The theory behind the noting of an interest on non-life policies is that, without suitable insurance cover, a third party’s property in the hands or possession of the insured would be considered a risk to a financier, which is the owner of the insured property or any other person who has a financial interest in the property. Having a third party’s interest noted on a policy does not make them a party to the insurance contract, nor does it automatically entitle them to make a claim under the policy.
It is worth looking again at the 2006 case of Barloworld Capital (Pty) Ltd t/a Barloworld Equipment Finance V Napier NO. A finance house (the seller) sold a mechanical excavator on instalments, with reservation of ownership until final payment. It was an express term of the sale that the buyer would insure the equipment and have the interest of the seller noted on the policy.
The buyer effected the insurance on the excavator but failed to ensure the noting of the seller’s interest on the policy. The contact of insurance was therefore between the insured and its insurer, with no other party’s interest noted.
Before final payment under the sale, the excavator was irreparably damaged in circumstances which triggered the indemnity under the policy. Prior to payment of the claim in terms of the policy, the insurer was informed of the seller’s interest. However, the proceeds of the policy were paid directly to the insured by the insurer.
The seller sued the insurer for the insurance proceeds, alleging that the proceeds should have been paid to it, instead of to the insured. The claim was based on an alleged breach of a contract between the seller and the insurer and, in the alternative, on an alleged trade usage.
The claim on the basis of a contract failed, because on the facts, there was no consent by the insurer to effect such notation on the policy – even though the insurer was aware of the seller’s request to have their interest noted on the policy.
The alternative claim was based on “trade usage”: that it was a long-standing practice in the industry, when an owner of insured property asked the insurer to note its interest, to pay the owner out of the proceeds of the policy any outstanding amount due to it by the insured in respect of the property, prior to paying the insured. The practice was allegedly universally observed and well-known. It served to give protection to the finance house without prejudicing the insured and involved the former being able to expect with certainty that it would be paid first.
The court held that the current legal position is that: “If the evidence established that an insurer’s mere receipt of a request to note or its mere knowledge of a third-party owner’s interest imposed on it, without contract, an enforceable obligation, on pain of damages, first to pay the owner, then the alternative claim will have succeeded.”
The evidence went no further than showing that the usage provided an effective arrangement, (whether one calls it a convention or practice is immaterial), as long as there is in effect tripartite consensus, express or implied, that the insurer, even though not contractually bound to the seller, will pay the latter first.
If the insured discloses the seller’s interest, this would imply his consent that the debt to the seller be discharged first. If the seller gives the insurer the requisite information, as here, an opportunity for the insurer to ascertain the insured’s attitude will usually arise.
In this case, it was found that nothing in the evidence warranted the conclusion that as a matter of trade usage, an insurer, by mere acquisition of knowledge of the seller’s interest, becomes bound as if by contract, to pay the latter ahead of the insured. A third party such as the seller can always take self-evident steps to ensure that the buyer or lessor complies with its obligation to have the former’s interest noted on the policy. Alternatively, it can take cession of the policy.