Short-term insurers cannot rely on the materiality defence

On 26 March 2009 we attended a Deneys Reitz Attorneys’ General and Insurance Litigation Department breakfast session. It’s an opportunity to catch up on recent rulings from South Africa’s legal trenches. In the first presentation, Deneys Reitz associat

Marching to the Supreme Court for R48 000

On 4 January 1996 Da Costa added a 1991 Mercedes Benz 230E to his existing agreement of insurance with M&F. Some time later, Da Costa was involved in an accident and submitted a claim to M&F in terms of his policy. When the vehicle was inspected both insured and insurer learned (for the first time) that the vehicle in question had been rebuilt from a 1988 Mercedes Benz body and a 1992 230 Mercedes Benz engine. An important fact in this case is that the insured had no reason to believe the vehicle was anything other than that stated in his policy. M&F had no hesitation in rejecting Da Costa’s claim on the “basis of material misrepresentation, or alternatively non-disclosure on the part” of the insured. And they believed they had solid legal grounds to do so.

Sithole comments: In Labuschagne versus Fedgen Insurance Ltd 1994 (2) 228 (W) a 1986 Mercedes Benz was represented to the insurer in 1989 as being a new motor vehicle and the insurer undertook to replace the insured vehicle with a brand new vehicle. And the court found that “the description of the year of manufacture or model year and the age of the motor vehicle are material aspects of the description of the risk which the insurer is assuming.” M&F thus argued the following points:

· It was only liable under the policy in respect of a 1991 Mercedes Benz 230E;

· The facts presented by Da Costa were material to its decision to insure the vehicle; and

· The description of the vehicle amounted to a warranty which the respondent had broken.

Although the Court conceded that misstated facts could be held as material without further evidence – this should only happen where the fact “speaks for itself.” They suggested that the true test of materiality should include an assessment of the insured’s viewpoint. In other words, “would a reasonable person consider that the fact was one material to be known by the insurer or a fact that might influence the underwriter’s opinion as to the risk incurred.” The conclusion was that the Labuschagne case “cannot be regarded as authority for the proposition that without any evidence on materiality a Court can assume that a misstatement as to the year of manufacture of a motor vehicle is to be regarded as material.”

Getting to grips with the materiality concept

The Court said there was no evidence to support that M&F would have refused to cover the vehicle in question or offered cover at a higher premium had they known the true facts when it was added to the policy. The Court then ruled that it “could NOT be held that the misrepresentation relied on was material!”

Sithole says insurers can learn two important lessons from this judgement. “Firstly, an insurer who wishes to rely on a breach of warranty should allege this from the onset and not wait until the trial to raise that defence for the first time.” And secondly: “Alleging materiality of the miss-description of the year of manufacture and model of the vehicle is not sufficient on its own unless there are other circumstances from which it appears that the issue is material. An insurer MUST lead evidence to establish such materiality.”

Editor’s thoughts: It’s great when an injured insurance consumer wins the legal battle against an insurer; but disappointing that the battle had to go to court in the first place. Does the legal justice system offer a realistic prospect of relief to the average distressed short-term insurance policyholder? Add your comments below, or send them to gareth@fanews.co.za