Issue Number 1
September 2006
OMBUZZ
ABOUT THIS ISSUE
A preliminary word
This electronic newsletter is, for us, a brand-new venture. There are precedents. The UK Ombudsman issues a regular newsletter of great value to the industry in the UK and elsewhere. The Ombudsman for Short-term Insurance has been distributing an electronic newsletter, appropriately named “Briefcase”, since 2003.
In following suit we aim to report on one or two selected cases in every newsletter which we hope will be of interest to, on the one hand, the media and, through the media to consumers with similar complaints; and, on the other hand, to insurers and in particular the complaints handling units of our subscribing members.
In this issue
We deal with a complaint on non-disclosure in this edition. Although we do not receive a large number of complaints about repudiations by insurers due to non-disclosures we think it is important to highlight the principles which apply when we evaluate a complaint of this nature.
NON-DISCLOSURE
Non-disclosure of material information by a proposer for life insurance may entitle an insurer to disallow a subsequent claim and to cancel the cover in certain circumstances.
The following complaint outlines our approach where there is an innocent/ negligent non-disclosure but where a disclosure of the actual information would have led to the insurer offering a policy but on different terms.
For more information on repudiation for non-disclosure please visit our website: www.ombud.co.za
Facts of the complaint
1. A life assured obtained a whole life policy. What he did not disclose at the time of his application for insurance was that he had previously consulted a psychiatrist on three separate occasions for major depression. He subsequently died in a motor vehicle accident in circumstances which had nothing to do with his depression. The insurer declined the claim and rescinded the contract and the premiums were forfeited.
The insurer acknowledged that had it been informed about the depression at the time of application, it would have offered cover but at non-standard rates.
Discussion
2. Insurers need as much information as possible to assess the risk they are asked to assume. Hence applicants are usually required to answer a series of questions on the circumstances of the risk. These questions must naturally be correctly answered. Moreover, since the facts affecting risk are more often than not within the peculiar knowledge of the proposer for insurance, the law imposes a special duty on them to disclose material facts known to them.
3. A proposed contract of insurance may conceivably be adversely affected by an applicant’s mis- or non-disclosure in two ways.
(a) In serious cases the effect of the misrepresentation might be that the insurer would not have entered into the contract at all had it known the true facts.
(b) In other cases of misrepresentation, as in the case described above, the insurer may still have entered into the contract but on terms different to those on which the parties in fact agreed upon. This is termed incidental misrepresentation.
4. The law makes provision for certain remedies for an insurer which had been misled by a false representation of a material fact in circumstances described in section 59(1)(b) of the Long-term Insurance Act 52 of 1998 (as amended). The remedy for material misrepresentation in this context is rescission. This remedy is available to the insurer not only when the insured committed fraud, but also where the misrepresentation was negligent or even innocently made.
5. The question arises whether an insurer should be entitled to rescind a contract even though, as a matter of probability, it would still have entered into an agreement with the insured albeit on terms less favourable to the insured where the mis- or non-disclosure was not fraudulent.
6. This question, which is not peculiar to insurance contracts but can arise with other types of contract such as a sale, has as yet not been squarely faced in our case law. The main argument raised against permitting rescission in cases of this kind of non-disclosure is that rescission would put the insurer in a better position compared to the position in which it would have been had it not been misled. In such an event the insurer would still have been liable in terms of the contract, notwithstanding the misrepresentation. Such a result would be contrary to the avowed purpose of the remedies for misrepresentation, namely to put the innocent party in the same but not a better position than the position in which he would otherwise have been. The insurer should after all not derive a benefit from the insured’s misrepresentation.
7. A counter argument is that somebody in the position of an insurer who had been misled by the other party may not be keen to remain locked in an ongoing contractual relationship, even on better terms. This argument is perhaps more appropriate in cases of fraud than in other instances.
8. The question of how one should address the consequences of incidental misrepresentation inducing a contract of long-term insurance, was touched upon in the case Pillay v South African Life Assurance Co Ltd, 1991 1 SA 363 370. The insured committed a breach of warranty by not supplying correct answers to certain questions in the proposal form. From the evidence it appeared that had the insurer not been misled, it would still have accepted the risk but at a higher premium. Didcott J opined that in these circumstances the cancellation of the whole contract would be unjust. According to him the insurer should be restricted to recovering the additional premiums it would have charged had it not been misled.
9. The court in Pillay had dealt with a breach of warranty. Provided a warranty pertains to a material fact, an insurer is entitled (subject to Section 59 (1) (b) of the Long-term Insurance Act) to cancel the contract in the event of a breach of warranty — an insurance warranty is really a very unforgiving term of the contract. As the law then stood, the Court therefore had no option but to uphold the insurer’s reliance on the breach of warranty but it nevertheless recommended that the law should be reformed to make it impossible for an insurer to cancel the contract on the grounds of an incidental misrepresentation whether warranted or not.
10. One objection usually voiced to what may be termed the Didcott principle is that it cannot be postulated that a contract would have ensued on the alleged different terms. This, however, is a matter for evidence and the probabilities. The difficulty of proving whether a contract would have ensued in the absence of the misrepresentation is therefore not insurmountable. Thus if the premium the insurer would have charged had it been correctly informed would have been market related and not excessive, it can be fairly assumed that a contract would have resulted on those terms. The insured after all experienced a need for cover and he selected the particular insurer to provide this cover.
11. The view that an insurer may rescind a contract in the case of incidental misrepresentation is not universally favoured.
E.g. The Australian situation (in cases other than fraud) is that the insurer is not given the right to avoid the contract if it is established that the non-disclosure would not have prevented the conclusion of the contract albeit on different terms. In those circumstances, depending on the nature of the contract, the insured’s claim or benefit is proportionately reduced.
12. Several of the major insurers in South Africa of their own accord adopt an approach in accordance with the Didcott principle. Thus in a recent complaint the insured failed to disclose that he suffered from a venereal disease. The insured died when he was attacked. The insurer eventually offered to pay the death claim but it deducted from the proceeds an amount to allow for a 100% loading of the premium. This represented the premium it would have charged had the insured disclosed his disease at the time of the contract. This in our view was a fair solution to the problem.
Our approach
13. A conclusion that rescission of a contract of insurance on the grounds of innocent or negligent misrepresentation (whether by way of mis- or non-disclosure) is only available if the insurer would not have entered into the contract at all, would, we believe, be fair to both parties. Such an approach would be fully justifiable in the exercise of the equity jurisdiction conferred on us in terms of our Rules. If the insurer would have entered into the contract but on different terms, an appropriate remedy must be made available to address the detrimental consequences of the misrepresentation. Such a remedy may take various forms, for instance to treat the matter as if an exclusion clause had been inserted in the contract, with a pro rata adjustment of the benefits or a corresponding increase in the premium or some other appropriate measure to balance the position.
14. We have been able in the past to persuade insurers to settle claims in accordance with the above approach and we shall continue to endeavour to do so in the future – but the time may come where a ruling will have to be made if persuasion fails.
Resolution of above complaint
15. In the complaint in question we assumed that the premium which would have been charged had the insurer been correctly informed would have been market related and not excessive. On the probabilities the insured would, therefore, in our view have accepted the terms. We asked the insurer to recalculate the life cover by taking into account the premium loading. We explained our approach to the insurer and suggested to the insurer that the recalculated lump sum amount should be paid to the two beneficiaries under the policy, and the insurer accepted our suggestion.
Disclaimer:
Ombuzz is published for general guidance only. The information it contains reflects our policy position at the time of publication. This information is neither legal advice nor a definitive binding statement on any aspect of our approach and procedure. The case studies are based on actual complaints we have dealt with.
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