Are we throwing the law and common sense out of the window?

As a broker, you try your best to cater for all of your clients’ needs. However, in an increasingly litigious age, we cannot be complacent when catering for these needs. Brokers need to be on top of their game in every aspect of every function they do, even if they are tempted to become complacent.

The Financial Advisory and Intermediary Services Ombudsman (FAIS Ombud) published the determination of Hughes versus Slippens and Gen-Assist Insurance Brokers. The ruling did not favour the broker, and Professor Robert Vivian, Professor of Finance & Insurance at the University of the Witwatersrand, believes that the Ombud could have handled the case very differently. He gave his thoughts to the FAnews, which are presented below.

Hughes household contents and vehicle were insured with Zurich. The sum insured for the household contents was just under R1 million. Hughes was enticed to change his cover to Discovery Insure. He wanted the exact same cover, terms and benefits he had from Zurich. Hughes contacted his brokerage Gen-Assist to arrange the change.

Gen-Assist sent the Zurich policy, the policy schedule and claims history to Discovery Insure asking for a quote. The schedule indicated the sum insured to be just under R1 million. Discovery Insure admits it received the schedule indicating the correct information but an administrator erroneously entered R100 000 into its system instead of R1 000 000. The quote, via the broker, was forwarded on 11 April 2013 to Hughes who accepted the quote by initialing each page.

Hughes subsequently experienced an armed robbery a few weeks after signing the quote at his residence and suffered a loss of R141 421. He submitted a claim to Discovery Insure who treated the sum insured as R100 000 and declared average. The claim was adjusted down to R16 560.

The Ombud obtained a response from Discovery Insure who put the blame on the brokerage saying it should have checked and verified the correctness of the details. A resolution of the dispute could not be reached so the Ombud issued a determination holding the brokerage liable for the difference; an amount of R124 960.

Building relationships through offer and acceptance

The legal relationship between the insurer and insured is one of contract. A contract comes into being via the process of an offer and acceptance. When an insured submits a proposal to an insurer, it is for the insurer to accept or reject that proposal. Having done so, the insurer submits a quote of the premium for acceptance by the insured.

So in this case, the insured placed a proposal before the insurer to be insured for an amount of R1 million. The insurer admits that this was what it received, considered, and this is what was accepted. There is no indication that this offer was rejected.

The insurer argues an administrative error occurred, and that the wrong sum insured figure was captured in its system. However, there was an offer and acceptance on both sides. In contract law the insurer is bound to the limit of R1 million.

A similar matter occurred in the Kahn versus African Life Assurance Company case in 1932. In this case the insured issued a proposal asking for an endowment of £203 payable when a child turned 21. The insurer made a mistake and inserted an endowment figure of £590. Careful note must be taken that in the Kahn case the insurer did not argue that the insured be bound by the erroneous figure of £590 but argued it was bound by the correct figure of £203 as stated in the original proposal form.

The matter went to court where the court, rightfully so, applied the law of contract. The proposal put before the insurer was for £203. The offer to be insured comes from the insured and is accepted by the insurer. The insurer can accept or reject that offer. Since it accepted the offer the correct figure was £203. The legal solution to the problem in the Kahn case was for the insurer to approach the court for rectification (the contract to be rectified to reflect the correct position). Thus, the application of the law of contract between the insured and the insurer indicates that Discovery Insure would be obliged to indemnify the insured up to the R1 million as originally agreed, excluding the error.

Broker-client relationship

The Ombud decided that the broker and employee were jointly and severally liable to the insured. In law it is difficult to understand how this can be. In law, the broker accepts a mandate to place the risk with a competent insurer obtaining competitive terms.

In this case the insured selected the insurer and asked to have the same cover from the new insurer. The broker went ahead and replaced the Zurich policy with the Discovery Insure policy as per the mandate set out by the insured. Once this was done, the broker had executed its mandate. The insured’s proposal was placed before the chosen insurer thereby discharging the broker’s mandate.

It is difficult to see how the broker can be liable in this matter. The insured and Discovery Insure seemed to argue that the broker failed to check the returned policy to ensure the details were correct. It seems to us that the approach adopted in the BoE Bank Ltd versus Ries case in 2002 was correct. In this case, a disappointed beneficiary argued that she would have received the policy benefits if the broker had harassed her husband into signing the change of beneficiary form.

So in this Hughes matter, the question posed is if the broker agreed to check the details of the documentation from the insurer? No evidence was produced to support the contention. Therefore, it is difficult for us to see how the broker, Gen-Assist, can be liable to Hughes.

The hammer and the nail

Approaching the matter from the point of view of the law, it would seem that Discovery Insure is contractually bound to indemnify the insured. How then did the Ombud come to a different conclusion? There is a saying that if the only tool one has is a hammer then every problem looks like a nail. Legal disputes should be dealt with by ordinary courts of law presided over by ordinary judges applying the laws of general application. The tools available to ordinary judges are wide ranging. The Ombud specialises in intermediary claims. Since this is the hammer at the disposal of the Ombud every problem will look like an intermediary problem. So this inadvertently means the intermediary is the problem.

Challenging the Code of Conduct

As indicated above this matter involves the law of contract and the law of delict. The general principles from these two disciplines are applied to the problem looking at previous precedents. The Ombud referred to none of these. The only reference was to the General Code of Conduct. This is another hammer and so every problem looks like a violation of the Code of Conduct. Of course one will always be able to argue everything is a violation of a General Code of Conduct.

As a general rule, everybody should drive carefully. So after every accident it can be argued that someone failed to drive carefully. A general code of conduct cannot be applied to every problem. It will always result in the intermediary being liable. If the Hughes matter was before the ordinary courts then all the parties would be before the courts i.e. the insured, the insurer, the broker and the judge would apply the whole range of the law. We anticipate that a very different result would then be reached.

Editor’s Thoughts:
Brokers cannot afford to bypass any steps in their provision of advice to clients, even if Professor Vivian feels that the Ombud erred. You need to go through every detail with a fine tooth comb. The Ombud is leaning hard on brokers who they feel do not comply with the FAIS Code of Conduct, and a small error in advice can lead to significant financial ramifications. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

5 December 2014

In response to the article above, Discovery Insurer's Anton Ossip has commented as follows:-

FAIS Ruling in the case of Hughes vs Gen-Assist Insurance Brokers 

There has been a lot of discussion regarding the recent ruling by the FAIS Ombud in the case of Hughes and Gen-Assist regarding underinsurance following an armed robbery. We wish to provide clarity on this case. 

Throughout its history, Discovery has successfully engaged with and supported brokers and financial advisers, who play a fundamental role across our business. Discovery Insure is committed to providing support and assistance to brokers within the ambit of regulations. 

Gen-Assist is a registered independent short term insurance broker that has built a successful business over the years on the basis of personalised client service and professional advice. 

In April 2013, Gen-Assist placed a personal lines insurance policy with Discovery Insure that unfortunately in error understated the client’s sum insured based on a quote incorrectly completed on Gen-Assist’s behalf by a Discovery Insure distribution support channel. 

At the time of loss, average was applied in accordance with the contract due to underinsurance, which was upheld by the Short-Term Insurance Ombudsman. Subsequently the client lodged a complaint with the FAIS Ombud. After reviewing the case, the Ombud held Gen-Assist Insurance Brokers liable for the shortfall.

Gen-Assist and Discovery Insure respect the view taken by the FAIS Ombud and recognise that both parties were responsible for ensuring the accuracy of the quote and policy. Arrangements have been made to ensure that the shortfall (R124 960) is to be borne by both Discovery Insure and Gen-Assist.

Regards

Discovery Insure CEO

Anton Ossip 

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