Induction methods

Reinsurance readers will be familiar with the Court of Appeal judgment Laker Vent Engineering Limited v Templeton Insurance Limited, which dealt with a claim arising out of an insurance policy for legal expenses.

One of the defences used in this case was the failure to disclose the required material facts or circumstances entitling the insurer to avoid the policy. An issue was whether the underwriter had been induced to enter into the policy by the non-disclosure.

The UK's Court of Appeal referred to earlier English authority, which established that a material non-disclosure or misrepresentation does not entitle an underwriter to avoid a policy of insurance unless that non-disclosure or misrepresentation had induced the underwriter to make the contract it did or on the terms it did.

The principles in English law are firstly, to avoid a policy for material non-disclosure, the insurer must prove on a balance of probabilities that it was induced to enter into the contract by material non-disclosure or misrepresentation.

Secondly, there is no presumption of law that an insurer is induced to enter into a contract by a material non-disclosure or misrepresentation.

Thirdly, the facts may, however, be such that it can be inferred that the particular insurer was so induced, even in the absence of evidence.

And finally, in order to prove inducement, the insurer must show that the non-disclosure or misrepresentation was an effective cause of its entering into the contract on the terms that it did. It must show at least that but for the relevant non-disclosure or misrepresentation, it would not have entered into the contract on those terms. It does not have to show that it was the sole effective cause of it doing so.

Different in South Africa

In South Africa, section 53 of the Short-term Insurance Act 1998, which in essence codifies the law on the issue of materiality of non-disclosure and misrepresentation, is silent on the question of inducement.

Section 53(1)(a) does say that a policy shall not be invalidated on account of a misrepresentation or non-disclosure, unless that is such as likely to have materially affected the assessment of the risk under the policy concerned at the time of issue, renewal or variation.

Section 53(1)(a) requires an objective test for materiality of the reasonable, prudent person.

Misrepresentation, whether positive or negative (in the sense of a non-disclosure) is, under South African common law (which is Roman-Dutch based), a tort. One of the elements of a claim based on misrepresentation is proof of a detrimental result caused by the wrongful conduct.

Section 53 does not alter the law of misrepresentation in insurance other than by way of the express terms of the section that ameliorates the effect of affirmative warranties in respect of any misrepresentations, and applies the objective test of materiality.

It remains part of South African law that the misrepresentation is actionable only if it induced the representee to enter into the contract of insurance, or a particular term of the contract when it would not have done so if it was not misled. The element of causation must be proved to found the claim in delict. The misrepresentation need not be the sole cause but it may be a contributing clause.

An avoidance of a policy for non-disclosure cannot succeed if an insurer does not allege and prove that it was induced to enter into the particular contract by reason of the material misrepresentation.

Objective test

It is the actual inducement of the relevant insurer to the non-disclosure, not the reasonable insurer or the reasonable person that is important.

Section 53 then applies the objective test of materiality to that particular non-disclosure and trumps the subjective say-so of the insurer that the facts were material.

The obvious fact that information is material may be strong proof, although rebuttable, that a causal link exists between the representation and the conclusion of the contract. If facts are so material that they would be relevant to any reasonable, prudent person negotiating an insurance contract, the probabilities are that those facts would be found to have induced the particular insurer in its assessment of the risk and induced the contract. (Mutual & Federal v Da Costa 2008(3) 459 SCA)

In the circumstances, the requirement of inducement referred to in Laker Vent Engineering Limited, is also a requirement in South African law.

If avoidance of a policy including a reinsurance policy is tested in a South African Court, (or the policy interpretation is subject to South African law), it would usually be necessary to lead the evidence of the relevant underwriter that he or she was in fact induced if the appropriate concession is not obtained from the insured.

If, however, the evidence of the underwriter is that the non-disclosure was irrelevant to the writing of the risk, an insurer cannot succeed in avoiding a policy even where the non-disclosure is material on the objective, section 53 test.

- Donald Dinnie is director at Deneys Reitz.