Fraud is fraud, even in insurance

An attempt to defraud his short-term insurer has cost a Pretoria-based insured dearly after South Africa’s Supreme Court of Appeals (SCA) ruled that the insurer was within its contractual rights to cancel the policy on the date of the claim, and recover the full value it had paid to indemnify the insured. On 14 June 2023, the SCA handed down judgement in the matter Discovery Insure Limited v Masindi (534/2022) [2023] ZASCA 101, ordering the respondent to repay the insurer ZAR1 594 980,00 plus interest on that amount dating back to 8 June 2017.

Bread and butter personal lines cover

The back story to this insurance claim debacle is simple. First, “the respondent took out a policy for specified insured risks, described as a Discovery Insure Plan, to insure, inter alia, his dwelling in Pretoria and household contents, against certain risks resulting in total loss or damage howsoever caused”. The policy included reimbursement for ‘out of pocket’ expenses incurred for emergency accommodation in the event the aforementioned loss or damage rendered the property uninhabitable. As any broker will tell you, these covers are the ‘bread and butter’ of a personal lines buildings and household contents policy. 

The judgement mentions that the policy contained a clause stating that “if any portion of a claim lodged with the insurer by the respondent was fraudulent, the insurer 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”. So, what went wrong? Per the judgement, on 11 November 2016 a severe storm caused damage to the insureds residence, leading to a claim for the cost of repairs to the residence and damage to household contents, totalling ZAR972 597,67 alongside a claim for emergency accommodation, totalling ZAR675 000,00. These amounts were paid by Discovery to the insured over the period 7 December 2016 and 25 May 2017. 

Plenty of common cause, even on the fraud

The judgement pointed out that it was common cause that the loss and damage claims were untainted by fraud and therefore technically legitimate; but that the claim for emergency accommodation was tainted by fraud. When Discovery found evidence of this fraud it immediately notified the respondent that it was exercising its right, as it was entitled to in terms of the policy, to cancel the policy with retrospective effect from the date of the incident. Unsurprisingly, when Discovery demanded its money back, the insured refused; and thus, the ensuing High Court and SCA actions. 

Before we unpack the judgement further, it is worth examining the two contract clauses that Discovery relied on to guide its actions. First, Clause 5.13 of the Plan Guide is headed ‘Fraud, misrepresentation and inaccurate information’ and holds: “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: 

• Where there is a misrepresentation, non-disclosure, misdescription by you or anyone acting on your behalf;
• If false or incomplete information is supplied for any fact and/or circumstance in connection with an application for cover or in connection with a claim in terms of this Plan by you or anyone acting on your behalf;
• If any claim or part thereof under this Plan is in any way fraudulent;
• If fraudulent means or devices are used by you or any acting on your behalf to get any benefit under this Plan is occasioned by your intentional conduct or any person acting on your behalf or with your involvement;
• If any fraudulent information and/or document whether created by you or any other party is provided to us by you or anyone acting on your behalf or with your involvement in support of any claim under this Plan, and whether or not the claim is itself fraudulent;
• If the size of any claim is inflated by you or anyone acting on your behalf or with your involvement, for any reason whatsoever, and whether the claim itself is fraudulent”. 

Fraud begets a cancellation or voiding of the policy

And it continues: “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”. In layman’s terms, if you commit fraud of any description, and in any way related to the claim, the insurer reserves the right to cancel or void the insurance, and claw back any benefits paid on it. 

Clause 5.5 is headed ‘Breach of conditions requiring your assistance’ and states: “We reserve the right to cancel your Plan and claim repayment from you for any amounts we have paid in settlement of your claim if you breach or fail to comply with our procedure and the rules set out in this Plan Guide”. Apologies for the lengthy italicised explainer, dear reader, but those familiar with contracts will no doubt take it in their stride. 

The matter headed to the SCA because the High Court found only partly in Discovery’s favour. It ruled that “Discovery was not entitled to repayment of the full amount claimed [but rather] that portion of the claim that was tainted by the undisputed fraud.” According to the SCA judgement, the High Court reached this decision on the basis that “the insured had acquired accrued rights to the payment of the genuine portion of his claim; that those rights remained intact, unaffected by the subsequent fraud; [and that] the policy clause that provided for forfeiture of claims tainted by fraud was, for all intents and purposes, a penalty clause, in terms of the Conventional Penalties Act”. Trust the courts to compound a matter that seems, on the face of it, rather cut-and-dried! 

Clearing up interpretation; accrued benefits and penalty clauses

The SCA identified three issues that would have to be cleared up. First, the interpretation of clause 5.13 read with clause 5.5 and the Agreement of Loss. “The appeal raises the question whether these clauses, properly construed, entitle Discovery to repayment of all amounts paid to the respondent subsequent to the insured event, when the insured, with full knowledge of his misrepresentation, submitted a partly fraudulent claim,” the judgement said. Second, “whether the doctrine of accrued rights finds application in the context of the facts of this case, and if so, whether the relevant clauses, which are central to this appeal, operate to disgorge the compensation already paid to the respondent in respect of the genuine portion of his claim”. And third, whether the High Court had been correct in its characterisation of clauses 5.13 and 5.5 as constituting penalty clauses. 

What followed was a lengthy explainer on how the court assigns meaning to phrases and words in contracts. Readers who enjoy the legal aspects of these matters can read the judgement for more on how the SCA picked apart the High Court ruling. However, we do draw your attention to this one-liner, contained in paragraph 21 of the judgement: As a general rule insured persons are under a duty to act in good faith in their dealings with insurers. In addition, in paragraph 25, the SCA noted that “forfeiture clauses of the kind under consideration in this case are now a common feature in insurance contracts … as a general rule such clauses are viewed as valid and therefore enforceable”. 

Termination with retrospective effect

In rebutting the respondents argument, the SCA held that clause 5.13 was clear and unambiguous and that effect must be given to it. “To construe clause 5.13 as the respondent would have it, would subvert the well-established tenets of interpretation of documents,” they wrote. The SCA similarly shot down the suggestion that attempts to recover the claims paid value from the insured should be considered in the context of the Conventional Penalties Act. “For all the afore going reasons, we do not agree with the interpretation of clause 5.13 favoured by the High Court … [the clause ]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”. 

And the final nail in the coffin: “We consider that Discovery was entitled to a refund of all the moneys previously paid out by it to the respondent and, thus, to the relief it sought in the High Court; in these circumstances the appeal should, therefore, succeed”. 

Writer’s thoughts:

South Africa’s life and non-life insurers are frequently hung out to dry by the media for not paying out claims… In this case, however, the court of public opinion seems contented that the insured has been punished for his attempted fraud. Were you surprised by the SCA decision, and if yes, why? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.