Most people are holders of some sort of insurance policy, be that in the form of car insurance, home insurance, or life insurance. What this policy represents is nothing more than a contract between two parties, namely the insured (as the policy holder) and the insurance company (as the policy provider). The insurance contract states that the insurer either indemnifies the insured or provides financial protection in return for a premium paid by the insured. Such indemnity or financial protection shall become due upon a certain event, known as the claim event, such as a motor vehicle accident or the death of the policy holder. It may, however, come as a shock to most policy holders that the insurer may refuse to pay the claim based on non-disclosure of information, even where such information has no relation to the claim event. This article aims to discuss the implications of non-disclosure of information and the potential risks that such non-disclosures hold in enforcing a right to claim.
The point of departure when dealing with non-disclosure in insurance contracts is the materiality test, which is set out in Section 9 of the Long-Term Insurance Act 52 of 1998 and s 53 of the Short-Term Insurance Act 53 of 1998. Both Sections state that:
“The policy shall not be invalidated … on account of any representation made to the insurer, which is not true … unless that representation is such as to be likely to have materially affected the assessment of the risk under the policy concerned at the time of its issue or at the time of any variation thereof.”
The provisions of the Act therefore require that non-disclosure must be material. The test for materiality is as follows:
“The representation or non-disclosure shall be regarded as material if a reasonable, prudent person would consider that the particular information should have been correctly disclosed to the insurer, so that the insurer could form its own view as to the effect of such information on the assessment of the relevant risk.”
The object of this test was discussed in Mutual and Federal Insurance Co Ltd v Oudtshoorn Municipality  1 All SA 324 (A) (“Mutual and Federal”), where it was held that:
“The object of devising a means or criterion for determination of the materiality of undisclosed facts must surely be to ensure … that justice is done to both parties. The insurer is to be protected against non-disclosure which could … prejudice him but at the same time the insured ought not to be unfairly required to forfeit his rights under a policy which he entered into in good faith.”
It is against this background that the application of the materiality test shall be considered in determining whether it gives effect to the object of justice for both parties.
In order to achieve justice for both parties, there are two considerations. Firstly, the insurer should be protected against non-disclosures, which could prejudice him and secondly, that the insured ought not to be unfairly required to forfeit his rights under a policy that he entered into in good faith. The following two cases shall be discussed considering these two considerations.
In the Mutual and Federal Insurance Co Ltd v Oudtshoorn Municipality case, the Oudtshoorn Municipality failed to disclose the hazardous height of an electric pole in the near vicinity of the airfield’s runway. After an aircraft collided with the pole, the Municipality claimed from the insurer, however, the insurer repudiated the policy based on non-disclosure of material information. When considering the non-disclosure, the court determined that it was likely to have materially affected the insurer’s assessment of risk. It further determined that a reasonable person would consider this information as material and should have disclosed it to the insurer. It is, however, important to note that even though the claim event and the non-disclosure have a causal relationship, it has no effect on the materiality test, as will be seen in the case below.
In the case of Ganas v Momentum, Ganas, who was a life policy holder with Momentum, was shot and killed during a criminal shooting. The spouse of Ganas filed a claim, however, Ganas had failed to disclose a blood sugar condition when applying for the policy. Momentum, on the grounds of non-disclosure of material information, repudiated the policy and declined the death claim. This matter was brought in front of the Ombudsman for long-term insurance, who upheld Momentum’s right to repudiate the policy. By applying the materiality test, it was determined that the non-disclosure of the medical condition would have affected the assessment of the risk under the policy concerned and that a reasonable person would consider this information as material and should have disclosed such information. The Ombudsman held that in accordance with the law, “the causal connection is between the non-disclosure and the conclusion of the contract and not between the non-disclosure and the claim event, for instance, death”. The ruling of this case quickly gained backlash on social media. Due to mounting public pressure, Momentum decided to change its policy to pay claims where the deceased was a victim of violence, even if the non-disclosure entitled Momentum to repudiate the contract.
What is clear is that the materiality test concerns itself only with the causal connection between non-disclosure and the conclusion of the contract and not between non-disclosure and the claim event. It is important to note that both the Long-Term Insurance Act and Short-Term Insurance Act were recently consolidated into the Insurance Act 18 of 2017, however, the legislator has not dealt with the shortcomings of the materiality test. Accordingly, it is advisable to disclose all information comprehensively at the pre-contractual stage by discussing all material facts relating to the assessment of the risk. The applicant should further request that the insurer adequately disclose all material terms to ensure these are well understood.
Written by Geor Malan
This article is a general information sheet and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact your legal adviser for specific and detailed advice. Errors and omissions excepted (E&OE).