Adviser obligations regarding disclosure of material terms and conditions of a policy

The need to explain material terms was never more clearly illustrated than during the pandemic outbreak in February 2020 and the subsequent lawsuits that really harmed the industry’s reputation.

Of course, if we all possessed perfectly working crystal balls, we would be able to foresee what mishaps would befall our clients and warn them about how his or her policy would react to them.

One aspect that emerged from the appeal cases concerned policy wordings, which, according to the judges, became so confusing that even the insurer had trouble in interpreting them correctly. What chance did the ordinary man in the street then have?

Relevant statutory provision

Section 7(1)(a) of the General Code of Conduct provides that a FSP, other than a direct marketer, must provide a reasonable and appropriate general explanation of the nature and material terms of the relevant contract or transaction to a client, and make full and frank disclosure of any information that would reasonably be expected to enable the client to make an informed decision.

Section 7(1)(c)(vii) of the General Code of Conduct provides that an FSP, other than a direct marketer, must, at the earliest reasonable opportunity, provide, where applicable, full and appropriate information and concise details of any special terms or conditions, exclusions of liability, waiting periods, loadings, penalties, excesses, restrictions or circumstances where benefits will not be provided.

In terms of the common law, there is no general duty on a broker to explain every clause of the policy to the insured. However, there is a legal duty, not only to inform the insured of the existence of any onerous policy conditions, but also to explain the importance of such conditions to the client.

Upon renewal, the broker is also required to satisfy himself or herself that there are no material changes to the policy or the insurable interest. If there are, this needs to be conveyed to the client.

Ombud case

The complainant insured his motor vehicle with Absa Insurance via his broker. About a year later, the vehicle was stolen, and Absa Insurance elected to repudiate the claim on the grounds that the insured did not abide by a policy condition to install a tracking device.

On further investigation, it transpired that the broker failed to communicate two subsequent endorsement schedules from Absa Insurance for onward submission to their client. The endorsement required the insured to fit a tracking device as a condition upon which indemnity against theft and hijacking would be met.

In its response to the Ombud, the brokerage stated that the initial quote upon which the insurance was ultimately concluded had no requirement for a tracking device.

The Ombud ruled that it was incumbent upon the intermediary to pertinently draw the insured’s attention to the additional terms on the policy schedule that were not included in the initial quotations.

The complaint was upheld, and the brokerage was ordered to pay the insured R87 300.

How does this impact you?

The information below was provided by Julian Lavagna in a newsletter to Moonstone Self-Comply clients in 2019.

The determination highlights two particularly important, yet often overlooked, themes:

  • Are clients made aware of any material terms, special conditions and/or circumstances in which benefits will not be provided?
  • Are the FSP’s internal communication channels functioning effectively?

Many repudiations are due to policy conditions not being met. It is sensible to point out to a client all conditions and/or circumstances in which benefits will not be provided and to ensure that these disclosures are documented (for example, via email or the record of advice).

It will also be sensible to enquire from the client about changes to his or her insurable interest at renewal stage and to document the client’s response.

Recommended controls

  • Once your client has accepted a quote, inform your client in writing of any special conditions and/or circumstances in which benefits associated with the policy will not be provided.
  • Request your client in writing to notify you of any changes to his or her insurable interest (you may wish to add this to your disclosure document).
  • At renewal stage, enquire from the client whether there were any changes to his or her insurable interest and document the client’s response.
  • Ensure that any client instruction or amended schedule is properly documented and implement a communication feedback loop to confirm the proper execution thereof.

In conclusion

So many respondents in complaints to the various complaint resolution forums use the same argument as above that it was company policy to inform clients to read the policy schedule. Of significant importance here is that one must consider the level of knowledge and experience that a client has of financial services matters. This will help you to determine how to ensure understanding of the relevant material terms and conditions. This applies particularly to industry jargon and legal terminology.

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