Prevention is better than cure: Extinctive Prescription and Contractual “Prescription” in Insurance

Prescription is a legal principle regulating the termination of a debt owed by the passage of time. Once the applicable prescription period is exceeded, the debt becomes unenforceable by a creditor, preventing action against debtors years down the line, once facts have been forgotten, and evidence is often sparse.

Prescription is a legal principle regulating the termination of a debt owed by the passage of time. Once the applicable prescription period is exceeded, the debt becomes unenforceable by a creditor, preventing action against debtors years down the line, once facts have been forgotten, and evidence is often sparse.  

 

In the South African jurisdiction, the relevant time periods are governed by the provisions of the Prescription Act, No.68 of 1969, which lays down a three-year prescription period for ordinary debts or causes of action.

 

It is important to understand prescription and how it applies in the insurance context. Parties to an insurance agreement are entitled to contractually agree to a stricter limitation period as provided for in the Prescription Act, generally referred to as “time-bar” clauses. We deal hereunder briefly with the rules of prescription as set out in the Prescription Act and importantly, we discuss how the so-called time-bar clauses in insurance contracts affect the contracting parties and what steps one can take to avoid falling foul of critical timelines.

 

PRESCRIPTION ACT: DOSAGE AND FREQUENCY

 

Prescription applies in different ways and is guided by different time periods where different debtor/creditor relationships exist.

 

Section 11 of the Prescription Act sets out the below time periods after which a debt will prescribe:

 

  1. Thirty (30) years in respect of: (i) any debt secured by mortgage bond; (ii) any judgment debt; (iii) any debt in respect of any taxation imposed or levied under any law; and (iv) any debt owed to the State in respect of a share of the profits, royalties or similar consideration payable in respect of the right to mine minerals or other substances;
  2. Fifteen (15) years in respect of any debt owed to the State and arising out of an advance or loan of money or a sale or lease of land by the State to the debtor;
  3. Six (6) years in respect of a debt arising from a bill of exchange or other negotiable instrument or from a notarial contract; and
  4. Three (3) years in respect of any other debt.

 

It must be noted that some debts are subject to different (and often shorter) prescription periods (such as Road Accident Fund claims) through other statutes, and the Prescription Act does not govern every single debt.

 

Prescription can only start running once a debt becomes due. In terms of Section 13 of the Prescription Act, a debt will become due when the creditor acquires knowledge of the identity of the debtor and of the facts from which the debt arises.

 

Section 14 of the Prescription Act explains that prescription could be interrupted by judicial interruption such as service of summons on a debtor, or by the debtor’s tacit or express acknowledgement of liability. To illustrate, the Courts have held that partial repayments of a debt by a debtor amounts to a tacit acknowledgement of liability. Requesting an outstanding balance or conveying to the creditor the intention to repay the debt are also considered acknowledgements of a debt.  

 

PRESCRIPTION AND INSURANCE CLAIMS: INDICATIONS

 

The debt faced by parties in the insurance industry most often fall under category 4 – “any other debt” – a catch-all provision for debts which do not fall under categories 1 to 3 or other legislative provisions.

 

If we consider the principles set out above, a claim by an insured for indemnification by the insurer must be for a fixed or specific amount. If the amount has not yet been determined, the claim does not yet exist. The contractual requirement to institute summons within a prescribed period following a rejection of a claim only applies to a claim that has been made for a specific amount. This has been confirmed by our Supreme Court of Appeal in Magic Eye Trading 77 CC t/a Titanic Trucking and another v Santam Ltd and another [2019] JOL 46389(SCA).

 

That being said, many insurance contracts contain a clause which provides that a party wishing to claim under the contract must do so within a specified period, failing which such a claim will be forfeited. This brings us to consideration of contractual “prescription” in insurance contracts.

 

CONTRACTUAL “PRESCRIPTION” THROUGH TIME CLAUSES: CONTRAINDICATIONS

 

It is important to remember that insurance is a specific contract, identifiable from the specific clauses therein and the purpose it seeks to fulfil. In the case of Lake v Reinsurance Corporation Ltd 1967 (3) SA 124 (W) 480G the court defined an insurance contract as

 

“[a] contract between an insurer (or assurer) and an insured (or assured), whereby the insurer undertakes in return for the payment of a price or premium to render to the insured a sum of money, or its equivalent, on the happening of a specified uncertain event in which the insured has some interest”.

This sums up the essence of an insurance contract, however one should keep in mind the complex commercial agreement that is an insurance contract. It is common practice to provide for further clauses in an insurance contract when a claim or dispute may arise.

 

“Time bar” clauses are very useful in insurance contracts as they fix the date for performance. The intention is to provide for certainty and clarity and to avoid claims falling into a state of dormancy for an extended period. In an insurance contract there may be several time regulation clauses, but a few common examples come to mind, namely:

 

  1. A thirty (30) day period to notify a claim or claim circumstances to the insurer once the insured has become aware;
  2. A ninety (90) day period to submit representations after a claim was formally declined; and
  3. A six (6) month period to formulate a claim once notified to insurers.

 

PREVENTION VS CURE

 

The main issue with time clauses in insurance is that the insured may not be aware of the effect of the clauses if they do not comply and may find themselves very unhappy. The impact of not performing within the time period agreed to is that the claim may become contractually “prescribed” as it may amount to late notification, the right to submit representations to a declined claim may have fallen away and if a claim is not properly formulated, the insurers may close the file. Should something arise in future relating to the circumstances, insurers may decline the claim on grounds of non-compliance with the policy conditions.

 

Insurance is a contract agreed to by the insured and insurer. When concluding a contract of insurance, ask your insurer or your broker about your duties in terms of the insurance contract and the time regulating clauses which you are bound to. A contract is a binding legal agreement, and you are essentially paying to transfer your risk. Insured parties need to avoid that a lack of knowledge of the basic terms results in them not being covered.

 

Bear in mind, a party may be contractually disentitled to its claim through the operation of a time clause, but this should not be confused with the claim having met the criteria for prescription under the Prescription Act.  

 

Many legal practitioners, and even some insurers, make use of a prescription alert system as part of their diary system. This system should notify the creditor well in advance of the prescription date (and not at the 11th hour)providing sufficient time to collate the relevant factual information, formulate the claim (or cause of action as the case may be) and serve the proceedings on the debtor.

 

Prescription awareness and education is key in avoiding prescription of a claim. As a creditor party, it is best practice to ensure that one institutes a civil claim timeously, or seeks an acknowledgement of liability by a debtor prior to the prescription date.

 

There is unfortunately no cure for a prescribed claim.

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