FAIS Ombud refuses appeal in good citizen warranty case and reaffirms equitable justice
On the basis of the FAIS Ombud’s statutorily-decreed humanistic approach to complaints resolution which takes into account fairness and equitability, as opposed to evidential and procedural rules of a Court of Law, the Ombud has refused a large insurance company and the broker leave to appeal his determination.
The Ombud said that under a constitution with a Bill of Rights, much emphasis is placed on concepts of fairness and equity. The Ombud was obliged to take into account constitutional imperatives, “the Constitution being the supreme law of the land”.
In October 2008, Charles Pillai (pictured), the Ombud for Financial Services, upheld a complaint against Renasa Insurance Company Limited and the broker, Action Plan Management, who sold the financial product containing a clause that was clearly unenforceable.
The Complainant Melishree Maduray of Phoenix, Durban, had insured her 2003 Audi A3 1.8T for R146400 through her broker, the First Respondent. The short term insurance product, Skysure, was underwritten by the Renasa Insurance Company Limited, the Second Respondent. Cover commenced from 1st June 2006.
The policy contains a so-called “Good Citizen Warranty” under which a claim for any loss, damage or liability will be repudiated if the vehicle is used other than in accordance with the laws, regulations, road and traffic ordinances and bylaws of South Africa.
On the morning of 31 July 2006, Complainant’s car overturned when she swerved to avoid an animal crossing the road. The vehicle was damaged beyond economical repair and she duly submitted a claim.
The claim was repudiated because, according to the insurer, she had contravened the Good Citizen Warranty by driving above the speed limit. The tracking device installed in the vehicle apparently recorded the speed of the vehicle as 161 kph. The Complainant stated in the claim form that she was travelling between 110 and 120 kph.
Complainant said she was unaware of the Good Citizen Warranty as she had neither been told about it by the broker nor had she received a copy of the Schedule of Cover or policy containing the terms and conditions of the warranty. Thus she sought monetary compensation for her vehicle.
In investigating whether it was true that the First Respondent had informed the complainant of the Good Citizen Warranty clause, the FAIS Ombud attempted to get a copy of the supposed voice log of a conversation between First Respondent and a representative of Second Respondent, in which the former said he had informed the Complainant of the Good Citizen Warranty and also sent an email to Complainant confirming this.
However, the First Respondent could not produce the e-mail. Also it was ascertained there was no voice-logging in operation at First Respondent at the relevant time. First Respondent’s legal representative said that a recording was made but due to computer problems the backup could not be accessed.
The FAIS Ombud requested First Respondent to provide copies of the record of advice, as was required in terms of the FAIS Code of Conduct, but it could not do so.
Pillai also found that the broker was under a duty to inform the insured of any material and unusual clauses in the policy of insurance, more particularly in this case about the Good Citizen Warranty.
He said the probabilities in the case favoured the Complainant’s claim that First Respondent did not inform her of the warranty.
The insurer had taken it upon itself to inform a prospective insured of the warranty. It failed to do so.
Section 47 of the Short Term Insurance Act 53 of 1998 obliged a short-term insurer to provide the insured with a copy of the policy within 30 days after entering into the policy. There was no proof that Second Respondent had done so.
Pillai said he was of the view that the insurer was also at fault and, therefore, he felt compelled to determine the matter not only as far as the First Respondent was concerned, but also the Second Respondent for the reason that the insurer undertook to render financial services to the complainant but failed to do so.
Pillai ordered both respondents to pay Complainant R109345 compensation for damage to her vehicle plus interest at 15.5 per cent per annum from 1 August 2006.
Referring to the Good Citizen Warranty, Pillai said a careful reading of the wording of the warranty showed it was virtually impossible for an insured to at all times comply with all of its provisions, which were onerous in the extreme.
“I dare say that it would be virtually impossible to find a driver who has not at some or other time inadvertently, if not deliberately, contravened one or other road traffic law or regulation.
“Given the wording of the warranty, an insured may be forgiven for thinking she may just as well park the car in her garage and not drive it at all for fear that she may unintentionally or for an otherwise valid reason unavoidably breach the warranty and find that she is not covered.
“This, to my mind, clearly negates the very purpose for which insurance cover is taken: to cover, inter alia, one’s own negligence causing loss.”
Pillai said the Good Citizen Warranty was not acceptable in a new constitutional dispensation with its emphasis on human dignity, equality and freedom as it contained “unconscionable, oppressive or unreasonable clauses”.
In separate applications for leave to appeal the Ombud’s decision, the Respondents indicated they reserved the right to challenge, if they were advised or elected to, the constitutionality of the processes envisaged in the FAIS Act, alternatively the Financial Services Board Act, in regard to the determination of complaints and appeals pursuant thereto.
The First Respondent alleged that a “stark factual dispute” existed between the Complainant and First Respondent as to whether Complainant was made aware of the so-called Good Citizen Warranty. It alleged that the Ombud erred in resolving that dispute on the papers alone based on probabilities when “even Courts of Law are not prepared to do so”.
It further alleged that the Ombud failed to utilise his investigative powers to resolve this “stark factual dispute’.
The First Respondent argued that the Ombud should have declined to entertain the complaint and should have referred the matter to a court which, in First Respondent’s view, was a more appropriate forum to deal with the complaint.
First Respondent also alleged that the Ombud misdirected himself by analysing the probabilities and simply relied on the fact that by not keeping records, as required by the FAIS Act, the probabilities favoured the complainant that First Respondent had not advised her of the Good Citizen Warranty;
First Respondent also relied on the fact that the Ombud had misdirected himself by relying on an apparent contradiction between what First Respondent and First Respondent’s attorneys had said relating to the keeping of the record.
First Respondent challenged the Ombud for merely concluding on the basis of the papers presented that the probabilities favoured the Complainant. Therefore, in the view of the First Respondent the determination was wrong and “could not and should not have been made”.
The First Respondent also challenged the quantum awarded to the Complainant. First Respondent maintained that the Ombud elected to utilise information which he obtained (from the insurer) without communicating same to First Respondent and, therefore, the Ombud failed to observe the “rules of natural justice’.
The First Respondent further pointed out that even if the Ombud had found that First Respondent had failed to inform the Complainant of the Good Citizen Warranty, that finding could not “without further ado” result in liability as the Ombud had determined.
The Second Respondent challenged the fact that the Ombud had assumed jurisdiction over it as it had not “conducted itself in the capacity of an intermediary or that it rendered financial service as envisaged in by the FAIS Act”.
The Ombud had assumed jurisdiction despite a ruling given by the Ombudsman for Short-Term Insurance to the effect that the insurer (Second Respondent) could not be faulted in its decision.
It also challenged certain procedural issues at not having been informed of the complaint and went further to allege that the Ombud failed to “clarify his role and the capacity in which he would be making the determination and thus misleading the applicant” that he would not be determining the matter against the insurer;
Second Respondent then challenged various substantive aspects of the Ombud’s determination. In particular:
a. That the Complainant was not aware of the Good Citizen Warranty;
b. In concluding, in the absence of any evidence, that the insurer had assumed responsibility to advise Complainant of the Good Citizen Warranty;
c. In concluding that the Good Citizen Warranty was “repugnant on the basis of equity”;
d. In concluding that the alleged failure to inform complainant of the Good Citizen Warranty is what caused her loss; and
5. The complaint that was before the Ombud was a complaint against the First Respondent only and, therefore, should not have been determined as a complaint against the Second Respondent who was merely the “product supplier and did not act as an intermediary nor rendered a financial service as contemplated by the FAIS Act”; and
6. The Ombud had “no jurisdiction to inquire into the validity or otherwise of the good citizen warranty”.
In refusing the Respondents leave to appeal his ruling, the Ombud said the Respondents confused the evidential and procedural rules of courts of law with that of a complaints resolution mechanism such as that of the Ombud.
He said Section 20(3) of the FAIS Act provides for the Ombud to consider and dispose of complaints in a “procedurally fair, informal, economical and expeditious manner and by reference to what is equitable in all the circumstances”.
In making an award, the Ombud is to determine “…fair compensation for any financial prejudice or damage suffered”.
“The first thing to be noted is that the Ombud deals with complaints within a particular regulatory setting and not legal causes of action as would be required in a court of law.
“Complaints are made more often than not by lay persons who cannot be expected to, nor required by the FAIS Act, to formulate complaints with the precision and particularity required in pleadings.
“The resolution of a dispute is to be done by reference to what is equitable in all the circumstances.
“In the application of the law, courts generally were not, before the advent of the new constitutional dispensation, concerned with whether a judgment resulted in unfairness or was not equitable.
“Under a constitution with a Bill of Rights, much emphasis is placed on concepts of fairness and equity,” the FAIS Ombud said.
“It is, therefore, evident that the Ombud is also enjoined to take into account constitutional imperatives; the Constitution being the supreme law of the land.”
In his ruling refusing leave to appeal, the Ombud said the First Respondent, “in dissecting the Determination, as it does throughout the application, approaches it on the basis that the Ombud should have followed strict procedural rules of Courts”.
“That argument is misguided and is to be rejected. The procedural rules of the Ombud’s Office emphasises informal adjudication that is both equitable and procedurally fair.
“The Ombud is strongly of the view that the procedure adopted in this matter cannot be said to have been unfair to any of the parties.”
“The Ombud did not determine the probabilities merely on the failure of the First Respondent to keep records in accordance with the Code as will be apparent from a proper reading of the determination as a whole.
“The Ombud, therefore, rejects the contention that there were mis-directions. The Ombud was justified in making the finding on probabilities with regard to the factual dispute.
“The applicant was negligent in the rendering of the financial service to the complainant and as a result she suffered damages,” the Ombud said, adding the policy sold to the Complainant contained onerous clauses which were virtually impossible to comply with and effectively excluded cover for any negligence of the insured as well.
The Ombud rejected the First respondent’s contention that the question of liability of the respondents should be approached on an “either/or” basis.
“Both respondents were negligent, hence the joint and several liability.”
The Ombud said the quantum was decided on the basis of what in his opinion was fair or equitable. The determination of the quantum was based on information supplied by the insurer, who was in a position to know what the value of the vehicle was.
The Ombud repeated that the broker had a duty to inform the complainant of the onerous clause quite apart from and independently of the fact that the insurer undertook to do so.
“For the reasons stated, the Ombud is of the view that there are no reasonable prospects that the Appeal Board would come to a different conclusion. The application for leave to appeal is accordingly refused.”
The Ombud rejected the Second Respondent’s assertion that it was not an intermediary nor rendered a financial service.
“Insofar as applicant dealt directly with clients and advised them about the product it rendered financial services as defined in the FAIS Act notwithstanding that it was also the product supplier.
“It, therefore, does not avail the applicant to suggest that because it is a product provider, it did not render a financial service. It took upon itself the roles of both product and financial services provider,” the Ombud said.
The FAIS Ombud said the Ombudsman for Short Term Insurance dealt with the complaint within his terms of reference. The FAIS Ombud dealt with it in terms of his mandate under the FAIS Act.
“The FAIS Ombud, in his capacity as the Statutory Ombud under the FSOS Act, informed the Second Respondent that he was investigating the complaint against it as well and invited the Second Respondent to make any submissions it may wish to.
The Second Respondent replied that it had no further submissions to make apart from those it had already made to the OSTI.”
During the preliminary investigation of the complaint the Ombud was of the view that the applicant may well fall under the jurisdiction of the Ombud under the FSOS Act, hence the initial letter to the applicant in terms of that Act.
Subsequently, the Ombud, on the strength of the facts at his disposal at a later stage, concluded that he could exercise jurisdiction over the applicant under the FAIS Act. He deemed it not necessary to inform the applicant of this fact because:
- Any investigation and determination of the complaint under FSOS had to be done mutatis mutandis in terms of the FAIS Act; and
- The applicant had already categorically stated that it had no further submissions to make other than those it had already made to the OSTI.
Therefore, no purpose would have been served in communicating with the Second Respondent any further as regards the investigation of the complaint as the end result would have been the same.
The Ombud said he took umbrage at the Second Respondent’s use of the words “under the guise of” and “thus misleading the applicant” in the application for leave to appeal.
“If it is insinuated that the Ombud acted in a dishonest manner or with ulterior motives, such suggestion is rejected as being contemptuous.”
The Ombud said he was of the view that there is no reasonable prospect that the Appeal Board may reach a different conclusion and the Second Respondent’s application for leave to appeal was also accordingly refused.
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