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Material non-disclosures – cancellation of policy and serious financial difficulty

24 August 2015 Donald Dinnie, Norton Rose Fulbright
Donald Dinnie, Norton Rose Fulbright.

Donald Dinnie, Norton Rose Fulbright.

In a judgment handed down by the High Court on 19 August 2015, Norton Rose Fulbright successfully assisted the insurer in a challenge to the insurer’s avoidance of the policy issued to the insured.

The judgment confirms that cancellation of the insured’s policy by its previous insurer due to non-payment of premiums ought to have been disclosed to the insurer prior to inception of the cover. And re-confirms that non-disclosure that the insured was in serious financial difficulty at the time when the insurance contract was entered into is also a material non-disclosure.

The insured was indebted to Nedbank in the sum of R30m, breached a settlement agreement concluded with Nedbank regarding the loan and Nedbank had attached the property due to non-payment of the balance of the loan.

The non-disclosure of the insured’s financial position and the cancellation of the previous insurance policy touched on the integrity of the insured and its only director and shareholder. The reasonable prudent person would consider that those facts ought to have been disclosed to the insurer to decide whether to accept the risk and, if so, on what terms.

Beside any possible moral hazard, the insured’s ability to maintain the property, which is not necessarily a moral risk but is a physical risk, is something which a reasonable person would consider to be important for an insurer to know when deciding whether or not to accept the risk.

The court dismissed the insured’s claim for an indemnity under the policy and ordered the insured to return an interim payment to the insurer.

First published by: Financial Institutions Legal Snapshot

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