South African court dismisses claim

A new judgment has just been released in South Africa concerning which courts would have jurisdiction in a matter where the primary insurer (fronting for an overseas reinsurer) rejects a claim and is based in Mozambique and the client who wishes to sue as a result of the rejection chooses to sue in South Africa which is the jurisdiction of the reinsurer reinsuring the overwhelming majority of the risk. The client believed it would be far easier to litigate in South Africa for many reasons with the chief one amongst them being that a large deposit has to be paid to the courts in Mozambique by any corporate entity suing and is forfeited if the case is ultimately lost. The deposit is based on the amount claimed, and if the claimant is not that positive about their chances of winning the case, it becomes a difficult decision to sue in Mozambique. The holding company of the claimant is also based in South Africa and so it becomes a far easier exercise to run the litigation from there knowing the attorneys and the litigation procedure.

The claim was based on a rejection of a contractor’s all risks claim where a sugar plant in Mozambique broke down and a large loss of profits claim resulted. The policy contained a time bar clause allowing the policyholder 12 months to issue summons to challenge the decision failing which the right to challenge the decision would lapse. No representation was made to the Mozambique insurer and sometime thereafter a summons was issued against the South African reinsurer together with the Mozambique insurer in a South African court. The claim was that the real insurer for this policy was actually the reinsurer who made the effective decision on the rate of the premium, to actually accept the risk and then ran the administration of the claim. It was a novel way to argue this. The reinsurer argued that a South African court had no right to hear the matter given that the insurer was resident in Mozambique as was the risk. Regulations in Mozambique state that the risk had to be insured in Mozambique and there was nothing wrong with a reinsurer assisting the primary insurer in making the important decisions as long as the final decision was communicated to the policyholder on the Insurer’s letterhead and by the insurer. While there were direct communications between the reinsurer and the policy holder’s South African based broker, no binding decisions were made by the reinsurer without going through the insurer.

The matter was heard by the South African court who determined there was sufficient evidence to show that the primary insurer is an independent registered insurer in Mozambique who formally issued the policy, and issued the rejection. In terms of regulation only they could insure the risk and therefore it must have been that all the parties intended them to be the actual insurer. It is common in the global insurance world for reinsurers to play an active role in accepting the risk and the claim if they carry a large amount of the risk. The claim was dismissed and it was too late to then issue a summons in the Mozambican court given the matter had formally prescribed. Reinsurers must be careful how in the way they communicate so these issues do not arise.