The disclosure test is in the insurance act

Section 59 of the Long-term Insurance Act and section 53 of the Short-term Insurance Act deal with misrepresentation and non-disclosure.

The supreme court of appeal’s judgment in Visser v 1 Life Direct Insurance Limited correctly founded the entitlement of an insurer to reject a claim on statute.

The insurance acts say that a policy cannot be invalidated and an insurer cannot exclude or limit its obligations under a policy or increase the policyholder’s obligations under the policy due to a misrepresentation or non-disclosure unless it is material. This, says the act, means that it is likely to have materially affected the assessment of the risk under the policy at the time of its issue or at the time of any variation of the policy.

The test for materiality is that a reasonable, prudent person would consider that the particular information constituting the representation or non-disclosure should have been correctly disclosed to the insurer so that the insurer could form its own view as to the effect of such information on the assessment of the relevant risk.

The urge to look to the common law when dealing with misrepresentation and non-disclosure in insurance contracts should be avoided. The case law is helpful in assisting the court to gain an overall perspective of the issues that are relevant such as materiality. It was the impetus for the legislative intervention in issues of misrepresentation and non-disclosure, but the fact that legislation was enacted to deal with those issues is decisive.

The onus is on the insurer to prove a material misrepresentation, and that they were induced by it to issue the policy or offer its terms. The onus arises from the general principle that the party who alleges something must prove it. In the Visser case the insurer failed to prove that the deceased had a material pre-existing medical condition that should have been disclosed.

First published by: Financial Institutions Legal Snapshot