To Disclose or Not to Disclose? That is the Question
- Posted by Roger Hendricks
- On 07/07/2015
- 0 Comments
Non-disclosure is a significant problem in the industry. A fine line often exists where the client is not exactly sure what constitutes disclosure and non-disclosure. Where do we stand?
Often the answer is that each case is unique. However, as much as the line can be very fine it can also be clear cut where the client is in no doubt as to what their position is. FAnews received the following interesting article from Byron O’Connor, Director: Dispute Resolution, and Verushca Pillay, Director: Corporate and Commercial, at Cliffe Dekker Hofmeyr which discusses this issue.
A contract of good faith
An insurance contract is one of utmost good faith and in order to accurately assess the risk; the insurer relies, almost exclusively, on information provided by the insured. There is therefore a duty on the insured to disclose all material information relevant to the risk that is to be underwritten.
In the matter of Regent Insurance (the insurer) v King’s Property Development (the insured), the insured, had one of its buildings damaged by fire and claimed the costs of the repairs and lost rental from its insurer.
The insurer rejected the claim alleging that the insured failed to disclose material information when it applied for the insurance policy. This non-disclosure was the insured’s failure to advise the insurer that the insured premises was occupied by a tenant (Elite Fibre Gauteng) which manufactured truck and trailer bodies using highly flammable materials; a risk that the insured would not have taken on had it known the nature of Elite’s business.
Treading the line
There were many requests for quotations for cover of the premises as well as various revisions to the policy between the insured’s insurance brokers and the insurer. Throughout these communications, however, the insured did not disclose to the insurer that a tenant was occupying the premises and using highly flammable materials to manufacture its products.
Section 53(1) of the Short-Term Insurance Act, No 53 of 1998 (Act) states that a policy will not be invalidated on account of a failure to disclose information unless that non-disclosure is likely to have materially affected the assessment of risk under the policy.
The Supreme Court of Appeal (SCA) stated that since the introduction of section 53 of the Act, the test in respect of misrepresentations and non-disclosure is an objective one, involving a two-pronged enquiry:
– the insurer must first prove materiality of the non-disclosure; and
– then prove that the non-disclosure induced it to conclude the contract.
The SCA further noted that the question to be asked is whether a reasonable person would have considered the fact not disclosed to be relevant to the assessment of risk by the insurer.
In this matter, the SCA found that while the insurance broker for the insured could have ascertained information about the premises from available records, what he would not have discovered was that the premises was being rented out by an entity manufacturing products using highly flammable materials.
The SCA found that had the insurer known that the premises was used to manufacture products made from highly flammable materials, it would have refused the cover.
The SCA found that Elite’s occupation of the premises, which the insured failed to disclose, made a material difference to the assessment of risk. The SCA therefore found that the insurer was induced to enter into the contract by the non-disclosure of Elite’s business.
It is clear that one of the prerequisites for proper assessment of risk by the insurer is for the insured to make a full disclosure of all information material to the insurer’s assessment of risk. Failure to do so entitles the insurer to repudiate a claim if that failure materially affects the insurer’s assessment of risk.