CR200 Non-disclosure –materiality – remedies
Non-disclosure –materiality – remedies – may an insurer rescind if it would have contracted in any event albeit on different terms?
The insured took out a life policy which also provided disability cover. Some five months after the conclusion of the contract the insured sustained brain injuries in a motor vehicle accident. This accident left him disabled and he lodged a claim for the disability benefits under the policy.
While considering the claim the insurer discovered that the insured did not correctly answer the question in the electronic application form relating to hypertension and hypercholesterolemia for which conditions he did receive treatment. These conditions were according to his treating doctor only slightly above normal levels.
The insurer rescinded the contract on the grounds of misrepresentation and rejected the claim. The insured objected and approached us for assistance.
In correspondence with us the insurer explained that had they known of the hypertension they would not have granted cover at standard rates. This gave the impression that if they had not been misled they would have been prepared to contract though on different terms.
In the light of their admission we suggested to the insurer to take account of the remarks made by Didcott J in Pillay v SA National Life Assurance Co Ltd 1991 1 SA 363 (D). Didcott J suggested that where an insurer had been misled but it would in any event have entered into the contract albeit on different terms, it was not entitled to rescind the contract but had to be satisfied with a lesser remedy. The purpose of such a remedy would be to make good the loss the insurer suffered as a result of the misrepresentation. The insurer could for instance deduct from the claim the additional premiums it would have charged had it known the true facts. Another possibility would be for the insurer to keep the premium as it was but to reduce the sum insured. Or to add to the contract an appropriate exclusion on which the parties would have agreed.
Whether, in the absence of misrepresentation, there would have been a different contract and, if so, on what terms, is a question of fact which must be decided on the probabilities.
We pointed out to the insurer that in our view there could be little doubt about the inherent fairness of the principle suggested by Didcott J. An insurer should after all not be entitled to be placed in a better position than the position in which it would have been in had it not been misled.
However, if the insured was guilty of fraud it would be understandable if an insurer preferred not to be locked into a contract with a fraudster with the result that rescission would not be barred.
The insurer reconsidered its position. It initially decided to cancel only the disability benefit but eventually it came forward with an offer of a settlement. In terms of this offer it made a substantial ex gratia payment in respect of the disability claim. As for the life cover, it reduced the sum insured and revised the premium. In the end all the parties were satisfied.
NOTE: See, too, Website at ombud.co.za
s.v. (i) Newsletter : Ombuz Number 1;
(ii) Papers and Presentations:
“Mis- or Non-disclosure: Reconstructing the Policy”