Over stepping boundaries

Insurers that contract to indemnify clients in the events of losses or damages often like to know whether the premises they are insuring are occupied by tenant manufacturers using highly flammable materials.

The Supreme Court of Appeal (SCA) in the Regent Insurance Company Limited (the insurer) versus Kings Property Development (Pty) Limited (the insured) case found that the failure to disclose that a building was occupied by a tenant which manufactured truck and trailer bodies using inflammable substances constituted a material non-disclosure under the Short-term Insurance Act. This non-disclosure induced the insurer to enter into the contract, and the defences of estoppel and waiver that were raised by the insured were not established.

The law of non-disclosure

It must be noted that the insured, when requesting insurance cover, must make a full and complete disclosure of all matters material to the insurer’s acceptance of the risk. Failure to do so entitles the insurer to reject the claim under the policy and to treat the policy as void.

The judgment contains a useful review of the law of non-disclosure, including a reminder that the insurer must be induced to enter into the insurance contract with the insured as a result of the non-disclosure of all material facts provided.

Legislation precludes insurers from treating misrepresentations or non-disclosures that are trivial as grounds for avoiding policies.

With the introduction of Section 53(1) of the Short-term Insurance Act (and the equivalent in the Long-term Act), the test for both misrepresentations and non-disclosures is an objective test in line with the test applied by the common law.

The onus

A reasonably prudent person would provide and disclose the correct information to the insurer so that the insurer could form its own views on the effect of the information on the assessment of the risk. The onus rests on the insurer to prove materiality and that the non-disclosure or representation induced the insurer to conclude the contract.

The test for inducement is a subjective test. The subjective test is whether the particular insurer was induced by the failure to disclose the material facts to issue the policy on the terms it did? In dealing with this question, evidence that the insurer had a particular approach to risks would be relevant and cogent.

Once materiality has been established, the insured is likely to face an uphill struggle in trying to demonstrate that the non-disclosure or misrepresentation had no effect on the issue or terms of the policy.

Playing the blame game

The insured sought to argue that the insurer was estopped from relying on the non-disclosure because the insurer’s representative had been asked to do an urgent survey of the premises. The insurer requested an assessor to do a survey but this had not been done by the time of the fire. The policy was not made conditional on the survey being completed.The court said that the request for the survey did not relieve the insured of the duty to make a full disclosure of all material facts.

The insured also argued that the insurer issued the policy despite not completing the survey and accepted the payment of the premiums. It allegedly lulled the insured into a false sense of security. The insured argued that had it known that the survey had not been complete and that the cover would not be issued, it would have attempted to obtain insurance cover from another company, instead of being misled and acting to its detriment.

Words of the wise

The court found that the policy was revised to cover the premises before the survey was even requested and that the insured was aware that the insurer had not complied with its request to do the survey urgently. No misrepresentation was proved and no estoppel was established.

It is useful if an insurer, in considering the risk and indicating that a survey might be conducted, expressly records that the survey does not relieve the insured of its duty to make a full disclosure of all material facts. If a policy is issued, subject to the survey being conducted then the consequences of unacceptable survey results should be spelled out in the policy, for example, the cancellation of the policy from inception. An insurer should remember that, if a survey is conducted which discovers material facts previously not disclosed, and the insurer armed with that information does not elect to avoid the policy, it will not be able to do so at a later stage when a claim arises.

If on receipt of a survey report, the insurer specifies remedial steps, and those steps are not taken by the insured, an insurer should then be astute to terminate the policy on notice, where provided for. The insurer may also wish to provide in the policy that where an insurer requires remedial steps to be taken by an insured following any survey, no claim relating to the particular risk will be paid for the period until remedial steps are taken.