Looking towards the future
It is human nature to try our best to get out of a situation where the likely outcome will not turn out to be in our favour. If we are the offending party, we will feign ignorance when questioned on the matter by authoritative figures. If clients feel that they are being hard done by, they are quick to turn to the office of the ombudsmen for restitution.
To negate the erratic application of law in the financial services industry, we have the reasonable person test. This has been contentious at times, and its future is unsure as we move ever more rapidly towards a world of robo-advice and online insurance transactions.
In the beginning
The issue of reasonability was discussed at the recently held Case Law Workshop at Norton Rose Fulbright. The beginning of the reasonability test came into play in 1958 where a judge heard a case between Mutual & Federal (M&F) and the Oudtshoorn Municipality (Municipality) where material non-disclosure was involved.
The Municipality ran a small airfield in the small town in the present day Western Cape. Outside of the perimeter fence of the airfield, the Municipality erected a fairly high pole which carried electrical wires. M&F were the insurers on record.
The pole was highly visible during the day and no aircraft crashed into it while landing during daylight hours. But as the airport started to run night flights, complaints about the pole started to stream in. Eventually, an aircraft crashed into the grounds at the airport after colliding with the top of the said pole.
There was a claim, and predictably M&F refused to pay the claim because the Municipality did not disclose the fact that the pole was causing problems. Was this material non-disclosure pertinent to the case? M&F argued that it was, the Municipality argued it was not.
Enter the reasonability test. The reasonability test asks a simple question: would the insured have made the disclosure to the insurer had they been fully aware of how the policy works (have full knowledge of the product)? A reasonable person would be like: that pole is going to cause problems; I better have a word with my insurer.
A victim of circumstance
But does the reasonability test always work in the insurer’s favour? As we saw with the Jerrier vs OUTsurance case, it does not.
The case is a bit more technical, and a link to the full description of the case is provided above. In summary, Jerrier owned an Audi R8 and had an accident on the night of 8 January 2010. Jerrier hit a pothole in the road which caused him to swerve and hit a car travelling close to the centre median of the road. OUTsurance rejected the claim on the basis that Jerrier did not disclose an incident in 2008.
The matter went to court. Jerrier did not deny that the 2008 incident took place, but chose not to inform OUTsurance about it because it was within his budget to privately fund the repair to his vehicle. If he had claimed then he would not have been eligible for his OUTbonus.
Here is the rub; in normal circumstances, the insured would have thought it would be reasonably prudent to report the incident to their insurer. The judge however found that the OUTbonus actually creates a disincentive for clients to report incidents where they can privately fund the repairs to the vehicle. A reasonable person in these cases will not report incidents unless absolutely necessary. OUTsurance were therefore a victim of their own circumstance.
Where to now?
As we have seen, case law in terms of non-disclosure has progressed quite rapidly in South Africa to a stage where the reasonability test is an effective test to judge where fault lies. And as we have seen, it doesn’t always work in the insurer’s favour.
The reasonability test establishes two things:
- You (insured) cannot disclose what you are not aware of; and
- Insurance is placed in good faith. You cannot have more than good faith; a person is either honest or dishonest, there is no degree or honesty or dishonesty.
The value of the above findings is that the insured is put in a position where there are no questions of whether they were at fault or not. There is no grey area when it comes to the reasonability test as it stands. But what happens when we move towards a future of robo-advice and the online insurance transactions? What will the reasonable man test be changed to??
Editor’s Thoughts:
Everyone is open about the fact that there will be a mix between robo-advice and advice given by a broker. You will need to accept this and change your business model accordingly. Be open minded in your thoughts on this. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts [email protected].
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