Disputed insurance claims are a common feature in the insurance industry, the world over. The recent uproar over a decision to reject a R2.4 million life insurance claim due to non-disclosure by health and insurance group, Momentum, in South Africa brings the issue of non-disclosure of material facts into sharp focus.

Although it is unfortunate that the policyholder died from gunshot wounds sustained during a hijacking, the insurer refused to settle the claim on the basis that the policyholder had failed to disclose existing high blood sugar levels.

After referral to the Ombudsman for Long-Term Insurance, the matter was ruled in favour of Momentum Life. Whilst, Momentum Life ended up paying the R2.4 million, probably to save its reputation, it is important to note that non-disclosure of material facts results in an insurance company justifiably refusing to settle a claim.

In this regard, full disclosure is a fundamental principle in insurance, and a breach can be considered misrepresentation of material facts.

What exactly does misrepresentation of material facts involve?

In insurance, misrepresentation involves intentionally providing false information or withholding information, that if disclosed might result in the parties to the contract changing the terms and conditions or deciding not to enter into the contract.

Whilst reluctance to give out what appears to be too much information regarding personal life is human nature, withholding critical information when

entering into contracts can render a contract invalid, when such information

is revealed at the claiming stage.

In Insurance, the principle of utmost good faith requires both the insurance company and the person taking out insurance (policyholder or insured) to disclose all information concerning the contract and the circumstances

surrounding the asset being insured.

Such information about the subject of insurance is essential for the insurer to

undertake risk assessment and price the risk.

It is the duty of the policyholder to keep the insurance company updated, with

all relevant material information, which may include:-

• Change of address of the insured asset in the case of movable \assets;
• Change of use of the insured asset, for example changing the use of an insured motor vehicle or house from private use to commercial use;
• Changes in behaviour such as smoking or car racing or other life-threatening activities in the case of life insurance; and
• Any health-related or medical developments, for instance, terminal illness in case, the policyholder has been diagnosed.

It is important to note that changes in such circumstances may affect the insurance policy by either increasing or reducing the premiums. For instance, if a policyholder has upgraded his/her home security by erecting an electric fence, it may result in the premium going down due to improved security, which lowers the risk of possible loss.

Full disclosure is important as it helps the insurance company to correctly price the premium or to make a decision on whether to enter the contract or not. It is therefore, important to disclose all material facts at the onset of an insurance

contract and on an ongoing basis for the insurance company to adjust its price and/or cover to avoid rejection of compensation at the point of making a claim.

Failure to disclose material facts by the insured may result in the insurance policy being of no force.

The duty of disclosure also requires the insurance company to treat customers fairly and in doing so, the company should demonstrate that it meets the following principles as best practice:

• Fair treatment of policyholders should be central to the corporate culture;
• Products and services marketed and sold should be designed to meet the needs of identified consumer groups and are targeted accordingly;
• Consumers are provided with clear information and are kept appropriately informed before, during, and after the point of sale;
• When consumers receive advice, the advice should be appropriate and tailored to the unique circumstances of any individual;
• Consumers are provided with products that perform as firms have led them to expect; and
• Policyholders do not face unreasonable post-sale barriers to switch the service provider, submitting a claim or making complaints.