Clearly worded questions are essential for client disclosure

The case of Bruwer v Nova Risk Partners Limited, Gauteng High Court, highlights the importance of clearly worded questions to facilitate proper client disclosure for underwriting risk!

A full bench of the Gauteng High Court handed down an interesting decision in October 2010, by saying that a policyholder would not be expected to disclose the fact that they had a conviction against them for reckless and negligent driving. Although the decision drew some surprise from the insurance industry the case should be viewed with more circumspection.

The matter dealt with the well-known insurance principal of complete and proper disclosure to the insurer of all elements of the risk, so that an informed decision could be taken to accept or reject the proposed risk, and set an appropriate premium.

Full disclosure essential

Insurance law states that the policyholder (or prospective policyholder) must disclose all material information to the insurer and truthfully answer all questions put to them. These questions should be clear and unambiguous so as not to limit the clients’ responses. The policyholder does not have to provide more detail than what is specifically required to answer each question. A further requirement of the law is that the policyholder must know that the information that needs to be disclosed is material.

A record of conviction for reckless and negligent driving is very material to any underwriter assessing risk, which explains the surprise at this ruling. However – the Judge was not saying that the record of a client with a conviction for reckless and negligent driving was inconsequential – but rather that the client had already informed the insurer of his impending conviction.

Ask the right questions

The question put to the insured only covered pending prosecutions. Once the insurer was aware of the matter, the fact that the conviction was subsequently handed down would not have changed matters as far as the risk was concerned.

The Judge ruled: “Applying the provisions of the aforesaid sections to the facts in this case, I am of the view that the non-disclosure of the actual conviction and sentence and endorsement of the licence would not have been regarded by a reasonable prudent person as affecting the calculation of the risk and/or premium. The plaintiff’s failure to disclose the fact of the conviction, sentence and endorsement of his licence was, therefore inconsequential.”

Had the client not disclosed anything, the matter may have been decided differently.

The “reasonable” defence

Insurers must make sure that their question or policy clauses are worded clearly, since any ambiguity will be interpreted against them. The Court will consider the concise meaning and not the broad intention of the question or clause.

Also, insurers cannot expect more details than a reasonable layman would be able to provide. In this case, it is possible that a reasonable person believed they had disclosed sufficient information for the insurer to make an informed decision.

The Judge also declared that: “In addition the evidence is clear that the conviction of negligent driving did not in any way affect the insurance risk or calculation of the premium as the insurance policy expressly indemnified the plaintiff against such negligence.”

This may be construed as the court believing that because the policy exists to cover negligence, these types of convictions and charges should not be interpreted as material. But the same could be said about requesting details on any previous claims. Insurers still have a right to ask about previous claims and make underwriting calls on that basis. The bottom line is that courts will be sympathetic to policyholders in determining the validity of rejected claims.