Authored by Donald Dinnie and Boitumelo Phillips.
A significant recent judgment (in which Deneys acted for the FSCA) has provided important clarity for the South African guarantee insurance industry, confirming that construction guarantees fall squarely within the ambit of the Insurance Act.
The ruling underscores that construction guarantees indemnify the employer against the contractor’s default and therefore constitute non-life guarantee insurance policies. Terminology such as “policy” or “premium” is not determinative; what matters is whether the arrangement meets the statutory definition of insurance.
The court held that providers of such guarantees must be licensed insurers, rejecting arguments that these instruments were merely credit agreements under the National Credit Act. Drawing on the precedent in Becker v Registrar of Financial Service Providers, the court emphasised that the jurisprudence developed under the Short-term Insurance Act continues to apply under the Insurance Act, and that the presence of collateral counter-guarantees does not alter the essential indemnification-of-loss element.
The Financial Sector Conduct Authority’s successful counter-application confirmed that Fusion’s guarantees amounted to insurance business conducted unlawfully without a licence.
The judgment provides useful guidance to insurers, reinsurers, and intermediaries: construction guarantees must be treated as insurance contracts, and all role players should ensure compliance with the licensing requirements of the Insurance Act.
For more on this judgment read here