A material fact that needed to be disclosed

05 May 2022 Myra Knoesen

Every piece of information, specifically in policy wording, is critical in the insurance world.

We summed up some case studies from the Ombudsman for Short Term Insurance’s (OSTI) briefcase, which we thought would be interesting for our readers… these cases remind us of the importance of brokers in helping clients understand their policies.

A restaurant, damaged by fire

The insured’s property, a restaurant, was damaged by a fire. The insured submitted a claim for the damage sustained. 

During the validation of the claim, the insurer established that the insured had sold the restaurant. The purchaser had the keys to the restaurant and operated the business. The purchaser had defaulted in its payment to the insured, and the restaurant was running at a loss. The insurer also established that the insured’s attorney had written to the purchaser threatening to cancel the sale agreement unless the arrear payments were paid up to date. However, the sale agreement was still in effect when the fire occurred. 

The insurer advised that it would not have continued with the cover had it had been informed about the sale of the business. According to the insurer, there was a demonstrable increase in risk linked to the ongoing defaults in payment by the purchaser and the continued failure by the insured to disclose the sale of the restaurant to the insurer, in terms of the insured’s ongoing duty to disclosure. The insurer declined liability for the claim and voided the policy due to the material change in the risk. 

The insured pointed out that the nature of the business remained the same after the conclusion of the sale agreement. On this basis, the insured argued that there was no change in risk. The insured argued that the insurer was not entitled to decline liability for the claim and void the policy based solely on the poor financial standing of the purchaser. The insured was also not satisfied that the alleged change in risk would have affected the underwriting of the policy. 

OSTI’s findings

OSTI pointed out to the insured that the change in the risk did not concern the nature of the business but the financial standing of the purchaser. OSTI also pointed out that the insured had a general duty to disclose any material change in circumstances which may affect the underwriting of the risk. OSTI considered the severe financial challenges of the purchaser, leading to an inability to continue paying the instalments in terms of the sale agreement, a material fact. 

OSTI held that the insured ought to have considered that the severe financial challenges of the purchaser may negatively affect the insurer’s ongoing underwriting of the risk. Furthermore, it held that the insured’s failure to disclose the change in the risk had induced the insurer to continue insuring a risk it would otherwise not have accepted. OSTI upheld the insurer’s decision to reject the claim and void the policy.

A damaged jacuzzi pump

This matter concerned a claim for storm damage to a jacuzzi on the insured property. The insured reported that the jacuzzi pump stopped working due to heavy rainfall. The insured had a contractor attend to the damage. The contractor reported that it detected water damage, from the rain, on the wiring and that this is what had caused the pump to burn. The insured informed the insurer about the incident and submitted a claim, accompanied by the contractor’s report.

Insurer rejects the claim

The insurer appointed an expert to validate the findings made by the insured’s contractor. The insurer’s expert established that the bearings of the jacuzzi pump motor were noisy. He reported that the pump’s bearings were in the process of ceasing. The expert further established that the pump had a faulty capacitor. According to the expert, the damage occurred gradually due to wear and tear.

The insurer accepted its expert’s findings and rejected the claim based on the policy provisions. The insured challenged the rejection of the claim.

Challenging the rejection

The insured was dissatisfied with the findings made by the insurer’s expert. He did not agree with the findings and maintained that the damage was due to heavy rainfall. The insurer argued that the unit was in working order and only had a noisy bearing and faulty capacitor. The insurer advised that the expert did not have any reason to remove and disassemble the pump and that it would have been liable to reinstate the damaged pump had it been removed and disassembled.

OSTI’s findings

OSTI recommended that the insurer settle the claim. OSTI established that the insurer’s expert did not use a multi-meter to test the capacitor. On that basis it was held that the findings made by the insurer’s expert were unreliable. The insurer conceded that the multi-meter test was the ultimate determinant of the cause of the damage to the pump but wanted this office to consider the expert’s experience in the field. OSTI pointed out that the insurer bears the burden to prove its application of the policy exclusion. OSTI held that the insurer had not discharged its onus. The insurer subsequently agreed to abide by OSTI’s decision and settled the claim.

Fire damage to a motor vehicle

The complaint relates to a claim for fire damage to Mr. Y’s vehicle. While driving, Mr. Y noticed a warning light on the dashboard. He pulled over onto the side of the road and saw smoke and flames coming from the vehicle’s bonnet. Mr. Y reported the incident to the insurer and submitted a claim.

The rejection of the claim

The insurer appointed a loss adjustor to validate the claim. During the validation of the claim, the loss adjustor interviewed the insured. The insured confirmed the above version and explained that he did not drive over an object or bump into anything. The loss adjustor recommended that the insurer appoint a technical expert, which the insurer did.

The technical expert noted that the main wiring harnesses from the battery to the fuse box and starter were still in place, with evidence of fire damage to the front section of the harnesses and to the cooling pump. The technical expert checked the coolant and oil level and found that there was no coolant, and that the dipstick did not read the presence of any engine oil in the dip sump.

The technical expert established further that the engine conrod snapped due to mechanical failure, perforating two holes to both sides within the lower engine block (crankcase). According to the technical expert, the engine oil immediately escaped, impinged with the hot exhaust pipe “cat” converter, and ignited. The technical expert concluded that the damage to the engine occurred due to mechanical failure when the conrod snapped, consequently resulting in minor fire damage.

Based on the findings of the technical expert, the insurer concluded that the fire damage was a result of mechanical failure, which is excluded from cover. The insurer rejected the claim on the grounds that no insured peril operated to cause the damage.

The insured challenged the rejection.

OSTI’s findings

The insurer rejected the claim based on an exclusion in the policy. Therefore, the onus rests with the insurer to prove its case. The clause in the policy relied on by the insurer states that the insurer will not compensate the insured for any loss or damage arising from mechanical, electronic, or electrical breakdown or defect. As the oil leak caused the fire, and the oil leaked as a result of a mechanical breakdown, leading to the fire damage, the fire resulted as a direct consequence of the mechanical failure. The policy excluded from cover loss or damage arising from mechanical breakdown.

OSTI found that the insurer was entitled to reject the claim and thus upheld the insurer’s decision on the claim.

Incorrect details of the regular driver

Read more on an insured who submitted a claim to the insurer for a stolen vehicle. The sale of the policy was conducted with the insured’s wife, who noted herself as the regular driver of the vehicle.

When the claim was submitted, it was pointed out that the insured’s son, Mr. B, was the last person to drive the vehicle. They informed the insurer that he was the regular driver of the vehicle, and that the vehicle was kept at their residence in Johannesburg.

The insurer rejected the claim and voided the policy. It argued that the details of the regular driver were misrepresented when the policy was sold.

Writer’s Thoughts:
Again, these cases remind us of the importance of brokers in helping clients understand their policies… policy provisions, terms and definitions! Do you believe the rulings were fair in these cases? If you have any questions please comment below, interact with us on Twitter at @fanews_online or email me.





Added by strini naidoo, 05 May 2022
In instances when a expert is sought for an assessment or opinion , his expertise must be part of the rejection report to ensure transparency and reporting within an acceptable framework , the information therein must include the remuneration or benefit the expert receives for his services .The diligence and capacity of the expert to act must be verifiable to a standard that the insured and the insurer agrees to to uphold credibility in the reports the expert produces . This will ensure good faith all round and avoid unnecessary steps thereafter .
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