Paul Esselaar of Esselaar Attorneys comments on the effect that the Consumer Protection Act will have on the Short Term Insurance Industry...

1. How will the Consumer Protection Act impact on short term insurance industry?
• The most important question to begin with is whether the Consumer Protection Act (CPA) affects the Short-term insurance industry or not. Looking at s1 of the CPA we can see that both the long and the short term insurance industry are excluded from the definition of ?Services?. Since the CPA applies to every transaction which involve either ?goods? or ?services? the short term insurance industry has effectively sidestepped being directly regulated by the various consumer protection bodies that are set up by the CPA and as such the CPA does not apply to the short term insurance industry.
• However this does not mean that the CPA would not have an effect on the short-term insurance industry, it merely means that the short-term industry will not be regulated by the CPA. S10 of Schedule 2 of the CPA indicates that the Short Term Insurance Act, 1998 (Act No. 53 of 1998), and the Long Term Insurance Act, 1998 (Act No.52 of 1998), must be aligned with the consumer protection measures provided for in the CPA by the 24th October 2010, failing which the CPA will apply to the short and long term insurance industry!
• In effect what this means is that the short-term insurance industry will still be subject to the consumer protection concepts as created in the CPA, but these concepts will be brought into the Short Term Insurance Act and be policed by the Short Term Insurance Ombud and other enforcement agencies created by that Act.



2. What should insurers be doing in this regard?
• In the world of short-term insurance the CPA could be seen as a significant opportunity for the industry. While businesses should be preparing for the coming storm (the CPA is already an Act, but it only becomes effective ? barring any extension ? on the 24th October 2010) it is quite ironic that this piece of legislation provides a significant opportunity for short term insurers. While we can?t examine all of these opportunities a few more prominent examples are:
• Sections 48-52 prohibit a business from having ?unfair, unreasonable or unjust contract terms? amongst other things. In essence what this means is that businesses will no longer be able to hide behind their standard term agreements which disclaim liability for everything and instead will be liable in various instances where they weren?t before. The only way a business can protect against this is to take out insurance against this risk.
• Liability for defective products and services is now far more strict than before in terms of s53-61 and the concept of ?strict liability? has been introduced. For example s61 indicates that the supplier of the goods or services will be liable unless certain circumstances exist. Moreover this liability now includes pure economic loss which the consumer may have suffered. Clearly insurance contracts and premiums will need to be adjusted for the increased risk that the Insurers will be assuming due to these provisions.

3. What should brokers be doing to ensure they are prepared for the impact?
• Unfortunately all insurance contracts will need to be reviewed due to this legislation. Moreover constant vigilance of the claims received after the effective date of the CPA would be wise as the initial claims could be the canary in the coal mine which would point towards the trend of consumer claims after the CPA comes into effect and the way in which the insurance industry should react to those trends. In addition much tighter drafting of insurance contracts with businesses will need to be implemented to ensure that Short-Term Insurers are truly aware of the risk that they have assumed now that the business landscape has been fundamentally changed.
• While the Short-Term Insurance industry will be needing to comply with the consumer protection concepts that the CPA raises, these concepts will need to find a voice in the Short Term and Long Term Insurance Acts. While some preparation can be done at the point, there is a real possibility that the manner in which those Acts protect the consumer could be slightly different from the way in which consumers are protected by the CPA. Moreover the regulations that will be published in terms of the CPA and the inevitable regulations that will be published in terms of the Short and Long Term Insurance Act are still in draft form and as a result concerted lobbying by the industry could result in significant concessions being made to the benefit of the industry.



4. General comments
• Care should be taken not to underestimate the effect of the CPA. This is arguably one of the biggest pieces of legislation ever to be promulgated and certainly has the potential to have a massive economic impact on not only the short-term insurers, but also on South Africa as a whole.
• Please note that these comments are summarised, may not be applicable to your particular situation and do not constitute legal advice. Please consult your legal professional should you wish to obtain a formal legal opinion.

- Paul Esselaar (July 2009)