When Does Material Non-Disclosure Void an Insurance Contract?
- Posted by Roger Hendricks
- On 10/18/2015
- 0 Comments
While it may be human nature to be reluctant to give out too much information regarding details of personal lives, there are often times when the public is called upon to give such information freely as failure to do so may lead to significant complicatio
In April this year, National Treasury, the Financial Services Board (FSB) and the South African Insurance Association (SAIA), issued a joint statement in response to a recent High Court judgment which they feared would impact on how insurers will assess claims in future.
The concern stemmed from the Court’s adherence to “hard law” instead of new policy on how to treat non-disclosure of material information by an insured.
“Because it is essential for the insurer’s assessment of risk that an insured keeps the insurer up to date with all relevant information, our 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,” says Max Ebrahim, partner, Webber Wentzel.
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 our law was set out in Mutual and Federal v Oudtshoorn Municipality in 1985, where an involved party 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, John Didcott applied the law as stated above but noted that the harshness of outcome will not always be fair. Instead, Didcott 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 experiencing an overhaul of the local consumer protection framework, including the 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 when 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;
- consumers are provided with products that perform as firms have led them to expect, and the associated service is both of an acceptable standard and what they have been led to expect; and
- consumers do not face unreasonable post-sale barriers to changing product, switching provider, submitting a claim or making a complaint.
“The TCF is set against the backdrop of the 2011 policy document issued by National Treasury, titled A Safer Financial Sector to Serve South Africa Better. In accordance with 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,” Ebrahim said.
With a focus on separate prudential and market conduct regulation, National Treasury identifies four objectives to be achieved by the financial sector: financial stability, consumer protection and market conduct, expanding access through financial inclusion and combating financial crime.
Highlighting 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
A 2013 KwaZulu-Natal High Court case, Sherwin Jerrier v Outsurance, 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 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, the judge held that 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, FSB and SAIA reacted with concern to the Jerrier ruling, clearly considering it as a step in the wrong direction. The parties met in April 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 company had “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 would take positive steps to protecting insurance consumers.
With the Didcott principle being an obiter statement of our 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.
As we have seen, full disclosure should be encouraged as not only are there legal implications, there also be significant complications when it comes time to lodge and process a claim. Disclosure may play an important role in life insurance whereby clients may be reluctant to disclose pre-existing conditions which may result in their exclusion from the policy such as smoking or heavy drinking.
The determination of whether a misrepresentation is deemed to be material is therefore essential for the protection of both the insurer and the insured. But surely there is a way to determine this before seeking legal measures to solve a case. Does a degree of this responsibility lie at the door of the broker/adviser?
How do you ensure that all information is given when selling a client a product? Is it necessary to point out these legal implications to the client? Or the relationship of trust between the client and the broker strong enough to know that full disclosure is in their best interest?