- Introduction
When concluding an insurance contract, it is important in the pre-contractual stage, to disclose all material facts which would be relevant to the assessment of the risk, the premium to be determined and decision to be made by the parties to conclude the agreement. A statement of fact which is false or misleading, amounts to misrepresentation, which if material, may affect the validity of the contract and result in certain adverse consequences. Even a non-disclosure, by way of an omission, may result in a pre-contractual misrepresentation.[1] The aggrieved party may attempt to avoid the enforceability and the consequences of the contract.[2]
- When is a mistake deemed to be material or essential?
An incorrect impression is to have been created[3] and a reasonable person in position of the representee, against whom the misrepresentation is made, would have reacted or relied on the mistake[4] and caused the representee to have entered into the contract or agreed to terms thereof, which would not have occurred had the true facts / state of affairs been known.[5]
A false disclosure is prima facie wrongful.[6] In case of a non-disclosure (omission), the legal convictions of the community, boni mores principle, requires that a person is to react positively, and attempt to remedy, if the surrounding facts and circumstances call for it, any incorrect impressions or perceptions which the other contracting party has, pertaining to any facts and information, at the time of contracting.[7] In other words, was there a duty to prevent or foresee the harmful consequences?” [8]
- Principle of good faith and duty of disclosure
A duty of good faith is to be applied to all insurance contracts, especially in as far as pre-contractual negotiations and this attaches weight specifically to the duty of disclosure. The absence of good faith, and disclosure in circumstances where the boni mores of the community in the facts and circumstances dictate conversely, is wrongful and may result in delictual consequences.[9] The absence of good faith is not decisive as to the determination of wrongfulness, but is a determinant factor, one of many, in the consideration for wrongfulness.[10]
- Negative misrepresentations (omission)
A failure to disclose a material fact itself is not wrongful, unless it is in breach or violation of a duty of a contracting party to have acted positively and disclosed same, in light of the prevailing boni mores prevalent within a community. Such omission can be intentional or negligent or innocent. The material fact is further to fall within the knowledge of the person with whom the duty to disclose vests.
An insurer, especially in terms of life insurance policies, requires a disclosure of certain information and facts to enable it to appropriately assess the risk that is sought to be insured and to determine an appropriate premium against which such risk is to be insured against. Some of this information would fall within the exclusive purview of the insured (and requires disclosure, for proper consideration). Some information is further accessible to the insured only. Disclosure by the insured of certain information is essential for the insurer to assess the risk and insurability of the insured.[11]
- Considerations relevant to the assessment of negative misrepresentation
5.1 Questionnaire / proposal form
In the case of life insurance, questionnaires are often utilised. These may be indicative inter alia, firstly, of the aspects and considerations which the insurer deems material to the assessment of the risk, secondly implies that aspects failed to be considered are likely not material, unless indicated otherwise and thirdly, if answers are left open or answered unsatisfactorily by the insured, and no clarification is sought, and a policy is issued it may imply a waiver by the insurer. [12]
In Colonial Industries Ltd v Provincial Insurance Co Ltd[13], it was however held, that there is still a duty of disclosure which vests with the insured and that “[I]n addition to answering the questions truly (…)it [is the insured’s] duty to make a full disclosure to the [insurance] company of all material facts.”
The facts and circumstances surrounding the pre-contractual negotiations of the life insurance contract is vital in the assessment of the underlying circumstances on which the contract was concluded, what information was solicited from either party at the time, if proposal forms or questionnaires where used, and to what extent these exhaustively dealt with soliciting information that would be deemed as material for disclosure and consideration by either party.
The facts and circumstances of each case, held against the criteria of the boni mores test of wrongfulness, are ultimately decisive in assessing if the nature of the questionnaire or form used, serves to have comprehensively dealt with material factors or conversely, if in terms of the content it is evident that material facts other than those asked for still fall to be disclosed.[14]
5.2 Absence of knowledge
A party to a contract cannot be expected to disclose material facts which do not fall within his or her knowledge nor can a duty be imposed on such a party to be required to ascertain the relevant information to make such a disclosure.[15][16] A contracting party could “be under no legal duty” towards the other contracting party to disclose any facts falling outside his or her knowledge, “but which he would have had, were it not for his own negligence.” Such failure is not wrongful.[17]
In Mahadeo v Dial Direct Insurance Ltd 2008 (4) SA 80 (W) paras 17 and 18 the court confirmed that the test in s 53(1) of the D Short-Term Insurance Act [18]was objective: “whether information should have been disclosed is judged not from the point of view of the insurer but from that of the notional reasonable and prudent person. The question is thus whether the reasonable person would have considered the fact not disclosed as relevant to the risk and its assessment by an E insurer.”
5.3 Constructive Knowledge
In Mutual & Federal Insurance Co Ltd v Oudtshoorn Municipality[19] it was held that the duty of disclosure extends to constructive knowledge, in other words, knowledge which the contracting party would have been able to ascertain, which would be material to the terms for consideration at the time of the conclusion of the contract.
The boni mores test for wrongfulness remains decisive. The insurer cannot however rely on such duty to disclose in relation to factors known to it, or alternatively, of which he can “reasonably be assumed to be aware”.[20] [21]
Glencore International AG v Alpina Insurance CO Ltd[22] expounded the duty of the insurer, by stating that “the underwriter must also play his part by listening carefully to what is said to him and cannot hold the insured responsible if by failing to do so he does not grasp the full implications of what he has been told.”
Factors that fall within public knowledge or are commonly known or ought to be by the insurer, do not require disclosure.[23]
5.4 Waiver
An insurer may through an express term of the policy or implicitly waive its right to information or disclosure, as determined by the facts and circumstances of each case.[24] If a contracting party is deemed to have waived a right to disclosure in relation to a certain fact, reliance cannot be placed on the contention that such subsequent disputed fact was required to have been disclosed.[25] [26]
The non-disclosed information does not have to be related to the insured event.[27] Emphasis is on the failure to have disclosed a fact that would have been material at the time of entering into the contract, and not on the effect of the non-disclosure on the insured event or risk.
5.5 Materiality
A false representation in itself is not wrongful. For the representation to be wrongful it is required to be material. The test for materiality relates to the element of wrongfulness and is objective.[28] Neither the insured or the insurers view point is to be preferred, and rather the criterion of the “reasonable man” is to be invoked.[29] [30] The duty to disclose by the insured at the time of contracting encompasses not all material facts, but only those material facts relevant to the risk.[31] [32] The enquiry is if the fact itself is material and not if the subjective viewpoint of the respective contracting party perceived it as such.[33] In Fransba Vervoer (Edms) Bpk v Incorporated General Insurances Ltd [34] the court further surmised however in qualification that it “is the duty of a proposer for insurance to disclose any fact, exclusively within his knowledge, which is material for the insurer to know.”
5.6 Legislative provisions pertaining to aspect of materiality
Legislative interventions attempt to regulate the circumstances under which an insurer could inter alia, be entitled to avoid liability, in an attempt to “protect insured parties who are ignorant, careless or uneducated from unscrupulous insurers who attempt to escape liability on the basis of common law.”[35] It would further be contrary to public policy and interest”[36] for an insured to waive the benefits of these provisions.
Rule 21 of the Long-Term Policyholder Protection Rules (as promulgated under GN 997 in Government Gazette 41928 of 28 September 2018) inter alia, specifically deals with misrepresentation, in codification of the aforementioned principles already alluded to. An insurer will be unable to declare a policy invalid and escape his obligations, unless it can be shown that the representation or non-disclosure materially affected the insured‘s ability to assess the risk at the time of its conclusion, measured against the criteria of the reasonable / prudent person.
- Burden of Proof
The burden of proving materiality rest on the party alleging and relying on the misrepresentation.[37] Reinecke, van Niekerk & Nienaber[38] state that “the insurer has to establish all the requirements of its defence to a claim on the policy, including materiality of the facts and information,” as per the case study, “not disclosed.”
In Pillay v SA National Life Insurance Co[39] it was held that the onus is “ D on insurer to show that false answers materially affected the risk in the estimation of the reasonable person.”
The onus of proving materiality is on the insurer, as is proving that the non-disclosure or representation induced it to conclude the insurance contract.[40]
- Causation
The misrepresentation must have caused or induced the responding contracting party, to
enter into the contract, or to agree to certain terms therein, which would not have occurred where it not for the misrepresentation.[41]
In Pretorius v Natal South Sea Investment Trust Ltd it was further held that the misrepresentation “is material when it has the natural and probable effect of influencing the mind of the person to whom it is made.”[42]
In Regent Insurance Co Ltd v King’s Property Development (Pty) Ltd t/a King’s Prop[43], the learned judge reiterated the principle that in case of a misrepresentation it required firstly, objectively, a consideration if the non-disclosure materially affected the insurer’s risk assessment and then conversely, subjectively, if the non-disclosure of the material fact induced the insurer to issue the policy or extend the cover.
- Remedies
8.1 Avoidance / Rescission [44]
The party aggrieved by the material misrepresentation, who was induced to enter into the insurance contract, may elect to rescind the contract, which is voidable, even in case of an innocent misrepresentation.[45] If elected, the contract would terminate and each party ought to return what was received.
The premiums paid by the insured ought to be returned, by the insurer, to place the parties in the position that they would have been had the contract not been entered into, unless the policy and insurance contract entered into specifically makes provision for a forfeiture of premiums in case of any material non-disclosure. The amount to be refunded will then be limited to what is provided for in the Conventional Penalties Act.
In Labuschagne v Fedgen Insurance Ltd[46] it was correctly observed that “[t]o avoid the contract, it being avoidable contract only, the [insurer] had to purport to cancel it”. Provided all requirements for the conclusion of a valid contract have been met, the contract is still valid but voidable.
8.2 Damages (in addition to or in lieu of rescission)
Damages are claimable only where it can be shown that the misrepresentation was culpable (either by way of fraud or negligence).[47] Delictual damages are claimable provided all elements of delict are indeed met in such instance. In certain instances, rather than rescinding the contract, it may also be feasible to uphold the contract but claim damages in addition to, for example claim the difference in premiums that would have been charged and would have been payable, had the material fact been disclosed at the time of conclusion of the contract.[48]
8.3 Estoppel
The aggrieved contracting party can also rely on the principle of estoppel, to hold the misrepresenting contracting party bound to the terms of the contract.
- Didcott principle of proportionality
The traditional English Law view, contends that an insurer may elect to rescind the contract in all cases of misrepresentation, not only where it would not have entered into the contract to start with but also where it would have probably still entered into the contract, but on different terms (the “all or nothing principle”).[49]
Didcott J however in Pillay v South African Life Assurance Co Ltd[50] called for an amendment to the current insurance legislation in South Africa to disallow the cancellation of a contract by the insurer, in circumstances where the insurer would have still entered into the contract but under different terms, where it not for the misrepresentation, on premise that alternative remedies should be prescribed for the insurer in such event.
If the aggrieved contracting party would have still concluded the contract but under different terms, in absence of the misrepresentation, the aggrieved contracting party is often in these cases, placed in a better position, in that he or she is capable of escaping liability, when the contract would have still been concluded, albeit on different terms. Legislative reform is needed to give effect to public policy considerations, in terms of which the old English Law all-or-nothing principle, requires amendment. In cases of incidental misrepresentation, reconstruction of the policy, should be enforced as an alternative remedy, to bring the contract in line with the version that would have likely been concluded had there been no misrepresentation.[51]
According to Reinecke, the insured accordingly would have the following remedies at his disposal in terms of the Didcott Principle:[52]
-
- If a higher premium would have been charged, the insured’s claim is to be reduced proportionately in relation to the underpayment of the premium, alternatively the underpayment can be reclaimed with interest;
- The insurer should be able to claim from the insured an underpayment of premiums, irrespective if a claim is brought by the insured;
- If the insurer would have included an exclusion or waiting period, the insured’s rights are treated as if the policy included such term.
A court cannot invoke Section 39(2) of the Constitution to develop the common law, to expand on the remedies, as the remedies available to the insured, are codified and require legislative intervention. Policy considerations and value judgments expressed, make it clear that legislative intervention and enactment is required to remedy the position, so as to ensure that the legislature gives effect to the prevailing boni mores and public interest prevalent within the insurance community, and to counter and preclude an insurer from escaping liability, in circumstances where he would have been liable to the insured, were it not for the non-disclosure (provided this was indeed not fraudulently made).
- Conclusion
The facts and circumstances of each case are vital in the determination of the misrepresentation and its materiality. Under what conditions, in light of which factors, was the contract concluded? At the time of the conclusion of the insurance contract was there an extensive questionnaire furnished for completion which possibly omitted an enquiry into material facts from the insured, that ought to have been canvassed? In assessment as to whether the misrepresentation made was material, it is objectively to be considered whether having regard to the prevailing boni mores, there was on a balance of probabilities, a duty on the insured to have acted positively, to have disclosed inter alia a medical condition, such as in life insurance policies. Would it have been foreseeable to the reasonable person in the position of the insured, that a relevant factor would have been relevant to the insurer in assessing the risk against which cover was sought at the time of conclusion of the contract? Was the insurer in response induced in response to conclude the contract with the insured? Would the insurer likely still have concluded the life insurance policy, albeit under different terms, such as the imposition of higher premiums?
To limit unnecessary and costly litigation, there is a clear emphasis for the contracting parties to an insurance contract, to canvass comprehensively, at the pre-contractual stage, all material facts, to the assessment of the risk, and setting of premiums, and for the insurer to adequately disclose all material terms and ensure these are well understood by the insured.
R WIERS LLB (UP) Senior Associate – ADAMS & ADAMS Specialising in insurance law, medical malpractice and personal injury law.
[1] Reinecke, MFB, van Niekerk, JP and Nienaber, PM South African Insurance Law Durban Lexis Nexis 2013 at par 8.5 – 8.6. [2] Reinecke, MFB, van Niekerk, JP and Nienaber, PM South African Insurance Law Durban Lexis Nexis 2013 par 8.3 [3] Supra 2 par 8.9. [4] Supra 2 par 8.11. [5] Supra 2 par 8.12. [6] Supra 2 par 8.12. [7] Supra 2 par 8.12. [8] Supra 2 par 8.17. [9] Supra 2 par 8.38. [10] Supra 2 par 8.35. [11] Supra 2 par 8.65. [12] Supra 2 par 8.67. [13] 1922 AD 33 40; also Supra 27. [14] Supra 2 par 8.73. [15] Supra 2 par 8.75. [16] Universal Stores Ltd v OK Bazaars 1929 Ltd [1973] 4 All SA 611 (A); 1973 (4) SA 474 (A) 762. [17] Supra 2 par 8.78. [18] 52 of 1998. [19] [1985] 1 All SA 324 (A); 1985 (1) SA 419 (A) 432 E, 436 E. [20] Santam Bpk v van Schalkwyk 2002 (4) SA 193 (O). [21] Supra 2 par 8.82. [22] [2004] 1 Lloyd’s Rep 111 143. [23] Supra 2 par 8.84. [24] Supra 2 par 8.87. [25] Supra 2 par 8.90. [26] Malcher &Malcomess v Kingwilliamstown Fire & Marine Insurance & Trust Co (1883) 3 EDC 271. [27] Supra 2 20 par 8.91. [28] Neethling, J, Potgieter JM and Visser, PJ Law of Delict 6ed Durban Lexis Nexis Butterworths 2010 42; [29] Mutual and Federal Insurance Co Ltd v Oudtshoorn Municipality [1985] 1 All SA 324 (A); 1985 (1) SA 419 (A) 435H–I. [30] Fransba Vervoer (Edms) Bpk v Incorporated General Insurances Ltd 1976 (4) SA 970 (W) 980. [31] Pereira v Marine & Trade Insurance Co Ltd [1975] 4 All SA 635 (A); 1975 (4) SA 745 (A) 755. [32] Mutual & Federal Insurance Co Ltd v Oudtshoorn Municipality [1985] 1 All SA 324 (A); 1985 (1) SA419 (A) 435G. [33] Fransba Vervoer (Edms) Bpk v Incorporated General Insurances Ltd 1976 (4) SA 970 (W) 976. [34] 1976 (4) SA 970 (W) 975. [35] Representative of Lloyds v Classic Sailing Adventures (Pty) Ltd [2010] 4 All SA 366 (SCA); 2010 (5) SA 90 (SCA) par 24. [36] Representative of Lloyds v Classic Sailing Adventures (Pty) Ltd [2010] 4 All SA 366 (SCA); 2010 (5) SA 90 (SCA) par 24. [37] Supra 2 par 8.116. [38] Supra 2 par 8.116. [39] 1991 (1) SA 363 (D) 367C E. [40] Regent Insurance Co Ltd v King’s Property Development (Pty) Ltd t/a King’s Prop 2015 (3) SA 85 (SCA) . [41] Supra 2 par 8.125. [42] Pretorius v Natal South Sea Investment Trust Ltd [1965] 3 All SA 1 (W). [43] 2015 (3) SA 85 (SCA). [44] Supra 2 par 8.133. [45] Government of the Republic of SA v Thabiso Chemicals (Pty) Ltd [2009] 1 All SA 349 (SCA); 2009 (1) SA 163 (SCA) 12. [46] [1994] 3 All SA 90 (W);1994 (2) SA 228 (W) 239A. [47] Supra 2 par 8.133. [48] Supra 2 par 8.135 – 8.136 & 8.150. [49] Reinecke, MFB “Remedies for Misrepresentation Inducing a Long-Term Insurance Contract: The Didcott Principle “ 2009 21 SA Merc LJ at 389. [50] 1991 (1) SA 363 (D). [51] Supra 49 at 391. [52] Supra 49 at 395.
