The Supreme Court of Appeal (SCA) in South Africa, in Centriq Insurance Company Limited v Oosthuizen and another, was tasked with considering the correct interpretation of an exclusion of liability clause contained in a professional indemnity insurance contract. The main issue for consideration was whether an exclusion of liability clause, which subverts the underlying purpose of the insurance policy, may be relied upon by the insurer.
The specific insurance contract in question, which was underwritten by Centriq Insurance Company Limited (Centriq), sought to indemnify a financial advisor from liability for a breach of his duties in connection with his business by reason of a negligent act, error or omission. However, where there was a third party claim arising from the depreciation in the value of an investment as a result of any actual or alleged representation, guarantee or warranty by the financial advisor, Centriq would be excluded from any liability to cover the financial advisor. It was this exclusion clause which formed the subject of judicial scrutiny.
In this case, a widow had approached a financial advisor for assistance in investing proceeds received from her deceased husband's policy, which amounted to circa ZAR 2 million. The widow informed the financial advisor that she required an extremely low risk investment as she was dependant on a steady stream of fixed income. In advising the widow, the financial advisor informed her that she should invest the proceeds of the policy into a property development scheme, being a newly completed shopping complex. Many newspaper reports, however, claimed that this property development scheme was a "Ponzi scheme" and "a house of cards waiting to cave in". The financial advisor brought these reports to the attention of the widow, not to discourage her to invest in the scheme, but rather to explain away any scepticism of the scheme by stating that these allegations were baseless and that "property cannot just disappear".
What the financial advisor did not tell the widow was that, despite his representations to the contra, what she was investing in was not a completed shopping complex. The widow was actually investing in the construction of the shopping complex. However, as the widow was not proficient in nor had any experience with financial investments, and because her deceased husband had previously utilised the services of this financial advisor, she wholeheartedly trusted his advice.
Shortly after the widow invested in the scheme, the development failed following an investigation by the South African Reserve Bank. This investigation found that the scheme contravened provisions of the Banks Act, 94 of 1990, by taking deposits illegally. Accordingly, the widow lost her investment and sought to recover the loss from the financial advisor. The financial advisor in turn sought to rely on the professional indemnity insurance with Centriq, who then relied on the exclusion of liability clause.
In claiming against the financial advisor, the widow alleged that the financial advisor had failed to act honestly and fairly through recommending that investment to her. Additionally, the widow claimed that the financial advisor had not provided objective financial advice which was appropriate to her needs. In totality, the financial advisor had not exercised the degree of skill, care and diligence that would be expected of an authorised financial services provider.
In disputing its obligation to cover the liability of the financial advisor, Centriq alleged that this exclusion clause was triggered by the widow's claim (being a third party claim) being one for loss arising from a depreciation in the value of the investment and that such an investment was made as a result of a representation, guarantee or warranty and thus fell within the ambit of the exclusion clause. Conversely, the widow claimed that her loss was due to the inadequate advice provided by the financial advisor and not the performance, or lack thereof, of the investment.
The High Court held that insurance contracts are like any other contract and must be construed by having regard to their language, context and purpose. Additionally, courts are to favour a commercially sensible approach when interpreting insurance contracts, which upholds the objective and aim of the contracting parties.
The High Court noted that where there was any ambiguity in relation to the insurance contract, the contra proferentum rule would apply. Accordingly, where an insurer sought to limit or exclude their liability, they would be required to ensure that such was clearly and adequately stated, as any failure to do so would result in a contra interpretation being preferred. That being said, courts are not entitled to interpret a policy in favour of an insured simply because the exclusions may be seen as unfair or unreasonable in the court’s eyes.
The High Court in this instance held that the financial advisor, in advising the widow to invest in the company, was negligent and refused to allow Centriq to rely on the exclusion clause. On appeal, the SCA confirmed the finding of the High Court and held that the financial advisor failed to take reasonable steps to satisfy himself as to the safety of the investment in order to give his client adequate financial advice.
Accordingly, any exclusion which would seek to exclude cover in these instances would be at odds with the entire purpose of the insurance policy. The SCA held that Centriq could not rely on an exclusion in the policy that was at odds with the purpose of the policy itself, which was to indemnify a financial advisor for a breach in connection with the rendering of negligent financial advice.
This case is of extreme importance to insurers underwriting financial advice on the one hand, in that they need to be very explicit on how the exclusion is worded. Additionally, this judgment is important to financial advisors seeking to indemnify themselves against the adverse consequences of their advice. Insurers should therefore review their policies to ensure that their exclusions are worded in such a way as to ensure absolute certainty.