An ex gratia payment is a payment made by a person to a claimant for damages or other claims without recognising any legal obligation. “Ex gratia” means “by favour” or “by virtue of grace” .Thus, an ex gratia payment is a voluntary payment that does not signify legal liability.
Ex gratia payments differ from legally-required payments because ex gratia payments are voluntary. These payments are made with the intention that the payment is made “in full and final settlement” to a creditor, and the reason for this will be discussed in detail below.
Basis for payment ex gratia
The test for whether a payment made, for instance by an insurer, was made ex gratia, depends on whether payment was made in terms of a valid contract or a contractual obligation.
Insurers make ex gratia payments in circumstances where a claim is made by an insured where there is no admission that the payment is covered under a policy. The insurer may opt to make a payment to the insured despite there being no admitted legal obligation to do so in terms of the policy, for several reasons.
Ex gratia payments are specifically distinct from claims that have been paid by an insurer which are covered by a policy. If a policyholder suffers a loss that is covered by their insurance policy, the insurer is legally obliged to pay. In such an instance, the payment by the insurer would be an indemnity in terms of the policy. It is the result of a legal obligation, and it typically carries with it an admission of liability.
Wording of ex-gratia settlements
In order to ensure that the insured does not attempt to institute any further claims in respect of the loss for which an ex gratia payments has been made, it is important to ensure that the claimant has specifically agreed that the ex gratia payment is made in full and final settlement of the insured’s claim, and further, that the payment is made without admission of any liability.
In the absence of such an agreement, there is a risk that the offeror, e.g. insurer, will be found to have acted in accordance with the contract (policy) by making a payment which may be found to be causally linked to contractual obligations and the liability which arises from the policy. The payment could be found to be a normal payment in terms of the contractual obligations and may then be required to fulfil all of its obligations in terms of the agreement. It is therefore important to ensure that there is an express agreement regarding the exclusion of liability.