As an insurance broker, ensuring contract certainty for your commercial clients is crucial. But when exactly does an insurance contract come into effect? Is it when the placing slip is signed, when the premium is paid, or once all the details have been finalised? This blog unpacks the key aspects of contract certainty, focusing on when your client’s cover actually begins and how to ensure everything is in place.

What is Contract Certainty?

Contract certainty means both the underwriter and the insured client have agreed on all the essential terms of the insurance policy, making the contract legally binding. As a broker, it’s your responsibility to ensure that everyone is aligned on these terms to avoid disputes or confusion, especially when a claim arises.

Contract certainty is achieved when:

• The critical terms (such as premium, insurance period, risks covered, and policy wording) are agreed upon.
• There is a clear record of the agreement, often documented via a placing slip or policy.

Without contract certainty, your client could be exposed to risks, particularly in the event of a claim. That’s why it’s essential to finalise all terms before assuming that coverage is in place.

When Does an Insurance Contract Become Legally Binding?

For an insurance contract to be enforceable, four key elements must be present:

• Legal Purpose: The contract must serve a lawful and legitimate purpose.
• Capacity to Contract: Both the insurer and the insured must have the legal ability to enter into the contract.
• Agreement: There must be a mutual understanding (meeting of minds) between the parties on the essential terms.
• Consideration: The insured must promise to pay the premium in exchange for the insurer’s promise to provide cover.

This means the contract is legally binding once all these conditions are satisfied. However, contract certainty doesn’t necessarily mean coverage starts immediately.

Consensus Ad Idem: Achieving Clear Agreement

In insurance, consensus ad idem, the “meeting of minds” is vital. Both parties must agree on the key terms of the contract, including who or what is insured, what risks are covered, the premium, and the period of insurance.

As a broker, you play a crucial role in ensuring clear communication between the client and the insurer to prevent any ambiguities or misunderstandings that could lead to disputes.

Key Elements of an Insurance Contract

For commercial property insurance, the critical elements that must be agreed upon are:

• The person or property insured.
• The risks covered (e.g., fire, theft, or damage).
• The amount payable by the insurer in the event of a claim.
• The premium.
• The insurance period.

Once these elements have been finalised and agreed upon by both parties, the contract becomes binding. However, keep in mind that cover may not begin until certain formalities, such as premium payment, are completed.

Legal Framework: What Brokers Need to Know

In South Africa, short-term insurance is governed by the Short-Term Insurance Act (STIA), which ensures transparency and fairness in insurance contracts. As a broker, you must ensure that your client fully discloses all material facts, as non-disclosure can lead to voided contracts or denied claims.

The Role of the Placing Slip

A signed placing slip or schedule is a key document in securing Assets All Risks insurance. It outlines the main terms agreed upon between the insured client and the insurer. However, signing the placing slip does not mean that the parties have achieved contract certainty.

Coverage usually starts on the insurance policy’s effective date, and claims on the signed policy usually depend on whether the premium has been paid or an agreement to pay has been reached. It’s crucial to double-check these details to ensure the cover starts on the agreed date.

Patrick Bracher, a respected legal mind in South Africa, recently discussed how this issue has played out in the London market in February 2024. In that market, under the Market Reform Contract (MRC), a placing “slip” no longer functions as a standalone document but is rather accompanied by a full schedule of terms from the outset. This approach ensures that when underwriters sign off, the contract is already in its final form, avoiding the need for further negotiation or ambiguity over which terms apply.

Bracher highlights that without such a framework in place, as is often the case in South Africa, insurers can find themselves in disputes about whether a placing slip is the final agreement or whether it’s merely provisional. The best practice, as he notes, is to ensure that all terms are clearly agreed upon and documented upfront, which avoids confusion later on when the actual cover is needed.

Case Study: Azrapart vs. AIG South Africa

A recent South African case illustrates how contract certainty can become an issue. In Azrapart (Pty) Ltd and Accelerate Property Fund Limited vs. AIG South Africa, the plaintiffs owned a shopping mall and claimed over ZAR 1 billion in business interruption losses due to COVID-19. They argued their policy included an “Infectious and Contagious Diseases” (ICD) clause.

However, the insurers claimed that a November 2019 quoting slip, which excluded ICD cover, was the final agreement. A final policy, signed in March 2020, did include the ICD clause, and the plaintiffs argued this was the binding contract.

The court applied the ‘parol evidence’ rule, which states that when a contract is in writing, the written document is the official agreement. The ruling favoured the plaintiffs, determining that the final policy signed in March 2020 was the binding contract. Please note the ruling is currently under appeal.

This case highlights how critical it is for brokers to ensure that the final policy reflects all agreed terms, as placing slips may not hold up in court.

Ensuring Your Client’s Cover is certain

In summary, an insurance contract is binding when both your client and the insurer agree on the key terms. From the Azrapart court ruling, the final policy with the embedded schedule is the only relevant contractual document, and the documents preceding these, are of no jural significance. By understanding the principles embedded in the Azrapart ruling, key legal precedents, and ensuring clear communication between all parties, you can help your clients confidently secure the insurance they need.