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Motor Insurance
Saturday, September 1, 2007
Shifting risk

We are becoming so beset by regulation that there is a tendency to think the existing regulators should control all aspects of the economy.

“There are good reasons why the Financial Services Board and its predecessors have for decades accepted that the ‘Collision Damage Waiver’ included in car rental hire contracts is not insurance,” comments Patrick Bracher, Director at Deneys Reitz. “It is a mistake to deduce that every time a risk shifts for a consideration the true nature of the contract is insurance. Usually when there is a shifting of risk between immediate contracting parties who are engaged in a business transaction other than insurance, it is unlikely to have anything to do with insurance.”
He says there are many examples of such commercial interaction. Risks are shifted in leases (movable and immovable property), carriage contracts, building contracts, sale contracts and a multitude of others. The seller of goods can decide to offer all the warranties that the common law provides, or to contract out of all warranties, or to extend warranties for a consideration. The National Credit Act, 2005 makes it clear that an extended warranty as part of a credit sale transaction is something different from insurance (compare section 102(1)(b) and section 102(1)(f)). This distinction is a real one and has existed since the advent of the law of sale in Roman times.
“Collision damage waivers provided by car hire companies are essentially no different from a provision in a house lease whereby the landlord accepts all risk of loss during the period of tenancy and agrees to take out an insurance policy in the landlord’s name to cover the risk,” he notes. “The cost of the insurance is built into the rent. That does not make the relationship between landlord and tenant an insurance relationship. It remains a lease and nothing else.”
Similarly when you hire a car you can agree to accept the risk or to pay a consideration for the hire company to carry the risk on your behalf.
“My firm, for instance, has a policy of insurance covering us for any losses incurred whilst driving a hired car,” says Mr Bracher. “When I hire a car, I need not accept nor pay for the collision damage waiver. If I do accept the waiver, then, between me and the car hire company, I am dealing with the shifting of risk in terms of a lease and not exercising an option whether to accept insurance from the car hire company.
“That is a commercial arrangement. If I can cover my risk via my own personal insurance at a lesser cost than agreeing, for a consideration, to have the car hire company accept all risks of loss or damage, I will refuse to pay for the waiver. Thus market forces will operate.”
He adds that there would be insurance if the car hire company offered to take out insurance on my behalf and passed on the premium to me. “What I pay for a collision damage waiver is, however, not a premium. It is extra rental arising from the fact that the hire company accepts a risk, which would otherwise be borne by me and releases me of a major debt in the event of a loss event.”
The same arguments apply to transactions such as extended warranties between seller and buyer of a motor vehicle. The legislature and the regulatory authorities accept that these are not insurance but an incidence of the sale agreement. “As I started out saying, we have to be careful not to plug ordinary commercial transactions into regulated environments where they do not belong,” he says. “The cost and inefficiency of regulation is already becoming extremely high in relation to the transactions they are supposed to govern.”
We have a very rich common law dealing with sale, lease, carriage and other arrangements, with which the law of insurance was never intended to interfere.

Copyright © Insurance Times and Investments® Vol:20.8 1st September, 2007
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