On Friday (21 November 2014), the Supreme Court of Appeal (“SCA”) delivered an important judgment in the area of non-disclosure in the insurance context, a topic with an already chequered jurisprudential history.
The court’s decision in Regent Insurance Company Ltd v King’s Property Development (Pty) t/a King’s Prop1adds further depth to the topic. In its judgment, the SCA:
- reiterated the principle that in order for an insurer to invoke material non-disclosure (or its positive corollary – misrepresentation) it must demonstrate that such non-disclosure in fact induced the issuing of the policy in question, deciding that this test is to be applied subjectively;
- answered the question as to whether the insured’s duty to disclose material risks can be discharged by a disclosure of a risk that is comparable to the actual risk for which indemnity is sought; and
- provided some clarity as to the circumstances under which an insurer may be estopped from relying on a material non-disclosure.
The appeal turned on whether or not an insurance claim was properly rejected and the policy treated as void by the insurer after a claim was instituted for fire damage to premises owned by King's Prop. The alleged non-disclosure lay in failing to advise Regent that the premises was occupied by a tenant which used highly flammable materials in a truck and trailer manufacturing business. Regent alleged that had it known about the risk, the Multimark policy would not have been underwritten. Notwithstanding the fact that the risk went undisclosed, at the time that a quote for cover was requested, the insured's broker requested an urgent survey of the premises. The insurer undertook to carry out the survey but failed to do so prior the fire breaking out.
High Court's decision
The High Court held that King's Prop had been misled into believing that the survey had been done and had accordingly paid the premiums on the assumption that the cover was in place. It argued that Regent was therefore estopped from relying on any non-disclosure. In making its finding though, the High Court did not decide the antecedent question of whether or not a material non-disclosure had been made in the first place. The answer to this question was settled on appeal and much can be gleaned from it.
Lewis JA, writing for the majority, noted the fundamental requirement that, at common law, an insured, when requesting insurance cover, must make full and complete disclosure of all matters material to the insurer’s assessment of risk and that failure to do so will entitle the insurer to reject a claim under a policy and to treat it as void. This common law rule has since been codified in the Short Term Insurance Act 53 of 1998 ("the Act").
However, despite the fact that Section 53(1) of the Act confirms that the test for the materiality of a non-disclosed fact is determined objectively, Lewis JA noted that it is silent as to the second leg of the common law test for material non-disclosure i.e. whether such non-disclosure, as a matter of fact, induced the insurer. She went on to note that the matter had been determined positively by Schutz JA in Clifford v Union Insurance Co of SA Ltd2.
This precise question was at stake in the instant appeal as King's Prop lead evidence as to the fact that a reasonable insurer might have issued the policy even if full disclosure was made. It was argued therefore that, objectively considered, inducement could not be established. Regent, on the other hand, pointed to its own clear internal policies directing that the risk in question could not be insured. Based on their own policies they argued that had the risk been disclosed they would not have extended cover and so subjectively speaking, the non-disclosure could properly be seen to have induced the policy.
Lewis JA decided that the test for inducement remains subjective (notwithstanding that the test for materiality is objective). The evidence that the insurer had a particular approach to the risk in question decided the matter in its favour.
The second principle underlined by the SCA was that notwithstanding that information is in the possession of an insurer3, this does not excuse an insured from the duty to make full disclosure. King's Prop argued that Regent had constructive knowledge of and had been aware of a risk that was comparable and analogous to the actual risk i.e. the carrying out of a bedding supply business rather than a truck and trailer manufacturing business in which highly flammable materials were used. The court held per Lewis JA’s majority, as well as Wallis JA’s concurring judgement, that the proposition that disclosure of some other risk could discharge the insured’s obligations to make full disclosure is inconsistent with the basic principle to make full disclosure (and lacks any authority).
This leads to the last notable point in the judgement and points to the way in which the estoppel was found to be unsustainable on the facts. In their concurring opinions, both Judges of Appeal looked again to the foundational principle of full-disclosure and the underlying rationale of the duty which is to allow the insurer to act in accordance with the actual risk present. King’s Prop argued that the representation that an assessment would be, or had been undertaken, had caused them prejudice because they had assumed cover was properly in place (hence fulfilling the requirement of estoppel). The court disagreed holding that what had actually caused prejudice to King’s Prop was its failure to disclose the tenancy and the nature of its business.
Wallis JA reasoned, moreover, that the only representation that was made by the insurer was that cover had been extended on the terms of the policy which included the right of the insurer to avoid liability if the insured was guilty of a material non-disclosure.
This judgment provides an important lesson to brokers and insureds that it is more prudent to err on the side of caution during the pre-contractual stage and to make as full a disclosure as possible when seeking cover.
It also highlights the value of proper documentation of an insurer's underwriting principles and the process followed prior to underwriting a risk.