When Does Material Non-Disclosure Void an Insurance Contract? A Legal Perspective
Johannesburg, South Aftrica -- (SBWIRE) -- 07/08/2013 -- A recent judgment indicates that the High Court will continue to adhere to "hard law" instead of adopting a new Treating Customers Fairly policy in relation to non-disclosure of material information by an insured.
South African law has always placed a duty of disclosure on an insured and allowed an insurer to deny liability for a claim when it discovers that the insured has materially misrepresented the facts relevant to his or her insurance cover. This is because it is essential for the insurer's assessment of risk that an insured keeps the insurer up to date with all relevant information.
The determination of whether a misrepresentation is deemed to be material is therefore essential for the protection of both the insurer and the insured.
Case law & the Didcott principle
The position in law was set out in Mutual and Federal Insurance Co Limited v Oudtshoorn Municipality 1985 (1) SA 419 (A), where Joubert JA held that courts determine if a non-disclosure is material by asking whether a reasonable person would think the information is material to the assessment of risk.
To make this determination, a court will consider all the relevant facts of the particular case and whether or not the undisclosed information is reasonable relative to the risk or the assessment of the premiums to be charged. In essence, an insurer can cancel the policy even where the withheld information would not have dissuaded the insurer from accepting the policy, but where it would merely have charged the insured a higher premium.
Six years later, in Pillay v South African National Life Assurance Co Ltd 1991 (1) SA 363 (D), Didcott J applied the law as stated above but noted that the harshness of outcome will not always be fair. Instead, Didcott J suggested that in certain instances of non-disclosure, it would be more equitable to "reconstruct" the policy than to cancel it.
According to what has become known as the "Didcott principle", if the insurer would still have issued the policy, albeit at a higher premium - even if the information withheld materially affects the risk to the insurer - then it would not be fair for the insurer to repudiate the claim.
The Treating Customers Fairly policy
South Africa is overhauling its consumer protection framework, including the Financial Services Board's (FSB's) publication of the Treating Customers Fairly (TCF) policy aimed at the financial services industry.
The TCF, proposed to be introduced in January 2014, requires companies to demonstrate that they meet six principles (or so-called "fairness outcomes"), including that:
- consumers can be confident that they are dealing with firms where the fair treatment of customers is central to the corporate culture;
- products and services marketed and sold in the retail market are designed to meet the needs of identified consumer groups, and are targeted accordingly;
- consumers are provided with clear information and are kept appropriately informed before, during, and after the point of sale;
- when consumers receive advice, the advice is suitable and takes account of their circumstances;
- products perform as companies have led customers to expect, and the associated service is of an acceptable standard and at the level customers have been led to expect; and
- consumers do not face unreasonable post-sale barriers to changing products, switching providers, submitting claims or making complaints.
The TCF is set against the backdrop of a 2011 policy document issued by National Treasury, titled A Safer Financial Sector to Serve South Africa Better. In this document, National Treasury recognises that the financial services industry should be held to a higher standard of market conduct than other industries, and accordingly, envisages a significant change to the regulation of the financial services industry.
With a focus on separate prudential and market conduct regulation, National Treasury identifies four objectives to be achieved by the financial sector:
- ensuring financial stability;
- facilitating consumer protection and appropriate market conduct;
- expanding access through financial inclusion; and
- combating financial crime.
Ameliorating the impact of the rejection of claims for non-disclosure is regarded as one of the components of consumer protection and market conduct.
Sherwin Jerrier v Outsurance Insurance Company Limited
A recent KwaZulu-Natal High Court case, Sherwin Jerrier v Outsurance Insurance Company Limited 2013 JDR 0562 (KZP), also considered the issue of insurance non-disclosure.
In this case, the insurer and defendant successfully rejected a claim based on the plaintiff/ insured's failure to inform it of two prior motor vehicle accidents during the insured period. The Court, per Koen J, held that in deciding whether or not to repudiate the contract, one must determine whether a reasonable person would take the unreported accidents as a change to the insured's circumstances that may influence:
- whether cover is granted (or continued);
- the conditions of such cover; or
- the premium charged.
In discussing the facts of the case, Koen J held (at para 30): "Both incidents would cause a reasonable man to conclude that knowledge of their occurrence would indicate a change to the Plaintiff’s circumstances, at the very least from a claims history perspective, but also as a moral risk, that may (not necessarily would) influence whether the Defendant would give the Plaintiff cover, the conditions of cover or the premium they would charge."
The Court dismissed the plaintiff's case with costs and ruled that the non-disclosure amounted to a material breach of the terms of the insurance policy; thus absolving the defendant from liability. In essence, the Court failed to take account of the Didcott principle and applied the current common law.
Industry reaction to the Jerrier case
National Treasury, the FSB and the South African Insurance Association (SAIA) reacted with concern to the Jerrier ruling, clearly considering it as a step in the wrong direction. The parties met in April 2013 to agree on measures to enhance disclosures to protect car owners.
In a media statement jointly issued, the participants noted that "motor car owners need not be concerned" with the Jerrier case as "the judgment will not have any implications on how the insurance industry will assess claims".
The parties also stated that insurance companies "undertook not to reject motor car claims on the grounds that customers do not report minor incidences (in other words incidents that are not material to the assessment of the insurance risk)". The statement also makes it clear that the SAIA members have "reaffirmed their commitment" to embracing the TCF initiative, and that the Treasury, FSB and SAIA will take positive steps to protecting insurance consumers.
With the Didcott principle being a persuasive but not binding statement of the law on disclosure, and the TCF programme merely being a guideline for improving market conduct practices, it is submitted that the Jerrier decision is uncontroversial.
It is not the place of the courts to change the common law based on policy. If National Treasury wants the law to be changed to provide for a stricter interpretation of materiality, then it must seek to amend existing legislation accordingly (i.e. the definition of materiality will have to be amended in the Short and Long Term Insurance Acts).
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