Prescription of liability policy
Author: Ayanda Nondwana – Director & Zinhle Mokoena – Candidate Attorney
Does a contingent right to claim indemnification under an insurance policy prescribe before or after liability is established?
In the recent Supreme Court of Appeal judgement in Magic Eye Trading 77 CC v Santam Limited (delivered on 10 December 2019), the court was confronted with the question of deciding whether an insured’s contingent right to claim indemnification under an insurance policy is capable of becoming prescribed in terms of s 12(1) of the Prescription Act 68 of 1969 (“the Act”) before the liability, and its extent, is determined.
Section 12(1) of the Act provides that:
“Subject to the provisions of subsections (2), (3), and (4), prescription shall commence to run as soon as the debt is due.”
The appeal arose from a delictual claim by Imperial Cargo Pty Ltd (“Imperial”) claiming damages to its truck, which was allegedly forced off the road on 21 March 2009 by the driver of another truck, Mr. Perumal Chetty (“Mr. Chetty”). Imperial issued summons alleging that Mr. Chetty, acting within the course and scope of his employment with Magic Eye, was solely responsible for the accident.
Mr. Chetty and Magic Eye denied all liability. Santam Limited (“Santam”) was joined as a third-party to the proceedings on the basis that it provided an indemnity insurance policy in favour of Magic Eye for liability to third parties. In the third-party notice, it was alleged by Imperial that by virtue of certain clauses in the policy, Magic Eye had a contractual right to claim indemnity from Santam for any liability to the injured party attributed to them.
Santam filed a special plea of prescription contending that upon the occurrence of the defined event, alternatively when Mr. Chetty and Magic Eye became aware of the event, further alternatively when Santam repudiated the claim, a right to indemnity against the contingent future monetary consequences of the accident became vested in Magic Eye. Because Magic Eye failed to serve the notice of joinder on Santam within three years of any of the above dates, any third-party claim that they may have had against Santam had prescribed.
In their replication to the special plea, Magic Eye averred that prescription commences to run only after the claim has been paid or at least from the time the insurers are liable to do so in a determined amount.
In determining when the claim for indemnification prescribes, the SCA was faced with what, at first blush, appear to be two diametrically opposed decisions emanating from it. These are Truck and General Insurance Co Ltd v Verulam Fuel Distributors CC 2007 (2) SA 26 (SCA) (“Verulam”) on which Santam and Imperial relied, and Pereira v Marine and Trade Insurance Co Ltd 1975 (4) SA 745 (A) (“Pereira”).
In Pereira, the court found that the phrase “to pay all sums which the insured shall be legally liable to pay” in the context of a claim for indemnification meant that the amount of damages had to have been established. The court remarked that an insured is only entitled to indemnity against loss or damage for which he becomes legally liable. An insured can only become legally liable to pay once a sum is fixed against him by a court or by agreement. Until then no claim for indemnification can arise.
Therefore, a claim for indemnification against liability to a third party only arises once liability, in a fixed amount, has been established.
Whereas, in Verulam it was held that the liability of the insurer to the insured arises as soon as the insured suffers the loss. This would be when all events have occurred which give rise to the liability towards a third party, even if the amount has not been quantified. The court a quo upheld the special plea as it placed its reliance on Verulam.
The SCA disagreed. Relying on an established line of authorities, it found that to conclude that a contingent right can prescribe prior to a determination of the right upon which it is contingent, would result in an absurdity. The SCA held that a claim for indemnification insurance under an insurance contract can only arise when liability to the third party in a certain amount has been established. The debt, for purposes of prescription, therefore, becomes due when the insured is under a legal liability to pay a fixed and determinate sum of money. Until then a ‘claim’ for indemnification under the policy does not exist; it is only a contingent claim.
In the circumstances, the court concluded that Magic Eye’s right to approach the court for a declaration concerning the obligation of Santam to indemnify it in the event of Imperial establishing liability has thus not prescribed. In fact, prescription has not even begun to run.
These principles are applicable to a contingent right to claim for indemnity for third party liability. The prescription of first party insurance is different as the right to claim indemnity occurs upon loss or happening of a specified event. The clarification of the principles to claim contingent right to indemnity is welcomed and it is now trite.
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