Are valid claims tainted by fraud recoverable?

In Discovery Insure Limited v Tshamunwe Masindi (85613/2017) [2021] ZAGPPHC 145 (8 September 2021), the court had to determine whether Discovery (plaintiff/insurer) was entitled to repayment from Masindi (defendant/insured) of all claims paid to the insured prior to, and after breach of the policy, as a result of the submitted claim being tainted by fraud.

On 23 March 2016, Discovery and Masindi entered into a contract of insurance which essentially provided cover for specified insured risks. One of the specified insured risks was damage to Masindi’s residence as well as an entitlement to claim costs for alternative accommodation as a result of the insured’s accommodation being inhabitable due to the happening of an insured event. On 16 December 2016, Masindi lodged a claim with Discovery as a result of damage to her property caused by storm and flooding which occurred on 11 November 2016. The property damage claim was part and parcel with a claim for emergency accommodation at the Villa Africa Boutique Hotel which allegedly accommodated Masindi during the period 20 November 2016 to 16 May 2017. It was common cause that Masindi submitted fraudulent invoices in respect of emergency accommodation.

The forfeiture clause of the policy read, in relevant part, as follows:

“All benefits in terms of this Plan in respect of any claim will be lost and this Plan may be voided or cancelled at our discretion:

If any claim or part thereof under this Plan is in anyway fraudulent, or if fraudulent means or devices are used by you or any acting on your behalf to get any benefit under this Plan, or if any insured event under this Plan is occasioned by your intentional conduct or any person acting on behalf or with your involvement.

Where any benefit under this Plan is forfeited in circumstances set out in this section, we will have the right to cancel your Plan retrospective to the reported incident date or actual incident date, whichever is the earliest.”

As a result, Discovery placed reliance on the forfeiture clause and pleaded that due to the fraudulent nature of the claim it was entitled to cancel the contract (which it did) with retrospective effect to the date of the incident and claim damages for the claims already paid out. In response, Masindi contended there was no express provision in the policy that determines that on the retrospective termination of the policy, the insured becomes liable for the repayment of any or all benefits paid by Discovery before termination, including benefits in respect of claims not tainted by fraud. Masindi also disputed the quantification of the claim made by Discovery.

The court placed significant reliance on the legal principles enunciated in Lehmbecker’s Earthmoving & Excavators (Pty) Ltd v Incorporated General Insurances Ltd 1984 (3) SA 513 (A), wherein the court was not prepared to interpret admittedly wide language of a forfeiture provision as extending to a previously accrued valid claim which was not tainted by fraud, having concluded that it would result in a gross and intolerable disproportionate penal effect. In Lehmbecker, it was also found that avoidance of a policy based on forfeiture could only take effect from breach of the policy so as to entitle the insured to recover in respect of any loss which occurred before the breach. In addition, in Lehmbecker, the court pointedly held that “a provision requiring forfeiture of honest claims made under and in terms of a valid policy of insurance and which had accrued and become due and payable prior to the subsequent breach causing the premature termination of the policy, would surely be nothing less than a penalty. And it could be a penalty grossly and intolerably disproportionate to the breach, which would be the case if the accrued, valid claims ran into hundreds of thousands of rands and the subsequent fraudulent claim was of relatively insignificant value.”

In utilising the principles enunciated in Lehmbecker, the court held that a breach committed when claiming benefits of a loss that has accrued prior thereto should not taint the part of the claim that is credible since the entitlement to recover accrued prior to the breach. The court in this instance held that, the effect of ordering a repayment of the amount paid for benefits that have rightly accrued and were due and payable at the time of payment would seemingly be disproportionate to the breach, taking into consideration that Masindi has not been unjustly enriched by the payments on the valid loss since the right to compensation had already accrued prior to the breach. In conclusion, the court held that Discovery had not shown that the amount of the valid benefits it requires to be repaid is in anyway proportional to the loss or prejudice it has suffered as a result of the breach. The fraudulent claim was, however, of no consequence to the accrued valid claims that were paid, in that, it did not affect the insurer’s position as to its prejudice. Accordingly, it was held that Discovery was only entitled to repayment of all proven amounts paid on the fraudulent part of the claim.

It is trite that forfeiture of valid claims tainted by fraud are enforceable but constitute a penalty. However, the mere inclusion of a forfeiture clause in a policy does not automatically guarantee success for a repayment claim against an insured but the insurer is still required to demonstrate and prove the extent of its prejudice due to the fraud.