Refund of premiums – cancellation of contract by insurer on the grounds of non-disclosure.
The insured took out a life policy but failed to disclose certain material information. The insurer cancelled the contract and invoked a clause providing that the insured forfeited all premiums if the contract is cancelled on the grounds of non-disclosure. The insured paid R4950 towards premiums.
We pointed out to the insurer that where a contract is cancelled on the grounds of misrepresentation, each party must restore what he or she has received under the contract because the cancellation has retro-active effect. This implies that an insurer cancelling a policy must in principle restore the premiums received by it. However, the misled insurer may recover compensation for any loss it has suffered as a result of the misrepresentation provided the misrepresentation was either fraudulent or negligent.
In the present case there was a clause in the contract that the premiums would be forfeited in the event of cancellation. This type of provision is frequently found in policies of all kinds and seriously affects the rights of insured especially where premiums have been paid for a considerable number of years in terms of a contract of life insurance. We regard and treat forfeiture clauses of this nature as penal clauses. In terms of the Penalties Act 15 of 1962 a penalty is enforceable but it may be revised if the amount of the penalty is out of proportion to the prejudice suffered. In accordance with the Act the term prejudice bears a wide meaning.
We enquired from the insurer what loss it had suffered in the present circumstances. This does not mean that we saddle the insurer with a full onus of proof requiring it to substantiate a claim for damages—we accept that a penal clause is prima facie enforceable. The insurer explained that a certain part of the premium was allocated to life cover. We did not regard this as part of the insurer’s prejudice since the insured in actual fact enjoyed no life cover. The insurer furthermore mentioned an amount expended on administrative matters (R348) as well as commission paid out (R711). This amounted to R1059. Compared to the amount of premiums paid out, we advised that the amount to be forfeited appeared to be out of proportion to the actual prejudice. The insurer agreed to repay R3890.