Basic Business Law. Lesson 6. Credit- and insurance agreements

Basic Business Law
Lesson 5: Credit- and insurance agreements
In the previous lesson I indicated that a prospective entrepreneur who wants to take tourist on a boat trip up
the St. Lucia estuary might find that buying a boat is too expensive and decide to lease the boat instead.
Another option would be to buy the boat on credit. But the St Lucia estuary can be a dangerous place with
aggressive hippos and unseen rocks and so regardless of how he chooses to get the boat he will have to
ensure it.
In this learning unit we will look at credit agreements and insurance agreements as the fourth and fifth types
of agreement that someone in the tourism industry will typically be a party to.
1. Credit agreements
1.1. The nature of a credit agreement
A credit agreement is an agreement between a credit provider and a consumer where the credit provider
supplies goods or services or lends money to the consumer and has the following features:
• The consumer pays for the goods or services, or repays the money, in instalments over a period
of time or agrees to make a single payment at an agreed future date.
• The consumer is obliged to pay interest, fees or charges on the outstanding balance of the
money borrowed or the amount owing on the goods and services.
The consumer is expected to agree to the terms and sign the agreement. The agreement will contain
information about the credit product that the consumer has applied for and that has been granted. This
information should include the repayment period, insurance, interest and other fees charged and what will
happen if the consumer fails to pay his/her instalments.
1.2. The National Credit Act
The South African legislation which protects consumers who buy or hire goods or services on credit, or
borrow money, is the National Credit Act (Act 34 of 2005).
The purpose of this Act is to …
• promote the economic and social welfare of all South Africans,
• promote a fair and transparent credit market,
• protect consumers and consumer rights,
• regulate all credit providers, debt counsellors and credit bureaux,
• limit the cost of credit and
• standardise the way in which credit is granted by credit providers.
The key features of this act are the following:
• The language in credit agreements must be simple and understandable.
• Quotes must be given on all credit agreements, and are binding for 5 days.
• Prescribed information on the cost of credit must be included in all advertising and marketing.
• Credit sales at a person’s home or work are strictly limited.
• Reasons must be provided if a credit application is declined.
• Automatic increases in credit limits are regulated.
• Reckless lending is prohibited.
• Interest and fees on all agreements are regulated.
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• Credit Bureaux are regulated and consumers have the right to a free
credit bureaux record.
• Debt counselling is introduced, to enable the restructuring of debts for over-indebted consumers.
1.3. The National Credit Regulator and the National Credit Tribunal
The National Credit Acts introduces a National Credit Regulator and a National Consumer Tribunal.
The functions of the National Credit Regulator are to …
• register credit providers, credit bureaux and debt counsellors, and monitor them,
• educate and create awareness of the consumer protection under the Act,
• research the credit market and monitor access to credit and the cost of credit,
• identify factors that may undermine access to credit, competitiveness and consumer protection,
• advise government on policy and legislation,
• receive and investigate complaints,
• ensure that consumer rights are protected and
• enforce the Act and act against contravening institutions.
The National Consumer Tribunal hears cases on non-compliance with the Act, issues fines and provides
compensation to consumers. Consumers and credit providers may appeal to the Tribunal against any
decision of the National Credit Regulator. The Tribunal is independent of the National Credit Regulator and
consists of a Chairperson and at least 10 other members.
Consumers can approach the National Credit Regulator for advice or assistance on any transaction falling
under the Act. The National Credit Regulator can also assist consumers on issues related to credit bureaux
or credit information.
1.4. Types of credit agreements
All of the following transactions are regarded as credit agreements.
1.4.1. Instalment sale agreements
This is the sale of movable property where the payment is made by way of periodic payments. Interest, fees
or charges are payable to the credit provider by the consumer who possesses or uses the property.
Ownership of the property passes on to the consumer at the end of the credit agreement period.
1.4.2. Mortgage agreements
An agreement in terms of which credit is secured by way of security in the form of a pledge of immovable
property, such as a home loan secured by way of a bond over the property
1.4.3. Leases
Temporary possession of movable property and payments are made for its usage. Interest, fees and charges
are payable and the consumer has the option of having the ownership transferred at the end of the
agreement.
1.4.4. Credit guarantee agreements
Credit guarantee with one person where this person promises to pay a debt incurred by another consumer
upon receiving a demand from the credit provider.
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1.4.5. Loans
Loans include micro-loans and other credit from banks or credit providers including
overdrafts, credit cards, vehicle finance and personal loans as well as furniture finance, clothing accounts
and any other type of credit from retailers.
1.4.6. Pawn transactions
A pawn agreement is a small credit agreement where a personal article is used as collateral. The pawn shop
will keep and be responsible for the thing pawned until the customer repays the loan with the agreed interest.
1.4.7. Developmental credit
Developmental credit is a special type of credit that is created and defined in the National Credit Act. There
are three types of developmental credit i.e. loans for educational purposes, loans to build, expand or improve
low-cost housing and loans to set up small-and medium-sized businesses.
1.4.8. Incidental credit
When the original agreement for the sale of goods and services is entered into, between any supplier and
consumer the intention is not to extend credit to the consumer. In other words it is not a credit agreement,
but due to the consumers’ failure to pay for the goods or services on or before a determined date, a fee,
charge or interest is added to the amount due. The agreement is now referred to as an incidental credit
agreement. An example of incidental credit would be an overdue municipal account or an overdue doctor’s
account.
1.4.9. Agreements which are not covered by the Act
The following agreements are not regarded as credit agreements:
• Agreements where the credit provider and the consumer are related, for example where a
husband lends money to his wife;
• Agreements where a member of a stokvel borrows money from the stokvel;
• Agreements where the director of a company lends money to his company;
• Agreements where a government institution lends or borrows money from any source. For
example where a commercial bank borrows money from the South African Reserve Bank.
1.5. The rights of the credit seeker
1.5.1. The right to apply for credit.
Every legal person has the right to apply for credit from any credit provider. The credit provider may grant the
credit or can refuse to grant the credit. The reason for refusing to grant the credit must be based on business
grounds that are in line with the normal credit risk evaluation processes of the credit provider.
A credit risk evaluation is an assessment done by a credit provider to decide whether or not credit will be
granted to a consumer, what level of bad debt can be expected, and what level of risk will be acceptable to
justify the profit made.
1.5.2. The right not to be discriminated against when applying for credit
Consumers who are applying for credit are protected against unfair discrimination by a credit provider.
Discriminating against consumers on the basis of colour, race, age, political affiliation, sexual orientation,
religious belief, or affiliation to any particular trade union is not allowed.
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A consumer who is of the opinion that he/she has been discriminated against for
these reasons may act against the credit provider through the Equality Court, or may
complain to the National Credit Regulator which will refer the matter to the Equality Court.
1.5.3. The right to be given reasons for credit being declined.
A consumer, whose credit application has been declined by a credit provider, has the right to request written
reasons explaining why the application for credit has been declined. If the decision to decline the consumer's
request is based on an unfavourable report received from a credit bureau, then the credit provider must
supply the consumer in writing with the name, address and other contact details of the credit bureau from
which the information was received.
Credit bureaux are entities that retain and disclose personal credit information for payment. They investigate
credit applications, credit agreements and the payment history and payment patterns of the credit seeker
using data from reports containing the above.
1.5.4. The right to be given documents in an official language that the consumer understands
A consumer has the right to receive documents from a credit provider in an official language that he/she
understands. Documents that a credit provider must give to a consumer include the credit agreement,
quotations and statements.
A credit provider can make a proposal to the National Credit Regulator (NCR) on the languages in which it
intends making its documents available if it’s unpractical or unreasonable to make it available in all official
languages. The NCR will approve these proposals if they are reasonable.
1.5.5. The right to be given documents in plain and understandable language
A consumer has the right to receive information and documents in plain language. This means that the
contents, meaning and importance of the document must be easy to understand. The NCR may issue
guidelines to indicate what would be regarded as “plain language”.
1.5.6. The right to be given documents related to the credit transaction
A consumer has the right to receive documents relating to the credit agreement in a manner that the
consumer chooses. A consumer may choose to receive documents in person, at the credit provider's place
of business, or by fax, email, or by a printable web page.
A consumer has the right to receive one replacement copy of documents from the credit provider. If the
replacement copy is requested within a year of the delivery of the original documents it will be free of charge.
The consumer will be expected to pay the credit provider for additional replacement documents
A consumer must be given a pre-agreement statement and a quotation before entering into a credit
agreement with a credit provider. A pre-agreement statement is a document which details the terms and
conditions of the credit agreement that the credit provider intends entering into with the consumer. The
quotation must disclose the costs of the credit required including the principal debt, the interest rate, the total
amount payable, the instalments and all fees, charges and interest. The quotation that the consumer
receives is valid for five business days.
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1.5.7. The right to confidential treatment
Any person or organisation that receives or compiles confidential information on a
consumer must use the information for the sole purpose for which the consumer has given his/her consent,
unless the usage or release of such information is a requirement in terms of The Act. The person or
organisation holding the consumer's confidential information may only release it as specifically instructed by
the consumer or by a court of law.
1.5.8. The right to access and challenge information held by a credit bureau.
The consumer has the right to access information that a credit bureau has in relation to him/her. The
information must be given to the consumer free of charge every twelve months or for a fee if the consumer
requests the information more than once within twelve months. Such a fee may not exceed R20.00. A
consumer may challenge and request proof of the accuracy of the information held by a credit bureaux
The credit provider must advise the consumer before certain adverse information about that consumer is
passed on to a credit bureau. The consumer is also entitled to receive a copy of that information on request.
1.5.9. The right to receive periodic statements
A credit provider must provide a consumer with a statement once a month or once every two months if the
agreement is an instalment sale agreement, lease or secured loan, but a 3-month interval may be agreed
between the parties. With regards to a mortgage agreement the consumer is entitled to receive a statement
every six months.
1.5.10. The right to settle the agreement early
The consumer may settle an agreement at any time before the date specified in the agreement and is not
obligated to give the credit provider notice that he/she intends to settle the credit agreement early.
In the case of a large agreement, when a consumer exercises this right, he/ she will be charged an early
settlement amount. This right is also available to a guarantor. A guarantor is a person who agrees to pay a
debt, which is due to a credit provider by another consumer should the consumer fail to pay the credit
provider.
1.6. The cost of credit
1.6.1. Interest
Interest is the amount that a credit provider charges a consumer on the outstanding balance of a credit
agreement. This amount is calculated by multiplying the principal amount with a percentage, called the
interest rate. This interest rate must be reflected on the credit agreement.
1.6.2. Initiation fees
The initiation fee is the fee that a credit provider charges a consumer for entering into a credit agreement. It
will only be payable if indeed the consumer and the credit provider enters into the agreement and may never
exceed 15% of the loan amount. - The maximum interest rates and initiation fees per type of credit
agreement is given in the table 1.
1.6.3. Default administration charges
This is a charge that a credit provider may charge a consumer who is in arrears with repayments on his/her
credit agreement. These charges relate to costs that the credit provider has incurred in attempting to advise
the consumer that he/she is in arrears with his/her account.
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1.6.4. Collection costs.
Collection costs are costs that the credit provider incurs when attempting to collect
an outstanding, overdue debt from the consumer.
The in-duplum-rule states that once a consumer is in default, arrears interest may never exceed the
outstanding capital balance owed at the time of default.
Table 1: Maximum interest rates and initiation fees
Type of credit agreement Maximum interest rate Maximum initiation fee
Mortgages and Bond (REPO rate x 2.2) +5%
Credit cards and Store cards (REPO rate x 2.2) + 10%
Personal loans and other
unsecured credit
(REPO rate x 2.2) +20%
R1000 + 10% of amount more than
R10 000 to a maximum of R5000
R150 + 10% of the amount more than
R1000 to a maximum of R1000
R150 + 10% of the amount more than
R1000 to a maximum of R1000
Incidental Credit 2% per month NA
Small & medium business loans (REPO rate x 2.2) +20%
Low-income housing loans (REPO rate x 2.2) +20%
Short term loans
5% per month
Other unspecified loans (REPO rate x 2.2) + 10%
R250 + 10% of the amount more than
R1000 to a maximum of R2500
R500 + 10% of the amount more than
R1000 to a maximum of R2500
R150 + 10% of the amount more than
R1000 to a maximum of R1000
R150 + 10% of the amount more than
R1000 to a maximum of R1000
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2. Insurance agreements
2.1. The nature of an insurance contract
The basis of insurance in South Africa is the insurance contract. An insurance contract (other than in life
insurance) is a reciprocal contract between an insurer and an insured in terms of which the insurer
undertakes to pay the insured an amount of money, in exchange for payment of a monetary premium, should
the risk borne by the insurer on behalf of the insured, materialise by the happening of an event in which the
insured has an interest.
Both Roman-Dutch and English law are considered to be the primary common law sources of South African
insurance law. The three most important pieces of insurance legislation are the Long-term Insurance Act 52
of 1998, the Short-term Insurance Act 53 of 1998 and the Financial Advisory and Intermediary Services Act,
2002 (‘FAIS Act’).
2.2. Different types of insurance
2.2.1. Capital insurance (non-indemnity insurance)
Capital insurance relates to instances were a specific amount is paid on the happening of a particular event.
In the case of capital insurance, the loss suffered, and the amount paid by the insurer are not necessarily
proportionate. Life insurance is typically capital insurance in nature.
Example
Randy Rockclimber’s life is insured for one million rand. He is currently 25 years old. During the negotiation
process he disclosed all information and the insurer is fully aware of his dangerous pastime and has loaded
his premium accordingly. He agrees to pay R2 000-00 per month for the cover. He nominates his wife Anna
Anxious as the beneficiary of the policy.
If he dies the day after he bought the policy, the insurer will be obliged to pay his wife the full amount of one
million rand. If however he lives to be 100 years old before he dies, his wife, if she is still alive, will still only
be entitled to a payment of one million rand regardless of the fact that Randy would have paid more than
R1.8M by then.
2.2.2. Indemnity insurance
Indemnity insurance relates to agreements where the insurer indemnifies the insured against patrimonial loss
upon the happening of an event described in the policy as the risk insured against. With indemnity insurance
there is a direct link between the amount insured and the actual loss suffered. Table 2 list a number of
indemnity insurance products.
Some insurance products can either be structured as capital insurance or indemnity insurance products.
Example
Ricky Racer insures his new car for R200 000-00. During the negotiation process he disclosed all
information. He agrees to pay R2000-00 per month for the cover.
If he is involved in an accident and the damage to his car is R20 000, that is what his insurer will pay. If the
car cannot be repaired the insurer will pay out the value of the car.
If it is found that he caused the accident by driving recklessly he would be in breach of contract and the
insurer will not have to pay anything.
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Table 2: Capital insurance products
Life insurance
Disability insurance
Endowments
Health insurance
Fund-policies
Investments
A capital amount is paid to the beneficiaries when the insured person dies
A capital amount is paid when the insured person is no longer able to work
A type of life insurance policy that pays out if the insured is still alive after a
certain period
Insurance against the risk of incurring medical expenses
Moneys payable from a fund to which the insured contributed over time, like a
retirement fund
Putting money into something with the expectation of gain, usually over a longer
term. More risky but more rewarding than other insurance products
Table 3: Indemnity insurance products
Motor insurance
Household insurance
Indemnity insurance
Fidelity
Guarantee insurance
Liability insurance
Health insurance
Accident insurance
Financial protection against physical damage to or theft of motor vehicles
Financial protection against the theft or loss of household items
Insurance against legal action by a third party
Fidelity insurance protects organisations from loss of money, securities, or
inventory resulting from crime
Insurance against the non-performance of a party to a contract
Insurance against lawsuits and other claims
Insurance against the risk of incurring medical expenses
Additional cover for accidental death and disability,
2.2.3. Investment products
Insurers develop investment products and structure these on an insurance platform. These are more pure
investment products and are normally done under a long-term insurance license.
2.2.4. Reinsurance
Reinsurance is where an insurer takes out insurance with another insurer that is bigger and has more
reserves. For example, after a hailstorm, a local insurer might receive so many claims that if it had to pay out
all of them it would go under, but because the insurer is reinsured for exactly such an event, it will be able to
survive.
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2.2.5. Mutual insurance
Mutual insurance is where an association of members with a common interest
collectively insure a common interest. For example, a group of stamp collectors form a club and display their
collections at a stamp museum. Instead of each collector insuring only his own collection the club might
decide to take out mutual insurance to cover the entire exhibition.
2.3. Insurance legislation
2.3.1. Long- and Short-term Insurance Acts
The Long-term Insurance Act and the Short-term Insurance Act are largely aimed at regulating the insurers
operating in South Africa.
Long-term insurers generally focus on capital insurance while short-term insurers focus more on indemnity
products, but more to the extent that such insurance relates to the compensation for patrimonial loss.
The Long-and Short-term Insurance Acts specify the various classes of insurance and insurance companies
must be licensed to underwrite a particular class of insurance product.
Both type of insurers act under the supervision of the Registrar of long and short-term insurance. The
Registrar forms part of the Financial Services Board (‘FSB’) which is a regulatory body supervising most
financial institutions in South Africa other than Banks.
The Long-and Short-term Insurance Acts also regulate the placement of insurance business outside the
Republic of South Africa. No foreign exchange commitments may be entered into by residents without prior
approval of the Exchange Control Authorities.
The Long-and Short-term Insurance Acts also address a number of consumer protection issues. These laws
contain important substantive provisions that relate to policies and the client intermediary-insurer
relationship.
2.3.2. The Financial Advisory and Intermediary Services Act, 2002 (‘FAIS Act’)
This Act regulates all distribution channels of financial products, which include both long-and short-term
insurance policies. The FAIS Act may also apply to insurance products issued by foreign product suppliers if
the product is marketed in South Africa.
The FAIS Act has created a new profession in South Africa and requires that any person providing ‘advice’ or
rendering ‘intermediary services’ must either:
• be licensed by the Registrar of Financial Services Providers as a qualified financial services
provider; or
• must act on behalf of such a financial service provider as its representative, mandated in terms of a
written agreement with the financial service provider and under the control of the financial service
provider.
The FAIS Act requires that financial service providers and its representative must be fit and proper and have
certain prescribed minimum qualifications.
2.3.3. Brokers, advisers, and insurance intermediaries
Insurance contracts are often concluded on the initiative or with the assistance of a third party or
intermediary. Compensation payable to such intermediaries must be in the form of commission and must be
paid in the manner prescribed by the Long-and Short-term Insurance Acts. The maximum amount of
commission payable is limited as a fixed percentage of the premium payable under the relevant policy.
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2.4. The duties of the parties to the insurance contract
2.4.1. The duty of good faith
When negotiating an insurance contract parties are considered to be doing so in “good faith”. This requires
the parties to be open and honest with each other and to make open and truthful representations about their
circumstances. Any misrepresentation of facts is a breach of the duty of good faith.
2.4.2. The duty to disclose
The duty of good faith includes the requirement that both the insured and the insurer disclose all material
facts relating to the insurance contract to be entered into. As the insured knows more about the specific risk
than the insurer, he/she has a duty to disclose all material information about the risk to be insured.
According to the amended Short-term Insurance Act, a fact will be regarded as material if a reasonable,
prudent person would think that the information should have been correctly disclosed to the short-term
insurer, so that the insurer could form its own view as to the effect of such information on the assessment of
the relevant risk.
The remedy for a breach of the duty of disclosure is that the insurance policy is voidable at the instance of
the insurance company. Should they wish to void the policy, they must actively do so within a reasonable
time of discovering the failure to disclose the material information and unless fraud is proven return the
premium paid. The effect of such an action is to treat the insurance policy as if it never came into existence.
2.4.3. The duty of the broker to advise the clients of their duty to disclose material facts.
The broker has a duty to advise the insured, of their duty of disclosure.
2.4.4. The duty to notify the insurer of a loss or claim
The insured must notify the insurer promptly, in writing, of any casualty loss, third-party liability claim, or
occurrence that could give rise to a liability claim.
2.4.5. The duty to cooperate with the insurer
The insured must notify the insurer timely of all material facts concerning the loss or underlying claim and the
insured must respond fairly to all reasonable insurer requests for information and documentation.
2.4.6. The duty to take all reasonable steps necessary to prevent further damage after a loss is
suffered
For example, it would be reasonable to affect temporary repairs to a roof following storm damage to prevent
water intrusion in the period of time before permanent repairs can be made.
2.4.7. The duty not to impair the insurer's subrogation rights.
An insured mustn’t do anything that would preclude its insurer from recovering against a third party.
When responding to a request the insured must carefully evaluate whether the requested act would
constitute an impermissible impairment of the insurer's subrogation rights and lead to a forfeiture of
coverage.
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Example
Tour-guide Tammy is involved in an accident with an off-road motorcycle in a game
reserve. Tammy is at fault and nobody is injured but the damage to the off-road is extensive. The off-road is
insured, but its driver doesn’t have a licence. The young driver starts to cry and tells Tammy that his farther
will “kill him”.
Tammy feels sorry for the young man and makes the following statement: “Don’t worry, it was my fault and
the company is insured against events like this. We will pay all your damages.”
The reality is that very few accidents are ever 100% one person’s fault. The insurer would normally pay out
and then its legal department would start to see what part of the moneys paid out can be recovered from
other parties. If both the parties involved in the accident are insured then the two insurers will come to an
agreement after paying out the claims of their own clients.
Tammy made two mistakes that can impair her insurer’s subrogation rights. Firstly she accepted full
responsibility for the accident, which nobody should ever do and secondly she gave the other party a
guarantee that her company would pay the damages. Tammy did not fulfil the duty as set out above and will
become liable in her personal capacity for some of the damages.
2.4.8. The duty to pay the insurance premium.
The insured is obliged to pay the premium, but at the same time the insurer is expected to give the insured
written notice of cancellation, and an opportunity to cure, before the policy may be cancelled.
2.5. The effect of misrepresentation, misdescription and non-disclosure
A breach of the duty of disclosure can take the form of not representing or describing the risk correctly which
is referred to as misrepresentation or misdescription and the holding back of known material facts.
Typically information which should be disclosed to an insurance company at the time of negotiating an
insurance contract includes the following:
• Facts which indicate that the property/life/limb you wish to insure is/are exposed to more than the
ordinary degree of danger.
• Facts which show the insured may be a greater liability than normal.
• Facts which show the insurers rights of subrogation would be unduly restricted
• Criminal convictions
• Previous claims history, cancellation or refusal of insurance
• Previous insolvency, liquidation, curatorship or judicial management
• Financial status
Insurance gives rise to a moral hazard in the sense that once insurance protection has been obtained a
person may be less careful or even bring about the loss themselves. Therefor the financial status of the
insured is seen as material because a deteriorating financial status could result in an increase in risk due to
cutting back on security, housekeeping, maintenance, or safety measures, as a result of budgetary
constraints and in extreme cases, the deliberate bringing about of the loss.
The duty of disclosure exists at the time of negotiating the insurance contract (right up to the time of
conclusion), when mid-term changes are made to a policy and at renewal.
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