When’s an insurer not an insurer?

By Bruce Cameron

When is a company that sells you protection against an event a short-term insurer and when is it not? The Financial Services Board (FSB) is investigating this question.

The issue was highlighted recently when the FSB took action against My Lawyer Legal Assistance for selling a product that protected consumers in the event of legal action being taken against them.

The FSB’s Enforcement Committee fined My Lawyer Legal Assistance R200 000 for selling what the FSB regarded as an insurance policy that was not underwritten by a registered insurer.

Jonathan Dixon, the FSB’s deputy executive in charge of insurance, says that if a company sells policies that provide cover against an unexpected event, it has to meet a number of requirements under the Short Term Insurance Act. One of these is that it must hold sufficient reserves to ensure that it can pay you out.

The Registrar of Short-term Insurance found that, between November 2011 and January 2014, My Lawyer marketed and sold policies that were not underwritten by a registered insurer, in contravention of the Short Term Insurance Act.

In mitigation, the registrar considered that My Lawyer accepted responsibility for the contravention, and its "conduct and contravention of the Act was never deliberate or intentional and done bona fide based on research, consultations with industry experts and legal opinion. Also, My Lawyer has put measures in place to rectify the contravention in that it is in the process of securing an underwriter for its insurance business," the FSB says in a media release.

The action against My Lawyer raises the question of when a company is, and when it is not, an insurer. For example, is a motor plan a short-term insurance policy, particularly because it means that the vehicle manufacturer or retailer has made a future commitment to you?

Dixon told Personal Finance that the distinction between insurance contracts and certain types of maintenance contract is not always clear-cut. This is not a problem that is peculiar to South Africa, nor is it a new one.

"Our approach has always been that each product must be considered on its own merits. When we consider a product, we take into account the provisions of the Short Term and the Long Term Insurance Acts, the common law essentials of an insurance contract, case law, academic writings, policy considerations, and the like.

"Taking the example of motor plans, each plan would have to be assessed on its own merits. Where a motor plan offers a warranty, such a warranty would constitute insurance business for purposes of the Short Term Insurance Act. However, where it offers only a service plan covering future services and the wear and tear of parts, such plan would not constitute insurance business, as the servicing of a vehicle is not an uncertain event (as required by the Short Term Insurance Act), nor is wear and tear."

Dixon says the FSB is considering a research project on the issue, possibly to provide more clarity on what constitutes insurance cover.

Source Independent Online