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Tuesday, July 1, 2008
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Two judgments dealing with cessions are of relevance and interest to insurers and brokers.

Stannic v Samib Underwriting Managers (Pty) Limited 2003 JDR 0373 (SCA) dealt with a claim by the financier, Stannic, against the underwriters, Samib, for payment under a policy taken out by the insured, the purchaser of a truck.
The truck was financed by Stannic, which reserved ownership of said vehicle until the full purchase price was paid. The purchaser undertook to insure the vehicle until payment of the final instalment of the loan, and ceded his right and interest in the insurance contract as security for the performance of his obligations under the finance agreement.
However, an insured risk event occurred and Samib set off a portion of the claim against unpaid premiums. It then paid a portion of the indemnity to Stannic, whereupon the finance house sued for the balance, the amount the underwriter had set-off against outstanding premiums.
The basis for the financier’s claim was that it was entitled to the full proceeds as cessionary of the rights under the insurance policy. It was alleged that the underwriter had full knowledge of the cession but, by its action, the debt had not been fully discharged. The underwriter had never seen the purchase contract, nor the cession clause.
Stannic needed to show that the underwriter had at least constructive knowledge of the cession. It was an inadequate to prove the underwriter’s mere knowledge of the financier’s ownership of the vehicle. There was some debate whether (where a right had been ceded and the debtor pays the cedent rather than the cessionary) the onus lay on the debtor to show that it had no knowledge of the cession and had therefore paid the cedent in a bona fide belief that the obligation would thereby be discharged.
The Supreme Court of Appeal said that this approach required the debtor to prove the negative – that it did not have notice of the cession. Whether that is the correct approach is dubious. It is the cessionary who has full knowledge of the cession which the debtor does not necessarily have. The cessionary is in a position to notify the debtor and so avoid payment to the cedent in discharge of the debt. Risk of that payment should therefore be on the cessionary and the onus should rest on the cessionary to prove knowledge.
The court did not find it necessary to decide the question of where the onus lay in proving knowledge or the lack thereof of the cession on the part of the debtor. In arguing for constructive knowledge the financier said that the representative of the underwriter:
• Had been asked to note an interest of the financier in the vehicle before the set-off was effected.
• Said that he knew that the monies paid in settlement of the insurance belonged to the financier; and
• The underwriters had paid a part of the settlement amount to the financier and must have known that the financier was entitled to the balance.
Stannic ultimately conceded that by virtue of that fact alone the underwriter was aware of the financier’s interest, but of the cession.
The interest usually noted by insurers is the fact that a financier reserves ownership until the vehicle had been paid in full. Accordingly it knew that the financier had rights in the vehicle. If it were destroyed, for example, the financier would  be entitled to the proceeds of the insurance policy. That knowledge, said the court, only meant that the insurer was entitled to assume that when it discharged its debt to the insured, the insured in turn had an obligation to pay the financier. In other words, there was no direct financial connection between the underwriter and the financier.
The settlement amount was negotiated with the insured and it was agreed with him that a portion would be paid to the financier. That did not lead to the inference that the underwriter knew or believed that the balance of the settlement was also payable to the financier. When the representative testified that he knew the money belonged to the financier, that did not mean he knew the underwriters had an obligation to pay the financier as cessionary. It meant nothing more than the representative was aware that the financier, having an interest in the vehicle, might be entitled to claim from the insured whatever proceeds were recovered from the insurer.
Interestingly there was no evidence placed before the court that it was normal practice for financiers to take cession of rights under insurance policies or that the representative of the insurer would have been aware of that practice if it existed.
The judgment reinforces the lessons learnt from the Barloworld Capital (Pty) Limited t/a Barloworld Equipment Finance v NS Napier N.O judgment:

Where the third party wants to obtain security by way of a noting of interest, there are several steps that it can take to ensure the insured complies with the obligation to have the interests noted on the policy, or it can ensure a record in the insurance contract of an obligation on the insurer to first pay the third party in respect of the insured’s outstanding debt to the third party in respect of the property insured at the time of the risk event.

An express notation on the policy could record the tripartite consensus. That noting will commonly be done by way of an endorsement to the policy. The third party can be expressly recorded as an insured under policy, but only to the extent of the insured’s outstanding financial obligation to the third party at the time of the risk event.
The third party can also, and preferably, take cession of the proceeds of the policy as security for the insured’s debt to the third party. Insurers, to the extent that they wish to limit their exposure to a claim for payment by a third party, can expressly in the policy:
• Exclude the noting of any third party’s interests.
• Record that any payment of an indemnity under the policy to the named insured constitutes a full discharge of the insurer’s obligations under the policy.
• Record that no third party shall have, for whatsoever reason, any claim under the policy, whether that be for an indemnity or otherwise.

In Wedzera Petroleum (Pvt) Limited v Zimnat Life Assurance Company of Zimbabwe 2004 JDR 0347 (ZH) the policy contained a clause specifically prohibiting cession of the policy.
The Plaintiff argued that the policy, and particularly the cession prohibition, had been novated.
The evidence indicated that the parties did not intend the policy document to constitute the entire agreement between them. While the policy specifically prohibited cession, the parties were negotiating cession with each other. The Plaintiff was even assured that it could cede the policies.
The correspondence recorded that other correspondence would form part of the agreement, including that particular correspondence. The insurer had, by way of its conduct, been willing to make many amendments to the policy.
Accordingly the insurer through its agent amended the contract to allow the insured to cede its policies.
Insurers should be alert to the fact both their pre and post-contractual representations and conduct may have the affect of altering the terms of the policy contract. Such consequences may be avoided by the incorporation of an appropriately worded non-variation clause in the policy. By Donald Dinnie of Deneys Reitz
 

Copyright © Insurance Times and Investments® Vol:21.6 1st July, 2008
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