CPA Insurance

The insurance industry has good reason to be concerned about the CPA. Not only does it have to fully comply with the Act, but the industry will act as risk carriers for many entities that are subject to the terms of the legislation.

Many articles have been published in the build up to this radical piece of legislation and there are sure to be many more now that the Act has taken its long anticipated place on the consumer protection playing field. The short-term liability insurance market is going to feel the effects of the legislation; understanding the reach is the responsibility of each and every industry player.

The Act, in very basic terms, seeks to “prevent exploitation or harm (to) consumers and promote the social wellbeing of consumers”. If one looks to the Common Law, anyone selling a service or product has always owed a duty of care to its customers – or the consumer. One could therefore be forgiven for thinking that the Act does not really change things. However, by delving deeper into and considering the specifics of the legislation, it becomes evident that there are some rather dramatic deviations from the Common Law:

  1. The introduction of cooling off periods for consumers in respect of direct marketing
  2. The ability to return goods at the supplier’s cost
  3. The ability to retain goods without paying for them if the goods arrived unsolicited
  4. The right to goods free of defects and suitable for intended purposes (regardless of whether the failure or defect was latent or patent or whether it could have been detected by a consumer before taking delivery)
  5. Specific requirements regarding warnings about the nature of risk in using a product
  6. The introduction of strict or absolute liability for harm caused by a product (regardless of whether it’s a supplier, retailer, distributor or manufacturer involved in the process)
  7. The introduction of Class Action
  8. The introduction of fines and penalties that may be imposed by the Consumer Tribunal, as well as criminal proceedings for failure to comply with the Act.

So with these changes (and these are just the highlights) should the industry really expect an increase in public and product liability claims?

It is of course probable that media coverage of the legislation and an increase in consumer awareness will stimulate complaints and claims. Further to this, there is talk of a similar system of dispute resolution to that which exists in the South African labour environment. It would therefore make sense to draw a comparison with the increase in labour disputes following the promulgation of the Labour Relations Act in 1995 and the subsequent creation of the CCMA.

While the size of our workforce has generally reduced since 1995, the number of cases heard by the CCMA has increased exponentially since that date. In the first two full years of its operation, the CCMA heard approximately 20 000 cases, while in the last financial year, the caseload breached the 130 000 mark. That’s a staggering increase of well over 500%. The increase can largely be attributed to greater awareness of rights and the absence of any legal expenses for the applicant in the dispute. A Consumer Tribunal that functions on the same basis is therefore likely to stimulate similar, if not greater activity from disgruntled consumers.

Of course not all of losses arising out of the aforementioned list can be insured and many underwriters will undoubtedly rely on the fact that “trade risks” are uninsurable. However progressive underwriters and brokers will seek out ways of transferring risk where possible and managing the uninsurable through effective risk management tools.

Most of the smaller businesses in the South African market continue to purchase the traditional Multimark-type policies and it is doubtful as to whether these policy forms will be able to cope with the new exposures. While straightforward bodily injury and property damage claims are still likely to be entertained by Multimark, there may be increasing disputes with underwriters over the meaning of the word “accident” that appears so prominently in the operative clause. This is particularly relevant when one considers the claims that arise out of poorly worded instructions and warnings on products. The same would apply to gratuitous advice.

Some of the existing specialist markets already provide inexpensive Umbrella liability coverage. It could be expected that one may see a significant increase in the claims where the top-up cover has to drop down to pick up losses that are excluded by the primary Multimark-type covers (as already described).
Of course even the specialist liability markets will find the CPA challenging. Questions will need to be asked about the viability of Fines and Penalties coverage, Product Recall (that responds when the Tribunal initiates a recall on behalf of the insured), as well as losses that arise out of product failure, where there is no physical damage to third-party property.

Brokers and risk managers would be well advised to seek out the widest possible cover that responds “from the ground up” to avoid the imposition of “Difference in Conditions” deductibles and disputes over which policy responds. As for the risks that underwriters are unwilling to insure, a network of specialist risk managers should be sought out. Specialists who can provide ongoing support in areas such as quality control, legal aspects of standard trading conditions, product batching and tracking (a requirement of the CPA), as well as reputational damage control.

Underwriters that are able to provide a blend of broad cover and comprehensive risk management should be the first port of call for any supplier, retailer, distributor, manufacturer or service provider.