Lize de la Harpe, Senior Legal Advisor at Sanlam Corporate
Introduction
Over the years our courts have frequently confirmed the position that an insurer has the right to avoid a contract of insurance not only if the applicant had misrepresented a material fact, but also if he had failed to disclose one.
The Naidoo-judgment handed down on 13 March 2025 is a stark reminder of the consequences of material non-disclosure.
Naidoo v Discovery Life Limited and Another (10163/2016) [2025] ZAKZDHC 9
In essence, the plaintiff instituted an action against the defendant, Discovery Life Limited, following their refusal to pay to her the amount of R6 million, which constituted the proceeds of a life insurance policy in respect of which she was the nominated beneficiary. The policy in question (life cover, severe illness benefit and capital disability benefits) was taken by the plaintiff’s late mother, Sandra Naidoo, who died of natural causes.
Discovery argued that the Plaintiff was not entitled to any benefits under the policy on the basis that:
- The deceased falsely declared and overstated her monthly income as R35 000 per month instead of R5 455.89 per month, which was in violation of the express warranty in the application form requiring all information to be true and correct, and for all material information to be disclosed to Discovery, and
- the deceased failed to disclose her simultaneous applications for life insurance with two other insurers, Old Mutual and Altrisk, and that this failure to disclose material information, as required by the contract, could result in the repudiation of the policy.
Discovery, based on the misrepresented facts submitted by the deceased and her declared income of R35 000 per month, issued the policy for life insurance for R6 million. Discovery contended that had it known the true facts (both relating to her correct salary earned via her ‘nominated occupation’ and her simultaneous applications for life insurance with other insurers), it would have either not issued the policy on the terms it did, or possibly at all. Alternatively, had she had disclosed her simultaneous application for life cover with Old Mutual, Discovery would have provided her with significantly lower life cover, or it may have decided not to offer her any cover at all on the basis that she was covered to the fullest extent, based on her age and verifiable income.
The plaintiff, on the other hand, submitted that her mother was employed by Checkers at the relevant time of contracting with Discovery, but that her total income was far more than her monthly salary from Checkers, with additional income derived from ‘other sources’ (none of which could be proved at trial). Accordingly, the plaintiff contended that the deceased and her broker (the second defendant) entertained the reasonable belief that what they were required to disclose was total ‘income’ and not total ‘salary’. On this basis, her mother did not breach the contract, and Discovery was therefore obliged to pay the amount due in terms of the policy.
The court had to answer several questions in order to decide the matter, including the interpretation of the policy insofar as the income declaration in respect of “nominated occupation”. The plaintiff and the broker argued that the form places no restriction on the sources of income and implied a cumulative income from any or all sources with an emphasis placed on the word ‘total’ in the context of all ‘income’, as opposed to the use of the word ‘salary’.
The court disagreed – it held that this section of the form should not be interpreted in isolation of the remainder of the form, particularly item 1.3, which required details of the applicant’s ‘nominated occupation’ and ‘employer’. The form continued with an enquiry of the breakdown of the applicant’s different functions within his or her ‘occupation’.
Discovery explained that they use a ‘quick reference’ formula in determining the amount of insurance that one could qualify for, based on the equivalent of 12 month’s salary multiplied by a factor of 10 – this figure represents the maximum cover that would be offered. This formula only considers income received from the insured’s primary or nominated occupation as declared in the application form.
Discovery’s position was thus that had the deceased properly disclosed her salary from Checkers, it would not have offered the life cover amount that it did – the misrepresentations induced them to enter into the agreement, on the conditions they did. Alternatively, if the deceased had disclosed her simultaneous application for life cover with Old Mutual, Discovery would have provided her with significantly lower life cover (based on the fact that she had already succeeded in obtaining cover with Old Mutual), or it may have decided not to offer her any cover at all on the basis that she was covered to the fullest extent, based on her age and verifiable income.
The learned judge rightfully pointed out that an insurer should not be liable to compensate the insured for more than the economic loss incurred. The purpose of underwriting is also to ensure that a client is not over insured having regard to the age, income and health status as an important part of the factors taken into account in determining the risk insured against.
The court concluded that the deceased misrepresented her income which allowed her to apply for life assurance in an amount that bore no correlation to her financial status. In doing so, she failed to make proper disclosure as she was obliged to.
As such, Discovery, was induced into the contract by a material representation and non-disclosure and was consequently entitled to avoid the contract and refuse to pay the death benefit stipulated therein to the nominated beneficiary.
Conclusion
The duty of disclosure in insurance contracts arises automatically by law.
The Appellate Division in the matter of Mutual and Federal Insurance Company Ltd v Municipality of Oudtshoorn 240/82) [1984] ZASCA 129 [1985] 1 All SA 324 (A) confirmed that there is a duty on both the insured and the insurer to disclose to each other prior to the conclusion of the contract of insurance every fact relative and material to the risk or the assessment of the premium. This duty of disclosure relates to material facts of which the parties had actual knowledge, all constructive knowledge prior to conclusion of the contract of insurance. Breach of this duty of disclosure amounts to mala fides or fraud, entitling the aggrieved party to avoid the contract of insurance.
It is critical to ensure that clients understand the potentially devastating financial consequences for their families when they die and the death claim is declined by the insurer on the grounds of material non-disclosure.
ENDS
