Introduction
Any party that decides to launch legal action does so with the goal of attaining legal recourse. In insurance, specifically, parties typically sue for damages. On the surface, it may seem futile to sue an insolvent person, as the chances of recovering damages are practically non-existent.
The question, therefore, becomes whether it is possible and worthwhile for a third party to claim damages from an insolvent policyholder. In the South African context, this question becomes even more pertinent given the country's economic climate and the increased likelihood of insolvency among policyholders.
The Law
As a point of departure, it is important to remember that there is no direct relationship between a third-party plaintiff and a liability insurer. Therefore, under common law, a third party has no basis to claim directly from a liability insurer. This is rooted in the well-known contract law principle of privity of contract, which means that only the parties to a contract can sue each other under that contract, to the exclusion of third parties. However, the common law position is overridden by the Insolvency Act 24 of 1936 ("the Act"), specifically in relation to liability insurance. Section 156 of the Act provides as follows:
Whenever any person (hereinafter called the insurer) is obliged to indemnify another person (hereinafter called the insured) in respect of any liability incurred by the insured towards a third party, the latter shall, on the sequestration of the estate of the insured, be entitled to recover from the insurer the amount of the insured's liability towards the third party but not exceeding the maximum amount for which the insurer has bound himself to indemnify the insured.
In light of the above-quoted provision, an exception is made for a third-party plaintiff to claim directly from a liability insurer. However, despite this provision, it is not as straightforward as it may seem. A third-party plaintiff must still prove the following: liability on the part of the policyholder; that the liability insurer would have been liable for the policyholder's debt (i.e., had the policyholder not been insolvent, the claim would have fallen within the policy's parameters); and that the policyholder's estate has been sequestrated. Although the facts and circumstances of each case differ, it is generally accepted that a third-party plaintiff's case becomes more complex in cases of insolvency.
Conclusion
There are a few key takeaways from the above legislation. First, the Act treats third parties differently from other creditors, to the advantage of third parties. This potentially raises a constitutional issue, but that discussion falls outside the scope of this article. Secondly, it is important to note that any liability insurance proceeds, if successfully claimed, do not form part of the insolvent estate of the policyholder. Lastly, a third-party plaintiff cannot claim an amount greater than what is stipulated in the policy between the insurer and the policyholder. Therefore, there are limits that are applicable.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.