What happens with liability of the insurer for the insolvent insured’s debt

“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” – s156 of the Insolvency Act, No 24 of 1936 as amended (Act).

Section 156 of the Act deals with claims made by third parties against an insurer, in circumstances where the person insured has become insolvent. Prior to s156 of the Act coming into effect, the legal position regarding such claims was that, upon sequestration of the insolvent (i) the estate of the insolvent would vest in the trustee of the insolvent estate and (ii) the third party would be precluded from claiming directly from the insolvent’s insurer. However, s156 of the Act created an exception to (ii) above in that it allows a third party to claim directly from the insolvent’s insurer if the requirements of the Act in this regard have been satisfied.

In order to rely on s156 of the Act, a third party must prove that (i) the insured had incurred a liability to the third party, (ii) the estate of the insured had been sequestrated and (iii) the insurer was liable for the debt of the insured.

The above principles came before the court in Bader and Others v Centriq Insurance Company Limited (4572/2015) [2017] ZAGPJHC 12 (Bader v Centric), as a stated case. The crux of the matter was whether the liability of the insured to the plaintiffs (which was established in the court a quo)] Bader V Wentzel and Delru Makerlaars CC 2014 JDR 0209 (GNP) (Bader v Wentzel) created an obligation for the defendant insurer, Centriq Insurance Company in terms of s156 of the Act.

Briefly, in Bader v Wentzel, the plaintiffs sued the insured, Delru Makerlaars who joined its insurer, Centriq Insurance Company as a third party. Judgment was given in favour of the plaintiffs and the third party proceeding against the insurer was dismissed. The claim was for the breach of professional duties by the insured, in respect of which the insurer repudiated the professional indemnity that the insured held with the insurer, based on an exclusion clause in the policy.

In Bader v Centriq the plaintiffs erroneously sought relief on the judgment against the insured in Bader v Wentzel, in submitting that simply because the insured had been found liable in the previous proceedings, it automatically followed that the insurer of the defendant would be similarly liable.

The court in Bader v Centriq found that the “plaintiff obtained no greater rights [against the insurer] than those enjoyed by the insured [against the insurer]”. Essentially, it could not be found that in one instance the insured had no claim against the insurer, but in another instance, that a third party substituting the position of the insured would have recourse against the insurer. To do so would afford the third party more rights against the insurer than those held by the insured.

Furthermore, the court held that s156 of the Act “does not transfer, nor vest existing rights of an insolvent in the third party”. The court ruled that, it “creates a new distinct cause of action for a third party on sequestration of the insured as a means to recover from the insurer precisely what the latter owes the insured under the indemnity”. Therefore, if there is no obligation on the insurer vis-a-vis the insured, a claim of a third party will fail.

The determination before the court was to establish a link between the liability of the insured and the terms of the indemnity. The court rejected the plaintiffs’ claim stating that, they had failed to prove that the insurer was obligated to indemnify the insured in terms of the policy. Consequently, there was no link between (i) the liability of the insured to the plaintiffs and (ii) the liability of the insurer in terms of the indemnity, for the purposes of s156 of the Act.

Denise Durand, Dispute Resolution practice and services, Cliffe Dekker Hofmeyr, overseen by Willie van Wyk.

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