Consequential loss – OSTI case study highlights importance of policy wording

“Consequential loss” has always been a grey area in the short-term insurance industry. The South African Insurance Association (SAIA) defines “consequential loss” as “a loss not directly caused by the insured event, but an indirect result of the event. “

An example is when a person’s geyser bursts and their ceiling and carpets are damaged. This is normally covered by a homeowner’s policy. The individual may have to wait for the plumber to arrive and as a result, miss a client appointment. This means he or she loses out on income and this loss of income is a “consequential loss” of the geyser bursting. This is in most instances not covered unless specifically mentioned in the policy document.

In one of the latest case studies of the Ombudsman for Short-term Insurance (OSTI) the concept of “consequential loss” is once again brought to the fore. In this case the relief sought by a client (Mr B) required OSTI to determine whether the insurer’s liability in respect of a theft claim could extend beyond the scope of the cover provided in the insurance contract on account of its delay in processing a vehicle claim.

What lead up to the claim?

10 October 2017 – Mr B submitted a motor vehicle accident claim to his insurer.
As Mr B’s policy provided cover for a rental vehicle during the claims period he was provided with a Ford Fiesta through a vehicle rental company.
20 November 2017 – An assessor was appointed to validate the claim.
As a result of the festive season there were delays in the repair of the vehicle.
On 2 February 2018, Mr B’s rental vehicle was broken into.
Mr B submitted a claim under the All Risks section of the policy for the replacement of the stolen items.
Mr B claimed for various items, including a specified 13” Apple MacBook.
The total value of his claim was R67 250.00.

The insurer’s response to the claim

The insurer pointed out the following to Mr B:

The laptop was specified under the policy for R14 000.00. The replacement value claimed, was for R19 600.00.
The limit for cover under the unspecified All Risks section of the policy was 25% of the sum insured, per individual item and the claimed incident. The sum insured was R12 900.00, less a basic excess of R250.00.
The insurer offered to settle the claim in the amount of R25 270.00
This was calculated as, R14 000 in respect of the 13”Apple MacBook and R11 270 for the total unspecified items less, the excess of R250.00.
The settlement offer was declined by Mr B.

Mr B’s reasons for declining the offer

Mr B stated that his claim was not based on the insurer’s contractual obligation. He submitted that the insurer should be held responsible for the full loss due to the admitted delays in the administration of the vehicle claim as this had ‘real-world consequences’ for him. He further claimed that the theft would not have occurred with his own vehicle as the rental vehicle, the Ford Fiesta is “notoriously vulnerable to this type of theft”. He also argued that the insurer’s initial offer should be reconsidered as it had been made during the tenure of the insurer’s CEO whose employment was subsequently terminated on issues relating to dishonest conduct.

The insurer’s counter offer

The insurer acknowledged its delay in appointing the assessor and apologised for the poor claims experience. As a result, they advised Mr B that they will waive the policy requirement for proof of ownership in respect of the unspecified claimed items. They further offered an additional R5 000.00 as compensation for the inconvenience suffered by Mr B as a result of its delay in the administration of the vehicle claim.

The aspect of “consequential loss”

The terms stipulated under the vehicle section of the insurance contract states:

“We do NOT cover – consequential loss from any cause (except car hire cover as it is insured in this Section);”

OSTI pointed out that “consequential loss: arose from a special circumstance. It was the indirect financial loss suffered by Mr B following an insured peril. The financial loss is usually not foreseeable or within the contemplation of the parties when entering into the contract.

“Consequential loss” is often excluded in short-term insurance policies thereby limiting the insurer’s liability. Consequential loss may be recoverable in terms of a damages claim – a delictual loss. In order to make out a valid claim for delictual loss, Mr B would need to establish a breach of contract of a legal duty and demonstrate that the loss was reasonably foreseeable as a probable consequence of the breach. However, the claim falls beyond the scope of the insurance contract and therefore outside of OSTI’s jurisdiction.

OSTI’s decision

OSTI’s view was that the insurer’s settlement offer was reasonable, fair and in line with the contract of insurance. OSTI also pointed out that they do not have the mandate to award penalties against the insurer for gaps in the service it provided to Mr B.

OSTI therefore upheld the insurer’s settlement of the claim and the matter was resolved in favour of the insurer.

It is important for financial advisers to understand the terminology and small print of insurance contracts to ensure that their clients are adequately protected.

Click here to download the case study.

In this day and age, customers will follow the international trend and find various reasons outside the scope of reality like, in this case, linking the claim to the dismissal of a senior executive for fraud. This case study is really worth reading.

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