Ombuzz Issue: Non-disclosure - "Closing your eyes to the light"

NON-DISCLOSURE – "CLOSING YOUR EYES TO THE LIGHT"

There is often a difficulty in non-disclosure cases if the insurer repudiates a policy where the applicant disclosed some but not all the material information (or mis-disclosed some information).

One such case went on appeal recently and the appeal tribunal confirmed, despite the insurer's contention to the contrary, that the authors were quite correct in Life Insurance in South Africa (at 23.22) and in MacGillivray on Insurance Law (10th edition at 442), that an insurer is required to make its own additional enquiries if such information as is disclosed raises alarm bells or needs further elucidation, and that an insurer cannot therefore take advantage of a failure to follow it up, so that "if they shut their eyes to the light, it is their own fault." See also our 2012 Annual Report page 26.

Example
An applicant says "no" to the question whether he suffers from diabetes. To the question whether he has sought medical advice for any ongoing medical problems he indicates "yes" and without giving the condition he mentions the name of a specialist and that he is using Glucophage (medication used for problems with blood sugar).

At claim stage the insurer discovers that the applicant had been diagnosed with Type 2 Diabetes Mellitus prior to inception of the policy and repudiates the policy.

The insurer should have followed up on the disclosed information regarding the medication and the specialist, despite the negative answer to the question whether the applicant suffers from diabetes.

Insurer's duty
An insurer cannot disregard important information which is disclosed at application stage without making further enquiries to find out what the actual position is. This is so in respect of all information, whether medical, financial or otherwise and whether the information is obtained from the applicant or other sources.

Where the insurer has been negligent in not following up disclosed information, the office will not uphold the insurer's right to repudiate the policy and cover will have to be reinstated.

Fraudulent non-disclosure
Where, however, the applicant is found to have fraudulently non-disclosed or mis-disclosed information the above approach will not be applied by the office. This was also the approach applied by the appeal tribunal in the abovementioned appeal.

If an insurer alleges that an applicant acted fraudulently it must however establish the fraud by proving:
• that the misrepresented or non-disclosed facts are material (normal test for non-disclosure), and
• that the applicant knew the facts were false, and
• the fraudulent non-disclosure / mis-disclosure was made with the intention of inducing the insurer to issue the cover.
The standard of proof that applies is a balance of probabilities. Fraudulent intent will often have to be established by inference rather than direct evidence.

Example
An applicant applies for a policy of R3 million disclosing that he has Std 7, that he is earning R80 000 a month and that he is the General Manager of a company. His given house address is in a poor area in the city. The broker gives an instruction that the applicant may not be contacted directly. The policy is issued and the applicant immediately cedes the policy to his employing company.

A short while later the applicant applies for a second policy for R15 million. The policy is issued and he again immediately cedes the policy to his employing company. The insurer made no enquiries into the applicant's financial or actual employment circumstances.

The insurer relied on mis-disclosure of the following information at claim stage: that the life insured was a lodger in a back room of a house with another family, not living in the house he gave as his address. He was not in fact a General Manager but a casual labourer in the employing company.

Despite the fact that the insurer in our view had "closed its eyes to the light" at application stage we did not uphold the complainant's (the employing company's) claim.

The office distinguishes between negligent and fraudulent non-disclosure for purposes of determining whether an insurer's negligence in not following up on disclosed information is detrimental to its case or not.

Our approach highlights the following:
The importance of an insurer's underwriting process and ensuring that important disclosures are not overlooked but pursued where necessary. However, the office will not uphold a complainant's claim if fraud is involved.

For more information about the office and its activities, please visit our website: www.ombud.co.za

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Disclaimer:
Ombuzz is published for general guidance only. The information it contains reflects our policy position at the time of publication. This information is neither legal advice nor a definitive binding statement on any aspect of our approach and procedure. The case studies are based on actual complaints we have dealt with.