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Short term Insurance
Sunday, January 1, 1989
Test case over

The first test case between insurance brokers and liquidated AA Mutual Insurance Company’s (AAMI) creditors is over. The bid by Premier Milling to overturn the Supreme Court’s 1987 ruling that premiums held by Priceforbes Federale Volkskas (PFV) be paid to the liquidators has failed.
When AAMI was wound up in 1986, the settlement of outstanding premiums owed to the company (and then to the liquidators) became a subject of much controversy.
The liquidators of AAMI contended that millions of rands’ worth of insurance premiums was owed to them by insurance brokers.
This put the brokers into a dilemma. Should they keep paid premiums back for their clients or should they comply with the liquidators demands?
Many people felt it was the brokers’ duty to act in the interests of the client. Clients argued that they were ‘throwing good money after bad’. It was a moot point to pay for a product, the full value of which they were not going to receive.
The matter also raised questions as to the legal position of the brokers. Were they agents for their clients, or were they agents for the insurer, AAMI?
The interpretation of Section 20 bis of the Insurance Act of 1943 became the fulcrum upon which legal fortunes turned. Under common law a broker is the client’s agent. But, under insurance law, and for the purposes of premium collection, he may be the insurance company’s agent. Opinions were divided.
To settle the impasse a test case was held in the Supreme Court. Specifically the case was brought against PFV as first respondent and Premier Milling as second respondent. The case was to argue the point of premiums being held back by brokers on clients’ instructions.
The liquidators were eventually deemed the victors. The court ruled that an insurance company was entitled to premiums that had been paid to a broker. PFV had been paid in full by Premier Milling before the official date of liquidation. Acting on express instructions from Premier, PFV had held back premium payments to AAMI. The court decided that the provisions of Section 20 his placed a statutory obligation upon PFV to pay to AAMI the premium owing.
At the same time it was agreed that AAMI had a right to claim such payment (which was then passed on to the liquidators). Premier Milling appealed against the judgment. But, this was dismissed in November 1988 with costs.
The upshot was that Premier was expected to pay for cover on a flour milling complex at Vereeniging, even though there was some doubt that the insurance company would have been in a position to meet its obligations.
This case now stands as a legal precedent for other cases which are sure to follow. Given the outcome, other brokers will probably encounter similar court rulings. As a result, the liquidators of AAMI can now look forward to being paid several million rands’ worth of premiums from insurance agents from all over the country.
Outstanding premiums will have to be paid in full plus more interest of 20%.

Copyright © Insurance Times and Investments® Vol:2.1 1st January, 1989
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