BUSE4024A Advanced Liability Insurance and Risk Management 2023 Lecture 3 PDF

UNIVERSITY OF THE WITWATERSRAND SCHOOL OF BUSINESS SCIENCES BCOM. HONOURS INSURANCE AND RISK MANAGEMENT BUSE4024A Advanced Liability Insurance and Risk Management 2023 Lecturer: Ms Penny Spentzouris (Notes prepared by Dr Albert Z Mushai) Lecture 3 SOURCES OF LIABILITY RISKS Liability risks have one...

UNIVERSITY OF THE WITWATERSRAND SCHOOL OF BUSINESS SCIENCES BCOM. HONOURS INSURANCE AND RISK MANAGEMENT BUSE4024A Advanced Liability Insurance and Risk Management 2023 Lecturer: Ms Penny Spentzouris (Notes prepared by Dr Albert Z Mushai) Lecture 3 SOURCES OF LIABILITY RISKS Liability risks have one common thread. They essentially arise from human conduct. Whatever the act complained of might be, it must be traceable to some human act or omission. To understand the sources of liability risk, it is important to understand where the types of obligations that exist since liability arises when there is some breach of an obligation. In Roman Dutch law, there are two main sources of obligations. The first source concerns obligations that people assume on a voluntary basis. This is the domain of the law of contract for an agreed price. For example, X promises to deliver a specific quantity of wheat to Y who runs a flour processing company. We can see here that both parties voluntarily assumed reciprocal obligations. X’s obligation is to deliver the wheat while that of Y is to take delivery of the wheat and pay the purchase price. If X fails to deliver the wheat, he is in breach of his voluntarily assumed obligation. Y can claim compensation from X provided he can prove that he suffered loss due to X’s actions. In that case, X becomes legally liable to Y. A second type of obligation relates to obligations imposed by law on each member of society. This is the domain of the law of delict. In the UK, US, and other common law countries they call this the law of tort. The law of delict regulates relations between people in their private capacities. Therefore, every motorist has a duty to drive their car without endangering other motorists and pedestrians. Consequently, we see some sections of a public road that are subject to speed limits e.g., those where there is a school nearby. Hence, even if one may want to drive above that speed limit, they cannot because it is against the law. Suppose X decides to drive above the speed limit and has an accident. A child on his way to school is injured. X is in breach of a legally imposed obligation to drive at a safe speed in the area in question. 1|Page Delict as a Source of Liability Risk By far, most liability risks facing private individuals and companies relate to delictual conduct. A delict is an act of a person that causes harm to another in a wrongful and culpable way. From this simple definition, we see that there are 5 elements to a delict, namely: § Act or conduct – the act could be a positive act e.g., driving a car negligently or an omission. § Wrongfulness i.e. causing harm to another without lawful justification. § Fault – this is the element of blameworthiness. At law, blameworthiness exists if an act is intentional (dolus) of negligent (culpa). § Causation – there must be a causal connection between the conduct of the wrongdoer and the harm suffered by the victim. § Harm/damage – conduct is wrongful and blameworthy if it causes harm or damage to an innocent party. Before examining each of these elements in more detail, it is important to highlight the distinction between delict that cause patrimonial loss (damnum injuria datum) and those that impair personality and reputation (injuria). Patrimony refers to a person’s property and finances. There is also recognition for claims for pain and suffering. Hence, a claim in delict could relate to any of the three or a combination of them i.e., claims for patrimonial loss (aquilian action), claims for injuria, and claims for pain and suffering. Claims for pain and suffering usually goes together with those for patrimonial loss e.g., a claim for bodily injury tends to involve one for pain and suffering. Now let us examine the five elements of delict mentioned above. Act/Conduct When analyzing act or conduct for purposes of liability in delict, it is important to bear in mind two important points. First, the law usually does not target specific acts or conduct for prohibition. Instead, the law seeks to prohibit the bringing about of certain consequences. Second, for purposes of liability, the act or conduct looked at in isolation need not be unlawful or blameworthy. For example, the City of Johannesburg develops an amusement park for children. Over time, the City Council omits to maintain some of the equipment in the park causing a child to sustain injury while playing on the equipment. What is the act or conduct in this case for purposes of liability in delict? The answer is developing the amusement park because it is that which set in motion a 2|Page chain of events leading to injury of the child. This is the concept of prior conduct. Yet on its own, the developing of the amusement park is neither unlawful nor blameworthy.1 A mere omission also constitutes an act or conduct if one fails to act where the law imposes a positive duty to act. Wrongfulness Of all the elements of delict, wrongfulness is arguably the most problematic. The reason for this is, there is no clear test for wrongfulness. The purpose of the element of wrongfulness is to distinguish between what is right and what is wrong.2 Others argue that the purpose of the element of wrongfulness is to determine whether there is unreasonable infringement of a legally recognized interest. Wrongfulness has often been confused with fault. The confusion relates to where the requirement of reasonableness fits in the two elements. Nugent (2006) argues that this confusion is unfortunate because fault as an element of delict cannot perform the same function as that of wrongfulness. In National Media Ltd v Bogoshi 1998 (4) SA 1196 (SCA) and Minister of Safety and Security v Hamilton 2004 (2) SA 216 (SCA) the Supreme Court of Appeal held that the test for wrongfulness incorporates aspects of reasonableness of an act, considerations of public policy, and the legal convictions of the community. A question often arises whether conduct is wrongful in the absence of fault. In Sea Harvest Corporation (Pty) Ltd v Duncan Dock Cold Storage (Pty) Ltd 2000 (1) SA 827 (SCA) Scott JA said “in the absence of negligence, the issue of wrongfulness does not arise”. Similarly, in Mkhatshwa v Minister of Defence 2000 (1) SA 1104 (SCA)3 Smalberger JA put the position as follows: The question of negligence (i.e. failure to comply with a standard of conduct of a reasonable person) is the logical starting point to any enquiry into the defendant’s liability for without proof of negligence the plaintiff cannot succeed in his action and considerations of wrongfulness………….will not arise. These pronouncements by the Supreme Court of Appeal seem to suggest that fault or negligence is a precondition for wrongfulness. Several academics do not agree. Fault 1 For further insights on the meaning of act or conduct in delict see: Cape Town Municipality v Paine 1923 AD 207 Nugent, R.W. (2006) Yes it is always a bad thing for the law: A reply to Professor Neethling, The South African Law Journal, 123(4) pp. 557-563 3 At page 1111F-G 2 3|Page Fault or blameworthiness comes in the form of intentional causation of harm (dolus) or negligent causation of harm (culpa). By far, negligence is the most common form of fault seen in most claims. In Roman Dutch law, the standard for determining negligence was laid down by Holmes JA in Kruger v Coetzee 1966 (2) SA 428 at 430 as follows: a) A diligens paterfamilias in the position of the defendant (i) would foresee the reasonable possibility of his conduct injuring another in his person or property and causing him patrimonial loss ; and (ii) would take reasonable steps to guard against such occurrence, and b) The defendant failed to take such steps Therefore, negligence is failure to exercise the socially optimal level of care. The essence of negligence lies in failing to take precautions against foreseeable harm to someone else. If a reasonable person in the position of the defendant could not have foreseen the harm to the plaintiff, then there is no blameworthiness in the defendant’s conduct and liability does not arise. Harm is foreseeable if it is not too remote in relation to the conduct of the defendant. This is the doctrine of remoteness of harm or damage. When courts assess whether the defendant’s conduct shows a level of care below the required level, they look at such factors as: § Whether the harm to victim was foreseeable and the ease with which it could have been foreseen § The magnitude of risk presented by the defendant’s conduct or activity § The ease with which the risk in the activity could have been reduced or eliminated as well as the potential cost of doing so i.e. the burden of the precautions needed to reduce or eliminate the potential harm § The current state of technical and scientific knowledge around the activity in question Most of these factors leave room for personal and subjective interpretation by judges. Causation The harm that the victim sustains must result from the wrongdoer’s conduct. Under normal circumstances, proving causation is a function of the ‘but for test’ or sine qua non test i.e. but for the wrongdoer’s conduct, would the victim have suffered the harm in question? The element of causation seeks to establish three things, namely: a) That the sine qua non test is met i.e. factual causation 4|Page b) That there is sufficient causal connection between the act committed by the defendant and the harm to the victim c) To limit the scope of the wrongdoer’s liability within reasonable bounds i.e. legal causation Causation for purposes of liability seeks to avoid making a wrongdoer liable for all the direct and indirect consequences of his/her conduct. However, in claims involving long latency injury or multiple wrongdoers, proving causation could prove challenging. For example, X works for three employers where he is exposed to asbestos. Some thirty years later, he develops cancer whose source is asbestos exposure. For purposes of causation, which of these three employers he worked for caused X’s harm? A rule like joint and several liability only comes into play once the issue of causation has been resolved. It cannot be of assistance in determining causation. Similarly, the ‘but for test’ alone is not helpful because X cannot prove the exact source of his exposure that led to the cancer. Consequently, we need other rules to come into play to help resolve the causation issue. In the UK, courts developed the material contribution rule.4 In terms of this rule, causation exists if X is able to show that the conduct of any one of his three previous employers materially contributed to the risk of him developing cancer. Harm There are different types of harm that can result from wrongful conduct. These include bodily injury, death, property damage, pure economic loss among others. From an insurance perspective, liability insurers are only interested in harm that is quantifiable in financial terms as damages. Contract as a Source of Liability Liability risk also arises in contract. Contract deals with self-imposed obligations unlike delict which involves obligations imposed by law. There is no need to dwell much on what a contract is since most of you did commercial law where this topic is covered as well as in the second-year insurance and risk management course. A contract is a legally enforceable agreement between two parties. From a liability risk standpoint, there are several important points about contractual liability worth highlighting. These are: 4 This rule was first used in the UK in Bonnington Castings Ltd v Wardlaw [1956] AC 613 5|Page a) From an insurance standpoint, contract is a less significant source of liability risk compared to delict. Some liability insurance policies notably public liability exclude liability arising in contract if such liability would not have arisen in the absence of that contract. b) Parties to a contract are free to contract on whatever terms and conditions they choose. By contrast, in delict, everyone is subject to the same legal standard. Insurers are more inclined to insuring liability risk arising in delict as opposed to contract. This is because bilateral contractual terms are more difficult to track for risk assessment purposes whereas in delict the same standard of behavior applies to everyone. In contract, parties have the freedom to limit or expand their potential liability as they deem fit. c) Liability in contract is strict i.e. there is no need to prove fault in the event of a breach. When a party to a contract is in breach, the innocent party only needs to prove two things to get damages. First, he/she must prove that the other party breached the contract. Reasons for the breach are irrelevant. Whether the breach occurred in good faith or due to an emergency is immaterial. Second, the innocent party must prove that as a direct consequence of that breach, he/she suffered financial loss. d) In contract, the innocent party has a duty to mitigate his/her loss by taking simple, practical, and cost-effective measures to prevent the loss from escalating once breach occurs. Vicarious Liability Vicarious liability is liability imposed on a principal for losses caused by the wrongful conduct of an agent e.g. employer and employee. For purposes of this lecture, I operate under the assumption that you are familiar with the doctrine of vicarious liability from your second-year course. Consequently, I will only touch on those aspects on the doctrine not covered in the second-year course to deepen your understanding of this doctrine as a source of liability. Vicarious liability rests on the premise that for risk reduction purposes, the principal is in a better position to police the agent than the courts or anybody else. Agents such as employees can engage in dangerous activities in the course of work that create risk or externalities for 3rd parties who have nothing to do with those activities. For the principal, liability imposed on him/her vicariously is a form of strict liability because it does not depend on any fault or wrongful conduct on his part. The principal becomes answerable for a wrong committed by somebody else. The principal is not liable for wrongful acts of an independent contractor. Therefore, an employee creates vicarious liability for the employer, but an independent contractor assumes his own 6|Page liability. However, in practice the distinction between an employee and an independent contractor is not always clear.5 There are four broad policy grounds used to justify the principle of vicarious liability. These are: a) Vicarious liability allows the plaintiff to obtain compensation from someone who is financially capable of satisfying a judgment. In this regard, vicarious liability is a proplaintiff policy instrument. It assumes that the principal has more wealth than the agent. b) A person, typically a corporation who employs others to advance its own economic interests should in fairness be placed under a corresponding liability for losses incurred during the enterprise-Lister v Hesley Hall [2002] 1 AC 215. In other words, the person who put the wrongdoer in a position to commit the delict should bear the resulting loss instead of the innocent victim going without compensation in cases where the actual wrongdoer lacks the means to pay. c) In the employment context, vicarious liability promotes a wide distribution of the delictual losses since the employer is a most suitable channel for passing them on through liability insurance and pricing policy. d) Vicarious liability is also a coherent concept from the perspective of deterrence. Given that liability falls on the employer, the employer has every incentive to encourage its employees to perform their responsibilities properly and to discipline those who are guilty of wrongdoing. Recent court decisions on vicarious liability have focused on the concept of ‘enterprise risk’ as justifying the imposition of vicarious liability. In terms of this concept if an enterprise carries with it certain risks, responsibility for injury caused by those risks should be borne by the person who created the enterprise and therefore the risk. This notion for justifying vicarious liability is common in North America. Therefore, when deciding whether a case warrants vicarious liability, courts often look at the nature of the enterprise. Evidence from various common law jurisdictions suggests strongly that claims brought under the vicarious liability doctrine are proving harder to defend. Even the traditional defence to vicarious liability such as the independent contractor defence no longer looks foolproof. 5 See for example: Barclays Bank Plc v Various Claimants [2018] EWCA Civ. 1670 where the court upheld a vicarious liability claim against Barclays Bank despite that the wrongdoer was clearly an independent contractor. The decision was reversed on appeal. 7|Page Common Law Defences to Liability Claims A discussion of the sources of liability risk is incomplete without examining the possible defences one could plead against allegations of legal liability. Understanding legal defences is important for several reasons. First, it enables a practitioner to tell the difference between a valid and an invalid claim. Second, some defences help reduce the magnitude of liability. In turn, this affects the quantum of damages. Finally, understanding the legal defences applicable to a given claim gives the practitioner leverage when it comes to negotiating a settlement. Useful defences in liability cases include: Contributory Negligence This refers to the conduct of the plaintiff and limits the extent of the defendant’s liability. In South Africa, contributory negligence derives from the Apportionment of Damages Act 34 of 1956. Under Roman-Dutch common law, contributory negligence on the part of the plaintiff precludes him from recovering damages from the defendant who is also to blame for the damage. This principle applies even if the defendant was largely to blame for the if the plaintiff was also to blame even to an insignificant extent, the defendant’s liability falls away completely. This common law principle often called ‘all or nothing rule’ derives from English law where it originated from the wellknown case of Davies v Mann [1842] 10 M&W 546. Today contributory negligence is a statutory defence in many countries. Voluntary Assumption of Risk Volenti non fit injuria or consent to risk negatives wrongfulness. When the plaintiff is well aware of the danger associated with a particular enterprise but willfully exposes himself to it he acts intentionally in respect of the harm he suffers-Stern v Podbrey 1947 (1) SA 350. In Lampert v Hefer 1955 (2) SA 507 the court distinguished between voluntary assumption of risk and contributory negligence. According to the court, voluntary assumption of risk denotes intent in engaging in the act knowing of the dangers involved. Where however the injured party should have been aware of the danger (as a reasonable man ought to) but was not, there is no voluntary assumption of risk but only contributory negligence. 8|Page Private Defence This defence arises where a defendant directs his actions against a plaintiff’s actual or imminently threatening wrongful act to protect his legitimate interests or those of someone else. The requirements for the private defence to be sustainable are: 1. The attack must consist of a human act. 2. The attack sought to be prevented must be wrongful i.e. it must threaten a legally protected interest without justification. 3. The attack to which the defendant reacts must already have started or be imminently threatening but must not yet have ceased. An expectation of a future attack does not justify a private defence. 4. The defence must be directed at the aggressor. 5. The defence must be necessary to protect the threatened interest. Accordingly, where the harm is avoidable without using force, the private defence is unavailable. In Ntanjana v Vorster & Minister of Justice 1950 (4) SA 403 the court pointed out that in considering this requirement of the private defence, the court must be careful to avoid the role of the armchair critic who is always wise after the event. 6. The act of defence must not be more harmful than is necessary to ward off the attackNtamo v Minister of Safety and Security 2001 (1) SA 830. Necessity A state of necessity exists when the defendant is placed in such a position by a superior force that he is only able to protect his interests or those of someone else by reasonably violating interests of an innocent 3rd party. Necessity is different from private defence. In private defence, the conduct of the defender is aimed at an attack by a wrongdoer, but necessity involves violating the interest of an innocent 3rd party. Thus, a person who defends himself against attack by an animal acts out of necessity and not in self defence because an animal cannot act wrongfully. Illegality In this regard, the legal maxim ex turpi causa non oritur action can be invoked as a defence to an action in delict/tort. The maxim literally means; “No right of action arises from a base cause”. Thus is A is injured while in the process of committing a criminal offence (e.g., a robbery) he is barred from claiming compensation because of illegality of his conduct. However, the application of this 9|Page defence is not absolute. In other words, it does not necessarily mean in every case where harm arises from commission of an illegal act, there is no recovery.6 Prescription/Limitation of Actions The Prescription Act lays down the time limits within which actions in delict expire. The standard prescription period is three years for most delictual actions involving personal injury or death. Prescription starts to run when the act constituting the delict is committed i.e. at the time the plaintiff acquired the right to sue the defendant. Where prescription succeeds as a defence, it is a complete bar to the recovery of damages notwithstanding the merits of the plaintiff’s case. Contracting Out of Liability It is common practice to attempt to exclude liability for negligence by using disclaimer or exemption clauses. Common examples of such clauses include the erecting of a sign at the entrance of premises where work is being conducted which reads that the company is not liable for any loss or damage to property or injury to persons who enter the premises no matter how caused. Another example is a sign in car parks to the effect that the vehicles are parked at owner’s risk. The question is can a company contract out of liability. Attempting to contract out of liability has resulted in several court cases worldwide. In South Africa, there are several cases where courts examined the question of contracting out of liability. In Galloon V Modern Burglar Alarms 7 an alarm company installed and maintained a radio burglar alarm system for a jeweller in terms of a lease agreement. The contract contained a disclaimer to the effect that the alarm company would “not be liable for any damage whatsoever caused by the non-operation of the alarm for any reason”. A technician employed by the alarm company worked on the alarm system at the jeweller’s premises. To do so the technician had to render the system inoperable by inserting a bridge. After finishing the work on the system, the technician failed to remove the bridge. Later a burglary took place, and the alarm did not go off. Subsequent investigations revealed that the bridge was the reason the alarm did not go off. The jeweler sued the alarm company alleging that its negligence caused the burglary to go on undetected. In its defence the alarm company relied on the disclaimer in the contract. The company argued that the phrase for any reason in the disclaimer exonerated it from liability for any reason including negligence. The court accepted that it was possible to contract out of liability 6 See for example, Stoffel & Co v Grondona [2018] EWCA Civ. 2031 where an attempt to rely on the ex turpi causa defence failed. 7 1973 (3) SA 647 10 | P a g e for negligence but to do so the contractual term purporting to exclude liability for negligence must be clear and explicit. In this case, the court held that the clause was not clear and explicit enough hence, the alarm company was liable8. In Government of the Republic of South Africa v Fibre Spinners & Weavers.9 Spinners as a manufacturer of grain bags signed a contract with the government to manufacture a large consignment of grain bags for farmers. The government indicated that it was unable to take delivery of the bags and asked Spinners to store them for it. Spinners agreed on condition that it was not responsible for the safekeeping of the bags. Its letter of acceptance included a disclaimer stating that it was “absolved from all responsibility for loss of or damage howsoever arising in respect of…” After some time, a decision was made to move the bags from the warehouse whereupon it was discovered that a large quantity of them had been stolen. From outside it looked as if all the bags were there but only the outside layer was intact. All bags in the middle were missing. Even worse, one of the persons involved in the theft turned out to be an employee of Spinners. The government claimed compensation for the lost bags from Spinners who raised the disclaimer as a defence. Government took the company to court but lost. The matter was then taken on appeal where again the government lost. Finally, in Naidoo v Birchwood Hotel10the plaintiff checked into a hotel and signed a registration card containing a clause to the effect that the hotel shall not be responsible for any injury on the premises caused or arising from the negligence (gross or otherwise) or wrongful acts of any person in the employment of the hotel. The following morning the plaintiff sustained serious injury when a heavy steel gate fell on top of him. Having found that the hotel was negligent, the court had to decide if the disclaimer was contractually binding on the plaintiff. The court held that denying the plaintiff redress for injuries he suffered due to negligence of the hotel offended against notions of justice and fairness. Public policy with notions of fairness, justice and reasonableness would preclude enforcement of a contractual term if its enforcement would be unjust or unfair, the court continued. Furthermore, the court said upholding the disclaimer in this case would be unfair and unjust – so the court ruled against the hotel. The confusion that this decision creates aside, one can understand why the court took this view. A hotel is in the hospitality business. The business entails caring for guests for the time that they are staying at the establishment. Many would have a problem understanding the rational of saying 8 See also: Micor Shipping v Tregar Golf and Sports 1977 (2) SA 709 1977 (2) SA 324 10 2012 (6) SA 170 9 11 | P a g e when such an establishment signs in people and those people sustain injury let alone due to the negligence of the hotel’s employees, the hotel can contract out of that liability using a disclaimer. If the hotel can do that, it can escape vicarious liability for harm caused to guests by its employees. Reasons why understanding of Legal Defences is important in Liability Risk Management and Insurance Finally, let us examine an overarching but important question. Why is understanding of applicable legal defences in each jurisdiction important in liability risk management and insurance? There are several reasons why understanding applicable defences to various liability risk situations is important. Firstly, availability of a legal defence to a liability situation affects the level of risk inherent in that situation. For example, a situation where absolute liability applies carries more risk that one where liability depends on proof of fault.11 Since applicability of a legal defence to a given situation influences its riskiness, knowledge of defences is important for the task of liability risk assessment and underwriting. In that sense availability of a defence affects the pricing of liability risks. Secondly, understanding applicable defences to a liability situation is important to the claim’s negotiation and settlement process. If a defence is one that removes or affect legal liability, understanding it and its scope represents the difference between valid claim and an invalid one. Therefore, for people in claims, it is important to know if there is legal liability for the claim in question and the extent if any that is affected by any applicable defence. Thirdly, for defences that are partial (i.e. those that do not result in the insured being absolved from liability completely (e.g. contributory negligence), understanding their application and scope gives the insurer leverage when negotiating claim settlements. Most liability claims are negotiated and settled out of court. Applicability of a defence gives the insurer a strong bargaining hand in such negotiations. Finally, availability of a defence also helps the insurer determine how to defend their insured under the auspices of the duty to defend. By studying the pleadings of the claimant, the insurer can best organize a defence strategy where competent defences are available. 11 Absolute liability is a situation where legislation may provide that perpetrator of a given act are liable for harm caused to anyone as a result of that act. Absolute liability means no defence is applicable since liability is absolute e.g. situations where people work with something inherently dangerous like dynamite. 12 | P a g e AZM-Feb-2022 PS- Feb-2023 13 | P a g e