The Case of Renasa Insurance Company Limited v Watson [2016] ZASCA 13

It is a standard clause in insurance policies that an insured "shall take all reasonable steps and precautions to prevent accidents or losses to the property insured".  This is because, in South Africa, the default position is that loss caused by an insured's negligent conduct is a risk that is assumed by an insurer when issuing an insurance policy.  An insurer therefore, in including such a clause in a policy, tries to exclude liability for an insured's negligence.  Even though it is common practice for insurers to include such clauses in their policies, it remains unsettled in our law exactly when an insurer is entitled to repudiate a claim based solely on the negligence of an insured in the context of such a clause. 

The locus classicus on the issue is Santam v CC Designing CC 1999 (4) SA 199 (C). In this case, a full bench of the Cape High Court (the case being on appeal) held that the 'reasonable precautions' clause must be interpreted restrictively, and that to interpret such a clause to exclude liability where loss or damage is caused by an insured's negligence, would be to take away a significant part of the cover afforded by the definition of the risk. In that case, the insured had fallen victim to a fraudster who had forged a deposit slip as proof of payment for a car which he purchased from the insured. The fraudster had written a bad cheque, which bounced after the insured had delivered the car, and the insured claimed the value of the car from his insurers.  The court ruled, following a thorough examination of South African and English law, that in order for an insurer to lawfully repudiate the claim, it must be able to prove that an insured had acted recklessly.  Gross negligence on the part of an insured is not sufficient and, in order to act recklessly, an insured is required to have subjectively foreseen the risk of the harm occurring and to have proceeded regardless.

Our courts have often struggled to differentiate between conduct which is grossly negligent, and conduct which is reckless.  It is important to note that the tests for grossly negligent conduct and for reckless conduct differ substantially. In the case of grossly negligent conduct the test is an objective test: the wrongdoer derogates substantially from what a reasonable person would have done in a similar situation.  In the case of reckless conduct the test is a subjective one:  subjective foresight by the wrongdoer is required and, in other words, in order to prove recklessness, an insurer must prove that an insured foresaw the possibility of harm occurring and proceeded in the knowledge that the risk may materialise. 

In Renasa Insurance Company Limited v Watson [2016] ZASCA 13 the question of when an insurer may lawfully repudiate a claim on the basis of an insured breaching its duty to take reasonable precautions, in the context of a 'reasonable precautions clause', came before the Supreme Court of Appeal.  The clause read:

"5 Prevention of Loss

The insured shall take all reasonable steps and precautions to prevent accidents of losses."

The case involved a bizarre set of facts.  A factory owner arrived at his premises after the summer holidays to find that an elaborate contraption of petrol cans had been erected over various machines, and were ready to be set alight by an arsonist. He called the police, who arrived at the scene and then took him to the police station to make a statement. He was told not to enter the factory as a forensics team would collect evidence.  He thereafter went to a friend's house, at which point he received a call from a neighbour to say that his factory was on fire.

The insurer repudiated the insured's claim on the basis of fraud, alternatively a failure by the insured to take reasonable precautions to prevent the loss from occurring.  The court, after examining the facts, rejected the insurer's argument that the insured had set the fire (or caused an accomplice to do so) and then turned to the insurer's alternative argument, based on the 'reasonable precautions' clause. The court considered the Santam decision, in which it was decided that such a clause required proof of recklessness, before liability could be excluded.  The insurer had submitted that "the bar was set too high by requiring Renasa to prove recklessness" on the part of the insured.

The Supreme Court of Appeal found that the insured had not even been negligent. As such it was unnecessary for the Court to decide whether such a clause required that recklessness be proved before liability might be excluded.  The Supreme Court of Appeal dismissed the insurer's appeal. 

It accordingly remains unsettled in our law exactly when an insurer is entitled to repudiate a claim based solely on the negligence of an insured, in the context of a 'reasonable precautions' clause.  It should, however, be noted that the standard of recklessness is the standard currently being applied by the Ombudsman for short-term insurance in the context of such clauses. Insurers should therefore carefully consider repudiating claims based solely on the basis of an insured failing to take reasonable precautions unless an insurer can prove that an insured acted recklessly, by subjectively foreseeing the possibility of the loss materialising. This is the approach adopted by the English courts, and is likely to be the approach adopted by our Supreme Court of Appeal, when the occasion for a determination on this issue arises.