Good citizen warranty in insurance contract slammed by FAIS Ombud

In a move likely to see many more cases being brought under scrutiny where insurers hide behind fine print, the FAIS Ombud has once again stood up for consumer rights by upholding a complaint against a large insurance company and the broker who sold its product.

The policy contained a clause that was clearly unenforceable in the circumstances.

Charles Pillai (pictured), the Ombud for Financial Services Providers, determined a complaint brought by Melishree Maduray of Phoenix, Durban, against First Respondent, Action Plan Management, and Second Respondent, Renasa Insurance Company Limited.

The Complainant had insured her 2003 Audi A3 1.8T for R146400 through First Respondent who was her broker.

The short-term insurance product, Skysure, was underwritten by the Second Respondent who outsourced the administration of the product to Unify. Cover commenced from 1st June 2006.

The policy contained a so-called “Good Citizen Warranty” under which a claim for any loss, damage or liability would be repudiated if the vehicle was 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.

The Complainant initially complained to the Ombud for Short Term Insurance (OSTI) after she was informed by her broker, one Riaan Swanepoel, on 6 October 2006 about the repudiation of her claim by the Second Respondent.

She denied a claim made to the OSTI by the broker that she had been made aware of the terms and conditions of the policy relating to the Good Citizen Warranty.

The OSTI then investigated the complaint. Despite the Second Respondent holding the view that Complainant was grossly negligent in driving at a high speed, the OSTI responded in a letter to Second Respondent that “driving at an inappropriate or excessive speed would not by itself constitute a failure to take due care and precaution on the part of the insured....that this would not constitute gross negligence by itself”.

“At best on the facts of the current complaint, it is our view that the conduct of the insured would indicate negligence. However, the purpose of the insurance contract is to provide cover for such negligent conduct.”

However, in what would appear to be a change in stance, the OSTI then informed the complainant in a letter dated 2 March 2007 that he was of the view “that the decision of the insurer to reject the claim, cannot be faulted”.

After having exonerated the insurer from blame, the OSTI advised the Complainant to approach the FAIS Ombud as there was a potential complaint against the broker.

Commenting in the determination on the change of stance, Pillai said: “It is, therefore, unfortunate that the OSTI changed his stance and expressed the view that – ‘...the decision of the insurer to reject the claim, cannot be faulted’.” [See sidebar story]

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.

“I must stress that the Second Respondent was not merely a product provider. It went beyond that on its own accord.

“It decided that it would render financial services in that it would advise a potential client, explain the product to him or her in order to enable her to make an informed choice.

“To this extent it conducted itself in the capacity of an intermediary and did not merely provide the financial product which some other intermediary sold to a client.

“To the extent that it committed itself to render services as an intermediary, the Second Respondent falls squarely within the ambit of the FAIS Act.”

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 holding both respondents liable, Pillai said First Respondent, as complainant’s broker, had a duty to draw her attention to material terms of the policy of insurance. However, he had failed to do so. He said the Second Respondent undertook to deal with the Complainant directly but had failed to do so.

Neither of the Respondents made Complainant aware of the warranty and she was consequently not only unaware thereof but also denied the opportunity to make an informed choice.

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.

Click here to download the full determination (PDF file 162kb)