Changing responsibility in the industry

While there are many people in the industry looking ahead and planning the future for themselves and their companies, there is a strong undercurrent of ludicracy rearing its head in the insurance industry. Clients are getting more brazen with their complaints to industry ombudsmen, and brokers are quickly finding out that they are often the unfair casualties in these situations.

For a while now, industry regulators and watchdogs have been firm in their stance that they need to create an industry which is sustainable and professional. However, are all these efforts really in the best interest of the industry? Perhaps the waters the industry regulators wanted to clear up have progressed from pools of unsavoury industry practices to rapids of litigation. The industry is moving towards a situation where the function of client management is becoming more important than selling a product.

Missing in action

This was particularly evident in a rather bizarre determination handed down in December 2014 by the office of the Financial Advisory and Intermediary Services Ombudsman (FAIS Ombud). In July 2011, a broker (hereafter referred to as the respondent) gave financial advice to the complainant after which the complainant obtained insurance for a Toyota Hilux with Saxum. The policy was incepted on 7 July 2011.

On 2 March 2013, the complainant’s vehicle was stolen. He immediately reported the theft to his tracking company, who could not locate the vehicle due their inability to pick up the signal from the installed tracking device.

The insurer subsequently turned down the  claim on the basis that the complainant had failed to adhere to the to the testing of the tracking device as stated in the policy document:

It is warranted that a tracking device approved by the company be installed in the vehicles(s). Should such device(s) not be installed and maintained there shall be no cover for theft in terms of this section of the policy.

It is warranted that the tracking system should be tested every six months and proof supplied that the system was tested at time of claim.

The complainant contended that it was the respondent’s non-compliance with the provisions of the FAIS Act and negligent failure to disclose the material term relating to the testing of the tracking device that led to the denial of his claim.

Falling on deaf ears

Before we move onto the respondent’s case, it is assumed that in order to maintain a sustainable business, a broker will have more than one client. If we have to live by the reasoning that the complainant has brought before the Ombud, the broker would have to explain each and every policy clause to each and every client.

The Ombud did give the respondent an opportunity to respond to the allegations made by the complainant. The respondent confirmed that he did provide advice to the complainant, but he refers to the proposal form that was completed by the complainant and the proviso that stipulates that the onus is on the insured to avail himself of all terms and conditions of the policy.

The respondent contends that there are hundreds of insurance clauses in an insurance contract and it could not be expected of brokers to explain each and every clause to clients.

The respondent goes on to argue that statutory disclosure documents were sent to the complainant; he was requested to read all the documents including the policy schedule. He emphasises that the tracking warranty clause is prominently displayed on page four of the policy schedule. Therefore, the complainant ought to have been aware of the term.

The discussion we should be having

At the end of the day, the Ombud ruled in favour of the complainant and ordered the respondent to pay an amount of R189 400, plus interest, to the complainant. The main reason behind the ruling was the admission that the material term relating to the testing of the tracking device was not disclosed prior to concluding the contract as the General Code demands. The Ombud contended that the complainant was not placed in a position where he could make an informed decision about the transaction.

It boils down to Treating Customers Fairly (TCF) and the assertion that every aspect of the policy must be explained to the client. However, the respondent rightly pointed out that there are many material term’s within a policy schedule and it is physically impossible for a broker to explain each and every one to each and every client.

In these instances, the question should not be whether brokers are complying with TCF, but where the clients’ sense of responsibility comes in. Common sense would suggest that a reasonable person will read each aspect of a contract before signing it, especially when it comes to an important issue such as insurance. Is this a reasonable argument, or must brokers bite the bullet and spoon-feed their clients just to avoid the inevitable call from the Ombud?

Editor’s Thoughts:
The reaction from brokers regarding a number of determinations handed down in 2014 is that there is a concerning trend of the Ombud being very hard on brokers and branding them as “guilty until proven innocent.” If we continue to see these types of rulings in the industry, brokers will see themselves facing the dreaded call from the Ombud on a regular basis, which is not good for an industry that is complaining about the lack of new business being generated. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

Since the publication of this newsletter, we have received the following letter  from Joe Kotze, National Manager: Compliance at the Financial Intermediaries Association of Southern Africa. 

Hi Jonathan 

I refer to the abovementioned article and the comments from brokers thereon.  Although it may seem that there is a total onslaught against brokers by the FAIS Ombud, especially in the short-term insurance space, it remains a fundamental requirement as stipulated in section 7(1)(c)(vii) of the General Codeof Conduct (GCoC), that the provider must give full, appropriate and concise details of any special terms or conditions, exclusions of liability, waiting periods, loadings, penalties, excesses, restrictions or circumstances in which benefits will not be provided. 

I share the sentiments of many that having to explain each and every clause of a policy schedule in detail to a client may border on the absurd. It may, however, be prudent to at least draw up a one-pager wherein the most prevalent pitfalls, as mentioned in section 7 of the GCoC, are explained. The broker should explain to the client that non-compliance with those clauses can lead to the repudiation of a claim. The broker should also urge the client to study those noted clauses as soon as reasonably possible and to contact him/her in case of uncertainty. This correspondence should be recorded as it may serve as proof that the broker acted as reasonably required.

 The attached document gives an overview of the duties of the prudent broker as recorded in our law. In Lappeman Diamond Cutting Works (Pty) Ltd v MIB Group (Pty) Ltd the court held that “a broker does not, and cannot be expected to control the business of the insured. Even the specialist broker’s duty does not encompass a duty to ensure that the insured complies with his obligations under the policy. He is not the insured’s keeper. His duty, as a specialist broker, is discharged when he has done everything reasonably necessary to draw the attention of the insured to obligations imposed by the policy. It is the insured’s responsibility to ensure compliance.” 

The above may still not be enough to convince the FAIS Ombud that the broker acted as could reasonably be expected. In cases where a broker feels aggrieved by a determination, he/she should seek the opinion of legal minds and FAIS experts such as an Anton Swanepoel. It is a common view that aggrieved brokers should exercise their right to appealmore frequently. This may hopefully lead to more consistentand fair determinations being made in the broker and client minefield that exists in the short term insurance sector.

Kind regards.

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