Policy fraud and avoidance
Fraud is an unfortunate common occurrence in the South African insurance industry, and is very difficult to resolve or root out. But a recent ruling shows that headway is being made.
In the Durban High Court matter between Harikasun v New National Assurance Company Limited, the defence of fraud relying on the policy’s fraud clause was successfully raised. The insurer established that, in claiming for the loss of a cell phone, the insured had falsely claimed the cell phone was in use and had a replacement value which it did not have. The insured acted with deliberate intent to obtain a benefit not due under the policy.
Avoidance unsuccessful
The insurer was less successful in the primary defence of avoidance of the policy on the basis of fraudulent misrepresentation. The insurer had argued that the insured had falsely misrepresented that it owned or bore the risk in three items of jewellery included in the all risks section of the policy.
There was no doubt that the insurer had extended cover for items which were non-existent and for which the insured bore no risk at the time of the issue of the policy, which impacted on the risk that the insurer had assumed.
The insured had been assisted by a broker in the completion of the relevant policy proposal. The relevant items had been contained in proposals to previous insurers and carried over rather than noting each of the items individually.
There was also a time lapse between each proposal. The court accepted that there was no evidence that the insured was aware, at the time, that the schedule that was utilised in the proposal for the policy with the insurer was a schedule that was utilised on previous occasions for earlier policies with other insurers.
The court was satisfied that the insured had not deliberately and intentionally made a material misrepresentation or non-disclosure in failing to note that certain items ought not to have been transferred from the previous schedule to the policy with the insured, because the insured was not solely responsible for listing the items included under the All Risks section of the policy.
Avoidance does not require fraud
The failure of the avoidance defence related to the alleged fraudulent misrepresentation. Fraud, of course, is not a necessary element for successful avoidance of the policy for material misrepresentation. A negligent material misrepresentation or non-disclosure inducing the conclusion of the policy or certain terms of the policy is sufficient to entitle the insurer to avoid the contract.
There was certainly a negligent material misrepresentation. It also did not matter that the representation is in part or wholly that of the insured’s broker. The broker is the insured’s agent and any material misrepresentations or non-disclosures of the broker are those of the insured as well. If the broker conducts itself culpably causing the insured claim to fail, the insured has a claim against the broker.
On the limited facts of the matter that can be gleaned from the judgment, it would appear that if the avoidance events had been pleaded differently, avoidance of the policy for the material negligent misrepresentation would have been successful.
Avoidance as an alternative to rejection for fraud
Of course avoidance of a policy takes place from inception and the parties are to be put back in the position they were in at the start of the policy. That requires the insurer to refund any premiums paid and the insured to repay any claims paid under the policy prior to the avoidance.
Insurers who suspect pre-contractual fraud on the part of the insured, but who are concerned about the adequacy of the available evidence to prove on the balance of probabilities, should consider what conduct constitutes fraud, whether it nevertheless constitutes a negligent material misrepresentation or non-disclosure that would then entitle the insurer to avoid the policy.
