Claims tainted by fraud are wholly recoverable by insurers
Ayanda Nondwana, Partner, Eversheds Sutherland (SA) Inc.
Kagiso Tshandu, Senior Associate, Eversheds Sutherland (SA) Inc.
In Discovery Insure Limited v Masindi [2023] ZASCA 101 (14 June 2023), the Supreme Court of Appeal (“SCA”) found that Discovery (insurer) was permitted to retrospective cancellation of the policy and therefore, entitled to repayment from Masindi (insured) for all amounts paid on the fraudulent portion of a submitted claim which included valid claims paid to the insured prior to the discovery of the fraud.
The insured took out a policy with Discovery to insure his dwelling and household contents. He later submitted a single claim under the building section of the policy for losses caused by storm damage to his residence. The claim was for the costs of repairs to the residence and damage to household contents, as well as for emergency accommodation. Discovery paid out the aggregate amount R1,594,980.12. The amount claimed for emergency accommodation was tainted by fraud while the claims for damage to the residence and household contents were legitimate. Discovery sought repayment in the High Court. The High Court held that Discovery was not entitled to repayment of the full amount claimed, rather, it was only entitled to repayment of the portion of the claim that was undoubtedly tainted by fraud. Dissatisfied with the judgment, Discovery appealed to the SCA.
The issue on appeal was whether, properly construed in terms of the policy, a partly fraudulent and partly genuine claim arising from the same incident results in the forfeiture by the insured of the claim in its entirety. If the question is answered in the affirmative whether the insurer, in that event, entitled to repayment of the amounts already paid to the insured, in settlement of the insured's claim, arising from the same incident, when it is subsequently discovered that part of the claim was tainted by fraud.
Discovery contended that the policy provided, amongst other things, that if any portion of a claim lodged with it is fraudulent, then it would be entitled to cancel the policy with retrospective effect from the date of the reported incident, or alternatively the actual date of the incident, whichever was the earlier. Consequently,
Discovery asserted that it had a right to reclaim all amounts paid to the insured, subsequent to the retrospective cancellation date. Insured asserted that nowhere does the policy contained an express provision to the effect that on the retrospective termination of the policy, the insured would be liable to repay all the benefits already paid by the insurer before termination including benefits relating to claims not tainted by fraud.
The court remarked that forfeiture clauses of the kind like the ones under consideration in this case are now a common feature in insurance contracts. Generally, such clauses are viewed as valid and therefore enforceable. The court found that the clause in question was clear and unambiguous and explicitly provides that upon breach of its terms, Discovery would be entitled to terminate the policy with retrospective effect from the date of the incident giving rise to the claim. When insured purported to submit his claim on 11 November 2016 there was no longer an extant insurance policy because it had already been terminated with retrospective effect from 10 November 2016 – the date of the incident – pursuant to the clause. Concomitantly, Discovery was under no obligation to pay out any moneys to Masindi on 5 December 2016 onwards because the policy had, on 10 November 2016, already terminated.
Consequently, the appeal was upheld and Discovery was entitled to a refund of all the moneys previously paid out by it to Masindi.
The judgment has re-emphasized the importance of the general rule that insured persons are duty to act in good faith in their dealings with the insurers. A breach of this duty by an insured, the court will definitely not come to the assistance of the insured even though the financial consequences may be dire.
