The Supreme Court of Appeal had to consider the question whether an insurer is entitled to repayment of the amounts already paid to the insured, in settlement of the insured’s claim, arising from the same incident, when it is subsequently discovered that part of the claim was tainted by fraud.
This article discusses the recent judgment of the SCA delivered on 14 June 2023, being Discovery Insure Limited v Masindi (534/2022)  ZASCA 101, dealing with the interpretation of clauses in the insurance agreement, on the question of the right of an insurer to avoid an entire claim and the legitimate part of such a claim, in the event that the insured’s claim is partially fraudulent, a fact which is discovered after the payment of benefits have already occurred and the right to recover all the amounts paid to the insured preceding the fraud is discovered by the insurer.
The insured in this matter suffered storm damage to his home and contents thereof, which was covered by his insurance policy with the insurer. Due to the extent of the damage, he claimed for the value of his contents, which were damaged, and also for the costs of emergency and temporary accommodation. The insurer paid to the insured and amount exceeding R1,5 Million in settlement of the claim, including R675,000.00 for the costs of the emergency accommodation.
After the payments had been made, the insurer discovered that the accommodation costs had been fraudulently inflated by the insured. It thereupon relied on two clauses in its policy to reject the claim in its entirety and to cancel the policy retrospectively to the date of the incident that caused the loss, proceeding also to recover the total amount paid to the insured as indemnity.
The operative clauses on which the insurer relied, are as follows:
Clause 5.5: ‘We reserve the right to cancel your Plan and claim repayment from you for any amounts we have paid in settlement of your claim if you breach or fail to comply with our procedure and the rules set out in this Plan Guide.’
Clause 5.13: ‘All benefits in terms of this Plan in respect of any claim will be lost and this plan may be voided or cancelled at our discretion:
· Where there is a misrepresentation, non-disclosure, misdescription by you or anyone acting on your behalf; or
· If false or incomplete information is supplied for any fact and/or circumstance in connection with an application for cover or in connection with a claim in terms of this Plan by you or anyone acting on your behalf; or
· If any claim or part thereof under this Plan is in any way fraudulent, or if fraudulent means or devices are used by you or any acting on your behalf to get any benefit under this Plan is occasioned by your intentional conduct or any person acting on your behalf or with your involvement;
· If any fraudulent information and/or document whether created by you or any other party is provided to us by you or anyone acting on your behalf or with your involvement in support of any claim under this Plan and whether or not the claim is itself fraudulent.
· If the size of any claim is inflated by you or anyone acting on your behalf or with your involvement, for any reason whatsoever, and whether the claim itself is fraudulent.
Where any benefit under this Plan is forfeited in circumstances set out in this section, we will have the right to cancel your Plan retrospective to the reported incident date or actual incident date, whichever is the earliest.’
The insurer instituted an action in the High Court and it was resisted by the insured on various grounds, arguing essentially that albeit that he did commit fraud pertaining to the costs of accommodation, the remainder of the monies (some R970,000.00) accrued to him lawfully because that part of the loss was genuine – and that he argued ought not be repaid to the insurer. The High Court agreed with the insured and ordered him to only pay to the insurer the R675,000.00 as ill-gotten gains. Interestingly and without it being the case of the insured at the time, the High Court also found that the clauses relied on by the insurer were tantamount to penalty clauses within the ambit of the provisions of the Conventional Penalties Act, and further that it fall foul of such Act.
The insurer, being dissatisfied with the outcome of the High Court, appealed to the SCA to reconsider the judgment, arguing that the meaning of the clauses in the insurance agreement are clear and valid and intended to protect the insurer against fraud by its clients.
The Honourable Masipa AJA ans Petse AP who delivered the judgment with Saldulker, Mabindla-Boqwana and Weiner JJA concurring, carefully considered the issue and the judgment of the High Court. The judges of appeal make it abundantly clear that the objective and the context of the contractual provisions have to be considered and that the interpretation of the clauses in an agreement is a unitary exercise, not a mechanical consideration of the text, context and purpose of the instrument under consideration. It was further stated that an interpretation should not be given that leads to impractical, unbusinesslike or oppressive consequences or that will stultify the broader operation of the legislation or contract under consideration.
The Court remarked that “our courts have on numerous occasions in the past pertinently observed that fraudulent insurance claims are not a rare phenomenon. Regrettably, such claims appear to be rising unabated.” As a result insurers have been moved to “incorporating in their policy contracts appropriate clauses designed to protect themselves against such claims. Such clauses, as a general rule, provide for forfeiture of the benefits that the insured would ordinarily derive from the policy in the absence of fraud or misrepresentation of the true facts.”
The SCA also commented with disapproval the introduction of the issue of the application of the Conventional Penalties Act (in support of the case of the insured) when it was not raised in the pleadings – and strongly mention that the case to be made in each matter should be left to the parties, who may have good reasons why they do not rely on any particular legal point or remedy in their matter, given that our system of justice remains adversarial.
The SCA found that the clauses relied on by the insurer are valid and the operation of which entailed that effectively, when the insured submitted his claim, he had already forfeited all the benefits in terms of his policy. The SCA therefore ordered that the insured repay all the monies he has received, with costs and interest.
The judgment will certainly be welcomed by the insurers in South Africa, because as the Court mentioned, the scourge of insurance fraud is increasing unabated. It also underscores that those who take chances to enrich themselves unlawfully, should not be able to walk away with no pain, when they are caught. Insurers have to expend enormous amounts to check and investigate claims in order to, as far as possible, pay only those claims which are valid. This places a financial burden on the insurers and by implication, all the other honest insured consumers, to whom those increased costs eventually fall in their premium to be paid.
by George Herbst | Director at Barnard