into after 1 January 2010 cannot provide for a period of less than 6 months, after the expiry of the 90 day period in which representations may be made.
The proposed rules will ensure in respect of policies falling within their protection, a minimum 90 day representation period and, in addition to that, a minimum 6 month time-bar period, namely a total minimum of 9 months before any claim can be contractually time-barred.
Even then, the rule provides that, notwithstanding those extended time-bar periods where there has been non-compliance with those time-bar periods, the policyholder may request the Court to condone non-compliance, if the Court is satisfied, among other things, that good cause exists for the failure to institute legal proceedings and the clause is unfair to the policyholder.
The policyholder will also get the additional benefit that the statutory limitation in the Prescription Act of 1969, only commences running after the expiry of the 90 day period within which representation may be made.
So, where a personal lines policy does not contain any contractual time-bar provisions or prescription provisions, the insured effectively has 3 years and 90 days within which to institute any action on the policy.
One must not forget that where a policyholder refers a complaint to an Ombud in terms of the Financial Services Ombuds Schemes Act 2004, the Act already provides for policyholder protection in terms of time limitations and prescription such that the official receipt of the complaint by the Ombud suspends any applicable time-barring terms for the period from the date received until the complaint has either been withdrawn or determined by the Ombud.
The new amendments are expected to come into operation in 2010. These findings by the Constitutional Court and legislative provisions will influence public policy regarding all time-bar clauses.
Insurers who provide cover which does not fall within the Policyholder Protection Rules should consider amending time-bar limitation periods and clauses in their policies to provide both for a 90 day representation period and at least a further 6 month time-bar period in order to limit the opportunity for commercial and corporate insureds challenging shorter time-bar provisions on the basis of the rationale expressed in the Barkhuizen judgment and mirrored in the protection rule amendments.