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South African Insurance Association

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Consumer Protection Act 2008

Application

The CP Act is widely drafted and will affect most transactions for the sale of goods or the supply of services within South Africa, provided that the consumer qualifies for protection under the CP Act.

The CP Act will offer protection to consumers who are individuals and certain juristic entities (e.g. companies or close corporations) where the juristic entity’s annual turnover or asset value, at the time of the transaction, falls under a specific threshold value. The threshold value is not yet known, but is anticipated to be relatively low as the CP Act is not aimed at protecting big business.

The CP Act will affect almost all industries within the business landscape and an industry will only be able to escape the operation of the CP Act, in the event of it qualifying for an exemption. Exemptions will be granted if the industry is already subject to regulation which achieves the same objectives as the CP Act.

Note: the mainstream activities of the insurance industry will be excluded from the operation of the CP Act. This will, however, only be to the extent that the industry aligns the provisions of the Short and Long Term Insurance Acts with the consumer protection measures contemplated in the CP Act within the next 18 months.

Timing

The provisions of the CP Act mainly dealing with the establishment of the National Consumer Commission and the Minister’s powers to make regulations will come into effect on the date one year after the President signed the CP Act i.e. on 24th April 2010.

All other provisions will come into effect on the date 18 months after the President signed the CP Act, i.e. on 24th October 2010, unless the Minister elects to defer the date by an additional 6 months.

Scenario to be discussed

Whilst the mainstream activities of the insurance industry are excluded from the operation of the CP Act, concern has been raised that an insurer may attract liability for damage caused by goods replaced or repaired by a supplier appointed by the insurer. This concern stems from the strict liability provisions which have been introduced in Section 61 of the CP Act.

Section 61 represents a significant amendment to the existing law in that it allows for a consumer harmed by unsafe goods, product failure or defect, or even inadequate instructions or warnings on the packaging, to sue almost any person involved in getting that product to market, irrespective of whether that person was negligent or not.

For example, where a defective geyser causes loss, currently the proverbial buck might stop with the plumber who installed it. Section 61, however, shifts the burden squarely on to the shoulders of the supplier and the consumer could now sue the geyser manufacturer or even importer. Section 61 provides that the producer or importer, distributor or retailer, installer or provider of access in respect of any goods may be liable for any harm, including death, illness or injury to any natural person; loss or physical damage to any property; and certain economic loss. The consumer will not need to prove that the producer, importer, or distributor was negligent, as is currently the case.

The question which concerns us is as follows: supposing that geyser was installed pursuant to an insurance claim and we, as insurer, had appointed the plumber, who installed it, can we be held liable for any damage caused?

What does the CP Act say?

Section 61: Liability for damage caused by goods

“(1) Except to the extent contemplated in subsection (4), the producer or importer, distributor or retailer of any goods is liable for any harm, as described in subsection (5), caused wholly or partly as a consequence of-
(a) supplying any unsafe goods;
(b) a product failure, defect or hazard in any goods; or
(c) inadequate instructions or warnings provided to the consumer pertaining to any hazard arising from or associated with the use of any goods,
irrespective of whether the harm resulted from any negligence on the part of the producer, importer, distributor or retailer, as the case may be.
(2) A supplier of services who, in conjunction with the performance of those services, applies, supplies, installs or provides access to any goods, must be regarded as a supplier of those goods to the consumer, for the purposes of this section.
(3) If, in a particular case, more than one person is liable in terms of this section, their liability is joint and several. “

Having regard to the generally accepted understanding of the terms “producer” and “importer” as well as to how the terms are defined in the CP Act, an insurer could never be said to be either a producer or importer of goods. What of a “distributor” or a “retailer” however? A “distributor” is defined in the CP Act as “in relation to any particular goods, means a person who, in the ordinary course of business - (a) is supplied with those goods by a producer, importer or other distributor; and (b) in turn, supplies those goods to either another distributor or to a retailer”. A “retailer” is simply defined as “with respect to any goods, means a person who, in the ordinary course of business, supplies those goods to a consumer”.

Looking at the scenario of the geyser, the geyser would be the “goods”. In relation to a geyser, it cannot be said that an insurer, “in the ordinary course of business” is either supplied with geysers for further distribution (distributor) nor supplies geysers to consumers (retailer). “Supply”, “in relation to goods, includes sell, rent, exchange and hire in the ordinary course of business for consideration”.

The next question to be addressed is whether or not an argument can be made out for bringing an insurer into the net by way of subsection (2), as a “supplier of services”? The definition of “service” in the CP Act specifically excludes, inter alia, the assumption of any risk by one person on behalf of another where such service is regulated in terms of either the FAIS Act or either the Long or Short-Term Insurance Acts. The intention is clearly that the business of providing short-term insurance does not fall to be regulated by the CP Act, but does that automatically mean that subsection (2) does not apply? A simple application of subsection (2) is that the plumber who provides the service of installing the geyser, (the “goods”), will for purposes of section 61 be regarded as the supplier of the geyser and, accordingly, could be held liable for any damage caused by the geyser, irrespective of whether or not he was negligent in the installation of the geyser. The “service” which an insurer supplies is the provision of or the undertaking to provide policy benefits under an insurance policy. Can it be argued, therefore, that if in fulfillment of it’s obligation to indemnify an insured (the performance of a service), the insurer appoints a plumber to install a geyser, and the insurer is providing the insured with “access” to the damage causing geyser? It is the writer’s opinion that to give such a liberal interpretation to the words, would be stretching the meaning beyond the ordinary and grammatical, to give the words an application not intended by the drafters of the legislation.

It is, also, important to note what appears to be a gap in the application of section 61: subsection (1) introduces so-called no fault liability for a producer, importer, distributor or retailer of goods. Subsection (2) however, purports to extend the application of section 61 to a “supplier of services”, but fails to refer it back to identified parties, namely, producer, importer, distributor or retailer, but talks rather about a “supplier of goods”. It would seem, therefore, that the plumber in this scenario could escape the no-fault liability net by arguing that he is not a producer, importer, distributor or retailer. The same argument could, also, be raised by an insurer. This was undoubtedly not the intention of the drafters and will presumably have to be amended in due course.

Assuming, however, that an argument could be made for an insurer attracting liability in terms of section 61 (1) or (2), subsection (4) provides an out: “(4) Liability of a particular person in terms of this section does not arise if -
(a) the unsafe product characteristic, failure, defect or hazard that results in harm is wholly attributable to compliance with any public regulation;
(b) the alleged unsafe product characteristic, failure, defect or hazard -
i. did not exist in the goods at the time it was supplied by that person to another person alleged to be liable; or
ii. was wholly attributable to compliance by that person with instructions provided by the person who supplied the goods to that person, in which case subparagraph (i) does not apply;
(c) it is unreasonable to expect the distributor or retailer to have discovered the unsafe product characteristic, failure, defect or hazard, having regard to that person’s role in marketing the goods to consumers; or
(d) …………” \

The defence that could be raised by an insurer is that it is unreasonable to expect it to have discovered the unsafe product characteristic, failure, defect or hazard. An insurer’s business is the provision of or the undertaking to provide policy benefits under an insurance policy. In discharging it’s obligation as aforesaid, it may obligate an insured to use the services of a certain supplier e.g. a plumber, but it plays no role in the actual marketing of the goods to be repaired or replaced e.g. the geyser.

Based on the writer’s analysis of the abovementioned provisions of the CP Act, the conclusion that is drawn is that it is unlikely that an insurer will be capable of being held liable for damage caused by goods replaced or repaired by a supplier appointed by the insurer. It is the writer’s opinion that an insurer would fall outside of the so-called “supply chain”.

However, an argument has been raised, and members should be mindful, that they may potentially be drawn into the net by continuously promoting the use of a preferred service provider where it has been demonstrated that such provider has consistently demonstrated poor workmanship or faulty products.