Class of use causes implications

15 January 2019 Myra Knoesen
Naresh Tulsie, FAIS Ombudsman

Naresh Tulsie, FAIS Ombudsman

Definitions, specifically definitions in policy wording, are critical and insurers each have their own definitions of terms in their policies which they follow.

A misunderstanding of the policy terms can lead to serious consequences for the policyholder, insurer and intermediary, as is the case in this determination by the Financial Advisory and Intermediary Services (FAIS) Ombudsman.

The complainant’s version

The complainant, Mr Bongani Nxumalo, who is self-employed as a courier, purchased a 2011 Toyota Hilux 2.5d 4D P/U S/U on 23 July 2013. The vehicle was purchased with the intention of it being used as a courier vehicle and had been fitted with what is described as a ‘High Volume Canopy’, or ‘Courier Canopy’.

Nxumalo was assisted by the respondent, Central Financial Advisors trading as Coler Financial Services Providers, to source insurance for the vehicle, which was subsequently secured with Renasa Insurance after the completion of the application form on 23 July 2013.

On 30 July 2015 the vehicle was stolen, and Nxumalo subsequently submitted a claim which was rejected by Renasa, the reason being that at the time of the loss the vehicle had been insured on a personal lines policy. Furthermore, the use of the vehicle had been captured as business use, when the vehicle had been used for commercial purposes. Renasa referred Nxumalo to the relevant sections of the ‘Domestic Policy’ which specifically excluded this vehicle from cover.

Nxumalo was disappointed in the outcome of the claim, as he claims to have specifically disclosed to the respondent that the vehicle would be used as a courier vehicle. He claims he had been under the impression that the respondent had adequately provided for this vehicle after having insured it for business use. He also claims to have never been informed that he required a commercial insurance policy.

Nxumalo, as a result, approached the FAIS Ombud, claiming he had relied on the expertise of the respondent in recommending the appropriate policy. He wants the respondent to be held liable for the losses incurred following the rejection of the claim.

The respondent’s version

The respondent argues that when it had assessed the insurance need of Nxumalo, it had used the official application form (the respondent’s emphasis) provided by Renasa. The respondent then refers to the motor section of the application form and specifically the section that deals with the cover required. He states that there were only two options for class of use available for selection, being domestic use and business use, and that the respondent had selected business use, based on these limited options.

The respondent proceeded to make the following statement: “There is no official section (the respondent’s emphasis) to choose commercial use as an option.”

The FAIS Ombud emphasizes that the respondent failed to appreciate that the personal lines policy or domestic policy from the insurer was not appropriate to the complainant’s needs and circumstances and that an application in respect of a commercial lines policy ought to have been recommended to have adequately addressed the purposes for which the vehicle would be used.

The respondent is of the view that this matter is attributable to the negligence of Renasa in not insuring Nxumalo in accordance with the respondent’s instruction on the application form, which was that the vehicle be insured for business use. In support of this claim, the respondent refers to Renasa’s letter of rejection dated 23 September 2015.

From the rejection letter the respondent quotes the following: “We refer you to your ‘Motor Vehicles Section’ of your ‘Domestic Policy’. The respondent cites this as proof of Renasa’s negligence stating that the application form was completed to reflect that the class of use was business use and not for domestic purposes as claimed by Renasa.

In further references to the letter of rejection, the respondent cites the following passage: “Where the category of use is shown in the schedule as business or professional, the vehicle is only insured while being used for business purposes.” The respondent believes that in this and subsequent referrals to other exclusions, Renasa does not include a referral to the alleged actions, that being a courier service, and only refers to commercial travelling, which the respondent believes is not only vague and specific but not applicable to the insured risk.      

The respondent believes that the repudiation of the claim by the insurer must be challenged. The respondent is of the view that the insurer should not be allowed to use technical definitions to justify the rejection of claims to manage and protect the company’s claims book.

The respondent also refers to the section of the application form which deals with security and claims that the complainant in having answered ‘No’ to a question “Is there any form of business conducted on or from your premises” – clearly did not disclose the correct information regarding whether he operates a business.

FAIS Ombud’s stance

According to the FAIS Ombud the respondent’s references to commercial usage not having been an option provided by the insurer on its ‘Domestic’ insurance policy application form, and its continued stance in this regard, casts doubt on the respondent’s competency to advise and or provide an intermediary service with regards to short term insurance products.

The evidence, according to the Ombud, confirms that the respondent had no understanding or appreciation of the insurer’s product offerings and which option was appropriate to the complainants needs and circumstances. The respondent, the Ombud says, as a result failed to conduct the financial service in accordance with the required due skill, care and diligence, as provided for in section 2 of the Code.

According to the Ombud, Renasa confirmed that in the event that there was a valid policy that would have indemnified the complainant for the loss incurred and the claim lodged as a result, that an amount of R144 500 would have been payable in settlement of such claim. This amount was derived by considering the retail value of the vehicle at the time of the accident, which was R152 200, and deducting the applicable excess of R7 610 (5% minimum R2 500).

The Ombud says for the conduct of the respondent, in failing to secure insurance cover which suitably met the complainant’s financial needs, the complainant would have been indemnified in terms of a valid policy of insurance providing cover for such eventuality. The respondent is therefore ordered to pay the complainant the amount of R144 590.

Editor’s Thoughts:
It is important that clients understand their policy wordings. So that they are made aware of all exclusions in a policy in order to understand what they are covered for and what will stand on grounds for a rejection of a claim. Maybe Nxumalo misunderstood the contents of the agreement or had an incorrect impression and maybe, as mentioned above, the respondent did not have a clear understanding of the insurer’s product offerings or perhaps the insurer’s application form was where the confusion all started… who do you believe is to blame? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts


Added by Registered User, 17 Jan 2019
It is clear from the determination that the intermediary does not appreciate the difference between commercial lines and personal lines- other a domestic proposal form would not have been provided to the customer.

If a customer and you receive confirmation that you are covered for business use and you are in person, nothing will suggest that the customer should prompt the intermediary to check if this is cover for commercial purposes of domestic purposes. The intermediary really did not apply their mind.
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Added by brian oxley, 15 Jan 2019
The client appears to be new to the business world, one of our much desired smme's to expect the client to understand the difference between business and commercial is optimistic. The Broker is at fault but the wording of the proposal made the mistake easy. \It is time that insurers got their wordings much clearer...and insisted that intermediaries are properly qualified
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