Company XYZ employed an unlicensed driver to drive a small truck for the company. The driver is stopped and forced out of the truck and the truck is stolen. The company submits a claim to their insurance company which repudiates the claim on the basis of the licensed driver exclusion in the standard policy. The risk manager of company XYZ feels that the insurer has no right to repudiate the claim since there is no causal link between the hijacking and the loss. The insurance contract will be important in determining liability. The exclusions that are set in an insurance contract will be discussed in this paper. Exclusions in insurance contracts are conditions that are not covered by the insurance company.
Good faith is a feature of South African Insurance law. Stoker states that the duty of good faith includes the requirement that both the insured and the insurer disclose all material facts relating to the insurance contract to be entered into.â€™ If the insured has more information about the specific risk than the insurer does, they have a duty to disclose all material information about this risk. This obligation forms part of South African Insurance Law. Failure to disclose any material fact renders the contract voidable. The insurer was always only required to disclose information that he was aware of. This has changed and today, the insured is only expected to disclose facts that he knows or that he ought to know. (Vivian 2013: pg 33) The important aspect which can contribute to a contract being voidable is materiality. Which information is material / important to disclose with you insurer. This is shown in the s53 short-term insurance act which is discussed later.
In the example under discussion this interpretation of the Law would mean that the insurance company could repudiate the claim as the entire contract could be made void by the insuredâ€™s failure to disclose a very material fact (using unlicensed drivers). The insured certainly knew this fact and it would have been an important fact for the insurer to underwrite the risk. As such it should have been disclosed to the insurer who would have been able to either adjust the premium to account for the changes risk profile or, more likely, have declined the proposed policy altogether. The insuredâ€™s duty to disclose arises at the inception of the policy and then continues throughout the policy. The duty of good faith extends beyond the time when the insured took out the policy.
A warranty in anÂ insurance policyÂ is a statement verifying that something the insured person says is true. An insurance contract is written on the principle of utmost good faith, as I have stated above, meaning that there must be an element of trust between the insurer and the insured. A breach of warranty entitles theÂ insurerÂ to treat theÂ insuranceÂ contract asÂ voidÂ even if theÂ actual lossÂ is unaffected by the breach. This will discharge the insurer from liability under the policy. The existence of a warranty in an insurance contract may be very harsh towards the insured but legislation, as set below, has mitigated this position. (Vivian 2013: pg 17) (In the case under discussion the insured certainly breached the obligation of utmost trust between the parties by failing to disclose an important fact that was very material to the assessment of the risk.)
The s53 of the Short-term Insurance Act was introduced and reads:
(1)(a)Â Notwithstanding anything to the contrary contained in a short-termÂ policy, whether entered into before or after the commencement of this Act, but subject to subsection (2) —
the policy shall not be invalidated;
the obligation of the short-term insurer there under shall not be excluded or limited; and
the obligations of the policyholder shall not be increased, on account of any representation made to the insurer which is not true, or failure to disclose information, whether or not the representation has been warranted to be true and correct, unless that representation or non-disclosure 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 renewal or variation thereof.
Â Â (b) The representation or non-disclosure shall be regarded as material if a reasonable, prudent person would consider that the particular information constituting the representation or which was not disclosed, as the case may be, should have been correctly disclosed to the short-term insurer so that the insurer could form its ownÂ viewÂ as to the effect of such information on the assessment of the relevant risk.
This sets out the test for materiality and ensures that the insurer cannot avoid liability on the grounds of facts that could not have affected the assessment of the risk because they are not material.
In our example lack of the disclosure of the fact that unlicensed drivers were being employed would have had a material difference on the “assessment of the risk under the policy concerned at the time of its issue…” S53 (1) (a) iii.
The insured has raised the point that there is no causal link between the loss which was caused by the hijacking â€“ and the fact that the driver was unlicensed. But even if there was not a causal link between the unlicensed driver and the hi-jack the insurer would have been able to repudiate the claim based on the fact that a something material to the assessment of the risk had not been disclosed.
The case of Mutual and Federal Insurance Ltd vs Gouveia 2003 4 SA 53 (SCA), in which the insuredâ€™s motor vehicle had been insured in terms of a comprehensive motor vehicle policy which had an exception clause that stated: â€˜ the company shall not be liable in respect of: any accident, injury, loss, damage or liability caused, sustained or incurred whilst any vehicle insured under the policy is being driven by the insured or with his general knowledge or consent by any person unless he is licensed to drive such a vehicle in accordance with the legislation of the territory in which it is being used.â€™ The insured knew that the driver of the vehicle he insured was unlicensed and when the vehicle was stolen, the insured made a claim to the insurance company for compensation. The insurer avoided liability in terms of the exception clause. (Havenga 2004: pg 596) The insured responded by saying that the exception clause was inapplicable as it was referring to a loss caused by / linked to that lack of a valid license on the part of the person driving the vehicle.
According to the court; the clear words used in the exception clause, connote a temporal connection rather than a causal connection especially if regard is had to the use of the wordwhilst
As Professor Vivian demonstrates in his article; A requirement for a causal link between policy terms and the loss? current law states that a breach of a warranted term in the policy is clear grounds for repudiation. No link is required. Vivian states that as a matter of law, there is no general requirement that a link exist between the breach of a policy term and the loss, he reinforces this idea in his next article; Insurance contracts as laws of general applicationâ€™ when he states that it is clear that no causal link is required to establish a material breach of contract.
Vivian writes in response to the proposal of a causal link between the loss and the breach of contract that â€˜the proposed test is not of universal application and thus as a test cannot be applied to all claims.â€™
Proposed Idea (The need for a causal link between the breach and the loss)
Professor Van Niekerk states that there definitely is a need for a causal link to lessen the harsh effect that sometimes comes from non-material breach of the insurance contract. (Van Niekerk 2010: page 270) This view also points out the fact that insurance companies have been repudiating valid claims for mere technical reasons. The idea that a causal link must exist between the breach and the loss implies that if an insurance company repudiates a claim on the basis of a breach in the policy term, they need to demonstrate the link between the breach of the term and the loss.
According to the Ombudsman for Short-term Insurance; The Ombudsman acts independently and objectively in resolving disputes and is not under instructions from anybody when exercising his or her authority. The ombudsman resolves disputes using the criteria of law, equity and fairness.
The case of RM Insurance Cape (Pvt) Ltd vs GCM (pvt) Ltd 1995 1 SA 698 (ZS), is an example in which the insured knew that the pilot of the insured aircraft was flying it without a valid pilotâ€™s license. The court approach was to accept that generally in insurance contracts, the insurer will be liable if the loss was caused/effected by the situation or peril. (Havenga 2004: page 596) The Court held that exception did not exclude the principle of causation. It also held that the breaches committed by the insured need to contribute to the accident. It was established that a connection was required between the risk and the occurrence of the loss. Many authors, such as P Havenga, commend this approach followed by the court. In Haveng article Insurance Contracts, exception clauses & causation; he states that â€˜it lends clarity to the judgement and creates a useful precedent.A court will regard, as persuasive authority, the decisions made in other countries on similar issues but will always apply South African Law.
If our case was taken on appeal or referred to the Ombud on what grounds would we hope to have the claim upheld? The only approach we could take is that the use of an unlicensed driver would not have affected the loss caused by the hi-jacking. Since there was no causal link between the breach and the loss the insurer should cover the loss. The counter claims the insurer could make are as follows:
The non-disclosure of an important fact in assessing the risk gives more than ample grounds for voiding the entire contract.
The insurer could claim that the insured did not “take all reasonable care to avoid a loss” (a standard clause in all insurance contracts). If the insured was reckless enough to employ unlicensed drivers might he not also have been reckless in choosing a route through a dangerous area prone to hi-jacking where a more prudent operator may have chosen a different, safer route?
Even if it is found that there are insufficient grounds for voiding the contract an argument could be made for the fact that the used of unlicensed drivers could have had a causal link to the hi-jacking. A licensed driver may have been more experienced than the unlicensed one and so may have been able to take evasive action and avoided the hi-jacking.
There is an ongoing debate between academics about the need for a causal link between an insured breach of the insurance contract and the claimed loss in South African Insurance Law, as seen in an article in Financial & Advisory News, February 2013 on The Great Debate between Professor Vivian and Professor van Niekerk.
My advice to the insured would be that it would be unlikely that they would succeed in getting the claim paid. Their use of unlicensed drivers was a major breach of the terms of the exclusion clause in the policy, as well as a breach of the duty of good faith which required the insured to make a full and correct disclosure of all relevant information. The non-disclosure would have had a significant effect on the underwriting of the risk â€“ to the prejudice of the insurer. Thirdly it may be possible to establish a causal link between the lack of experience of the unlicensed driver and the loss. The only hope the insured may have would be to avoid the traditional court system and to rather approach the Ombud â€“ since the Ombud can fall back on non-legal reasons such as “equity” and “fairness”. The Ombud may fail to make a causal link between the experience of the driver and the loss and could rule that the hi-jack could have happened to a licensed diver and so in the interests of “Fairness” and “Equity” rule in favour of the insured.