CHP 15 – THE CONTRACT OF INSURANCE

CHP 16 – CREDIT AGREEMENTS

LEARNING UNIT 6

HISTORY AND SOURCES • = trade usage which existed in medieval Italian city states • Marine insurance was the first type (transport was very

important in the development of Europe)

• SA law of insurance is based on Roman- Dutch common- law • English law is only used as COMPARATIVE LAW

• 3 Acts which apply to insurance contracts:

1. Long- Term Insurance Act of 1998 2. Short- Term Insurance Act of 1998 3. Financial Advisory and Intermediary Service Act of 2002

• NOT Consumer Protection Act of 2008 NATURE AND BASIS OF INSURANCE CONTRACTS • Basis = reason for conclusion = indemnification +

compensation

• Read: page 189 – 190 (paragraph 15.2)

CHP.15- THE CONTRACT OF INSURANCE

TWO TYPES OF INSUARNCE CONTRACTS

1. Indemnity insurance = insurer undertakes to indemnify the insured for actual damage which he may suffer from an insured event in the future Amount of compensation = actual amount of loss suffered by the insured and is only calculatable after the event has occurred Eg. insurance against theft or fire

2. Non- indemnity insurance (capital insurance) = insurer undertakes to pay the beneficiary a fixed sum of money on the occurrence of a certain insured event Amount BEARS NO RELATIONSHIP to the extent of loss suffered Eg. life and personal accident insurance

patrimonial loss

non- patrimonial loss

o usually a sum of money

o Payment is not required for the creation if the CoI (undertaking to pay is sufficient) but it could be a suspensive condition for the policy to take effect

ESSENTIALIA OF INSURANCE CONTRACTS What is the essentialia of a contract? Contract of insurance (CoI) has 4: 1. An undertaking by the insured to pay a premium 2. An undertaking by the insurer to compensate the insured for either a patrimonial or non

patrimonial loss 3. The occurrence of a particular uncertain future event (the risk) 4. An insurable interest

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indemnity insurance o insurer must pay a determinable sum of money o amount is only determinable after the event has occurred o measure of indemnity is determined not by its COST but by its value at the time of loss o eg. a house is valued at R200 000 at the time that it is insured. The owners make

improvements which increases the value of the house. It is however destroyed by a fire and at the time of the fire the house is valued at R250 000. The insurer will have to pay R250 000.

o where there has been only partial loss (damage) the insurer will be liable for the

amount of o the partial loss suffered o eg. Joe insures his car and during an attempted hijacking, the window is smashed and

must be replaced. The damage caused was worth R500 and thus the insurer must pay the insured R500 even though the car is valued at R10 000.

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non- indemnity insurance

o the sum payable will be predetermined and that amount must be paid to the beneficiary

o eg. where a person has insured their life for R1 mil, the insurer must pay R1 mil

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PRINCIPLES WHICH REGULATE THE INSURERS UNDERTAKING TO PAY A SUM OF MONEY

1 Valued and unvalued policies valued policy: where the insurer and the insured agree at conclusion of the CoI on the value of the risk- object the insured need not prove the exact amount of the loss but only that loss was suffered do not confuse with a limitation of liability = insured is entitled to claim only the exact amount of their loss up to the amount of the sum insured in the policy

2 The insurer’s right to repair insurer may reserve the right to have the damaged insured object repaired rather than to compensate the insured once the decision to repair rather than compensate has been made the decision is final must be completely repaired

3 The insurer’s right to subrogation

provides the insurer with a right of recourse where the insured has a claim against a third party he may not claim from both the insurer and the third party where the insurer has fully indemnified the insured, the insurer may “take over” the claim against the third party and may recover the paid amount eg…

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4 Insuring with several

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insured may insure the same object with as many insurers as he wishes BUT cannot recover more than the full amount of the loss where an object is damaged he may claim the full amount from one insurer of pro rata amounts from all the insurers where one insurer has paid the full amount he may then use the “principle of contribution” to recover pro rata contributions from the other insurers

5 Over- and underinsurance insured may insure an object for more than is necessary to recover full compensation in the event of loss in the case of indemnity insurance however the insure may only recover the full loss and no more underinsurance is where an object is insured for less than the actual value thereof CoI may contain an “average clause” = the insured must pay themselves for the balance of the damage where an object is not fully insured eg….

Excess clause it may be agreed in a CoI that the insured may recover only a certain portion of their loss the insured must sometimes carry some of the loss themselves eg. the first R500 of the loss

o the risk = uncertain event against which a person is insured o description of the risk is NB as the obligation to pay is dependent

thereon o a description of the risk must include:

1.the insured object. Eg car/ person’s life 2.hazard insured against. Eg.theft or death 3.circumstances affecting the risk. Eg.limitation of amount of

indemnification where car is stolen while parked in an unsafe place

o also read top paragraph of page 194

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CoI // WAGERING CONTRACTS 1. Wagering contract is unenforceable in court 2. Wagering contract: Parties choose an arbitrary event and when

this happens one party wins and the other loses. THUS the parties create their own interest in the event. CoI: parties have an interest in the NON-occurrence of an event.

3. CoI does not create a risk of loss in itself 4. Intention is different. Wager: increase estate. CoI: protect

estate.

o insurable interest exists whenever a particular event causes someone damage o only the person with the insurable interest may recover on the policy AND only to the

extent to which the interest was lost or damaged

Indemnity insurance

o insured must have at least a financial interest in the non- occurrence of the risk and the financial interest must have some legal foundation

o interest must exist at the time of the loss or damage

Non- indemnity insurance

o distinguish between the interest in your own life and in that of another person o unlimited interest in your own life o must have at least a financial or pecuniary interest in the life of another person

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SELF STUDY: pages 195 – 198: 1. The duty of good faith (pay attention to

warranties!!!) 2. Parties to the CoI 3. Statutory protection

CHP.16- CREDIT AGREEMENTS

•Indebtedness is BAD. But why? •Self study paragraph 16. 1 on page 199 of the consequences of over- indebtedness •In order to curb and regulate the bad consequences of debt, the National Credit Act was enacted… •The Act defines and regulates different types of credit agreements (CA’s) •Self study: page 200 & 201 •For an agreement to be seen as an agreement ito the Act, it must be a credit agreement between 2 parties who deal at arm’s length which is made within/ has effect within SA. SO… 3 KEY CONCEPTS INDETERMINING THE APPLICATION OF THE NCA 1. “credit agreement” 2. “parties” (credit provider and the consumer) and 3. “dealing at arm’s length”

Dealing at arm’s length:

1. 3. 2. 4.

a

Credit agreements: types

b c d

Excluded from definition 1. 2.

3.

New categories 1. 2.

Parties

Act apply: 1. 2 3. 4. 5.

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DRAW THESE and complete

them as we go…

Credit provider Consumer How?

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Section 8 of the NCA : a) = a credit facility, eg. credit card b) = a credit transaction, eg. instalments c) = a credit guarantee, eg. suretyship d) = a combination of a- c Insurance policy Lease of immovable property Stokvel transaction

indigenous type of informal credit- rotating association wherein a group of people agree to contribute a fixed sum of money to a common pool on a weekly/monthly basis…

What does this mean?

NOT credit agreements

Check out: Not your Gogo’s Stokvels at http://www.iol.co.za/the-star/not-your-gogo-s-stokvels-1.1243875#.UDuXMdYgcQo if you want to know more about this…

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Credit facility = credit provider (issuer of credit, eg. bank) undertakes to pay an amount as determined by the consumer (the amount of the purchase made by the credit card holder) to a third party (the supplier of the purchased goods or services, eg. a store) Credit transaction = pawn transaction or discount transaction SELF STUDY page 203 (middle paragraph) for other instances of credit transactions: •Incidental credit agreement •Instalment agreement •Mortgage •Lease •Other agreement with deferred payment Credit guarantee= where a person undertakes to satisfy payment on behalf of ANOTHER person on demand. OTHER NEW AGREEMENTS: Developmental credit agreements = student loan and Public interest credit agreements =eg. loans in times of national disasters

pawn – where 1 party gives money/ credit to another and takes possession of goods as security

discount – where goods/services are given to a consumer with 2 prices. When you pay BEFORE a certain date a lower price is paid than when you pay for the goods after the date

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Usually 2: credit provider (eg. money lender)and the consumer (eg. money borrower) Credit Provider How? Consumer

Person who supplies goods/ services Under a discount

transaction, incidental

transaction or instalment

agreement

Person to who goods are sold/

services rendered

Person giving money/credit (eg.

pawnbroker)

Pawn transaction Person to whom money/ credit is

given

Person who extends credit (eg. the

bank)

Credit facility Person to whom credit is given

The morgagee Mortgage agreement Mortgagor

Lender Secured loan Borrower

Lessor/ landlord Lease Lessee

Person to whom assurance is given Credit guarantee Guarantor (the person who gives

guarantee. Aka?)

Person who advances money/credit Credit agreement Person under whose direction

money/ credit is granted

Any other person who has the right

of credit provider under a credit

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NOT Loans between: •Family members •Partners •Friends

WHEN THE ACT DOES NOT APPLY 1. Where persons are dealing closer than arm’s length (friends, family and partners) 2. Loans to the State, an organ of State or juristic person with a turnover of more than

R1mil 3. Where the credit provider is the SA Reserve Bank 4. Where it is a large agreement and the consumer is a juristic person 5. Where the credit provider is outside of SA THUS the Act focuses on the retail credit market (private and small business sector)

CLASSES OF AGREEMENTS Classed according to size: •Small agreement limit or principal debt is UNDER R15 000 •Intermediate agreement falls between R15 000 and R 250 000 •Large agreement principal debt is over R250 000

page 206 of the textbook

NOTE THE APPLICABLE AGREEMENTS

CREDIT INDUSTRY REGULATORS 1. The National Credit Regulator (NCR) 2. Provincial credit regulators 3. The National Consumer Tribunal (NCT) SELF STUDY: read page 207 Regulation by registration of credit providers… Only if: 1. The credit provider has concluded more than 100 credit agreements 2. Total principal debt of outstanding credit agreements exceeds R500 000 Registration may be cancelled if: 1. Fail to comply with conditions of registration 2. Fails to meet BEE commitment or an over- indebtedness commitment 3. Contravenes the NCA

CONSUMER CREDIT POLICY THOUROUGHLY READ pages 209 – 212!!! 2 important aspects: 1. as it relates to consumer rights… • Every adult natural/ juristic person may apply for credit and may not be discriminated

against on the constitutional grounds or the grounds set out in PEPUDA when assessing: o Ability to meet the obligation of payment o Whether to refuse an application o Determination of the cost of a credit agreement o Proposing or agreeing to the T&C’s of a credit agreement o Assessing or requiring compliance by the person ito a credit agreement

• Documents issued by a credit provider must be in plain language! o Factors top take into regard when determining if it is in plain language: o The context, comprehensiveness and consistency of the document o Organisation, form and style of the document o Vocabulary, usage and sentence structure of the text o Use of illustrations, examples, headings and other aids

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2.as it relates to confidentiality, personal information and consumer credit records… The provisions of the NCA and PAIA apply concurrently •Certain information must be kept in a register by the NCR… oCredit provider’s name, principal name, principal business address and registration number oName and address of the consumer oConsumer’s ID number (natural person) or registration number (juristic person) oCredit agreement: credit limit and expiry date of the facility oCredit transaction/ guarantee: principal debt under the agreement, particulars of pre-existing agreement, amount and schedule of payments, and the date of fulfilment of the consumer’s obligations

•The credit bureau also keeps certain “consumer credit information”

o Person’s credit history o A person’s financial history o Person’s education, employment, career, professional or business history o Person’s identity: name, date of birth, ID number etc

SELF STUDY: functions of the credit bureau: pages 211 and 212.

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= the agreement AUTOMATICALLY comes into existence UNLESS the consumer declines the offer PROHIBITED by the NCA 1. Also where credit limit is increased under an existing agreement 2. When entering into a credit agreement the credit provider must

present a written statement to the consumer with the following options:

a. To decline the option of pre- approved annual credit limit increases b. To be excluded from telemarketing, marketing or customer lists and

mass distribution sms’s or emails

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CREDIT MARKETING PRACTICES 1.Negative option marketing

2.Marketing 3.Advertising

4.Required marketing information

Credit providers may not harass persons into applying for credit Credit providers may not enter into private dwellings except: 1. Visit is prearranged 2. Credit is incidentally offered while visiting in order

to offer goods/ services 3. If prescribed by law

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Ads may not advertise credit which is unlawful, misleading, fraudulent, deceptive or prohibited. May contain comparisons of credit costs, but must: 1. Show the costs of each compared alternative 2. Show rates of interest for each alternative 3. Be set out in the prescribed manner and form 4. Be accompanied by the prescribed cautions or warnings concerning

the use of such comparative statements NEVER use phrases like: •“no credit checks” •“free credit” •“guaranteed loans”

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Solicitation to apply for credit must contain: 1. Name, business address and registration number of the

credit provider 2. Nature of the proposed credit agreement 3. Credit provider’s current annual interest rate 4. Whether security deposit is required 5. Whether residual payment is required 6. Name and address of the agent and amount/ basis of

calculation of commission in the case of a credit agent

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OVER- INDEBTEDNESS • The NCA aims at preventing over-

indebtedness of consumers

• Often the result of reckless credit (either because credit providers give out credit too easily or because consumers keep asking for more credit)

OVER- INDEBTEDNESS AND RECKLESS CREDIT

RECKLESS CREDIT Reckless when… At the time it was made: 1. Credit provider failed to make the required assessment, irrespective of the outcome

thereof 2. Credit provider did assess the consumer and concluded the credit agreement DESPITE

the fact that: a. The consumer did not understand the risks, costs or obligations incurred b. Concluding the agreement would make the consumer over- indebted

Over- indebted = consumer will be unable to satisfy his obligation in a timely manner

PREVENTION •To prevent the conclusion of a reckless credit agreement the credit provider must make an assessment on the following grounds: 1. Whether the consumer understands the risks and costs and the

rights and obligations under the agreement 2. The consumer’s debt repayment history 3. The consumer’s financial means, prospects and obligations 4. Whether the agreement is reasonable to conclude

(a consumer is not protected by the NCA if they did not truthfully answers

all the questions during the assessment)

EFFECT OF RECKLESS CREDIT • Court/ Tribunal may set aside the credit agreement or suspend some of the incurred

obligations for a time

• When an agreement is declared unlawful, it may be declared void and all the money paid to the CREDIT PROVIDER must be returned to the consumer

• The rights of the credit provider to recover money/goods are either cancelled or forfeited to the State

• 10 unlawful provisions: SELF STUDY page 218.

• Unlawful provisions render a credit agreement VOID and the Tribunal may either: 1. Sever the unlawful provision to the extent required to make the agreement lawful OR 2. Declare the entire agreement unlawful

MECHANISM FOR ASSESSMENT •Credit providers may determine their own criteria and mechanisms

“Debt restructuring order”

“Suspension order”

DISCLOSURE, FORM AND EFFECT OF CREDIT AGREEMENTS

Form • In writing and signed by the consumer • Consumer must be given copies of all the documents f the agreement • Failure to provide copies to the consumer is an offence and multiple failures may lead to

deregistration of the credit provider

Pre- agreement disclosures • Before the conclusion of a credit agreement the provider must give the consumer a pre-

agreement statement and a quote

• The quote must contain: 1.The principal debt 2.The proposed distribution of the amount 3.The interest rate and other credit costs 4.The total cost of the proposed agreement

• Quote is valid for 5 working days… allows the consumer to “shop around” Self study: read about the interest rates as applicable under small and intermediate agreements (page 219)

Fees •Additionally to the cost of an instalment agreement, mortgage, secured loan or lease, a credit provider may add the following:

1. Initiation fee 2. Cost of an extended warranty 3. Delivery, installation, and initial fuelling charges 4. Connection fees, levies or charges 5. The premium under a credit insurance policy

Change in interest rates • In general, the credit provider may not change service fees or the method of calculation Except: 1. With written notice of at least 5 days 2. Where the contract provides therefore 3. Agreement provides for a rate to vary if the variation is by a fixed relationship to a

reference rate (changes in the same margin as the bank’s prime lending rate)

Termination by the consumer Straight forward Self study: paragraph 16.3.19.1 on page 225

Statement of account • Statements must regularly be given to the consumer (at LEAST monthly)

• Also:

1.Statement of the current balance of the account 2.Statement of amounts credited or debited 3.Amounts currently overdue and when it became due 4.Any amount currently payable and the date it became due

Alteration of credit agreement • Any alterations made to the agreement after it has been signed, are void UNLESS:

1.It reduces the consumer’s liability 2.The consumer ratifies the change (sign/initial) 3.The parties have agreed in writing to alter the terms

Collection A consumer (or guarantor) may settle the account at any time without having to give notice to the credit provider To settle an agreement, the consumer must offer to pay: The unpaid balance of the principal debt at the time The unpaid interest charges and other fees Termination charge/ settlement charge – in the case of a large credit agreement

Prepayment Consumers may make prepayments to the credit provider Order of satisfaction: Due or unpaid interest Due or unpaid fees or charges Reduce the amount of the principal debt

Surrender Deals with the termination of an instalment agreement, secured loan or lease and the return of goods Straight forward Read paragraph 16.3.20.3 on page 226

Initiating complaints of applications • A person complains to the NRC and the NRC then initiates the complaint in its own name

• NRC applies to the tribunal for an order: 1. Resolving the dispute 2. Compelling delivery of a statement or account 3. Review of the conduct of the sale of goods 4. Leave to bring a complaint directly to the Tribunal

Debt enforcement Court may declare credit reckless and make an order 1. setting aside all or part of the consumer’s obligations under the contract 2. suspending the force and effect of the agreement

Dispute settlement other than debt enforcement •File a complaint with the NCR •Distinguish between when the credit provider is a financial institution like a bank (ombudsman with jurisdiction) and when the credit provider is not a financial institution (consumer court, ADR or may be referred for conciliation, mediation or arbitration)

Informal resolution or investigation of complaints Searches: a search warrant may be given by a judge of the High Court if it is believed that prohibited conduct is occurring on certain premises Also to search a certain person Offences: disclosing confidential information and failing to attend a hearing when summoned or to respond improperly to an investigation

Maximum interest rates and initiation fees

REMEMBER TO DO THE GLOSSARY OF TERMS IN

THE WORKBOOK!