What obligations are there on you to provide clients with a reasonable explanation of the material terms of their policies? This topic is very relevant in terms of the recent Jerrier case, which saw National Treasury intervene in order to prevent further reputational damage to the industry.
Julian Lavagna, my colleague who looks after the Moonstone Protector clients kindly allowed me to copy a portion of an article he wrote. I do not include the practical guidelines he shared with our clients, though. That is their value add.
Relevant statutory provision
Section 7(1)(a) of the General Code of Conduct, stipulates 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 generally 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 stipulates that a 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.
Facts from an Ombud Case
The complainant insured his motor vehicle with the insurer via his broker, the respondent. About a year later the vehicle was stolen and the insurer elected to repudiate the claim on the grounds that the insured did not abide by a policy condition to install a tracking device.
The only condition that the client was aware of was a gear lock requirement which was met. On further investigation, it transpired that the respondent failed to communicate two subsequent endorsement schedules from the insurer for onward submission to the client. The endorsement required the client to fit a tracking device as a condition upon which indemnity against theft and hijacking would be met.
In their response to the Ombud, the respondents stated that the initial quote, upon which the insurance was ultimately concluded, had no requirement for a tracking device. The respondents also stated that it was company policy to inform clients to read through the policy schedule, so that clients may confirm that the policy meets with their requirements.
The Ombud ruled that the respondent was negligent in that they never forwarded the additional terms and conditions to the client. It was held that it was incumbent upon the respondent to pertinently draw the client’s attention to the additional terms on the policy schedule which was not included in the initial quotation.
The complaint was upheld and the respondents were ordered to pay the client an amount of R87 300.
How does this impact you?
The determination highlights two very important, yet often overlooked themes:
- Are your clients made aware of any material terms, special conditions and/or circumstances where benefits will not be provided?
- Are the FSP’s internal communication channels functioning effectively?
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 (for example, subsequent improvements to a client’s motor vehicle).
Many repudiations are due to policy conditions that were not met. It therefore makes sense 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 e-mail or the record of advice).
It is also sensible to enquire from the client whether there were any changes to his or her insurable interest at renewal stage and to document the client’s response.