On Tuesday we discussed what happens when material changes occur in a client’s health between the time of applying for life cover and acceptance of the risk by the insurer.
My colleague Julian Lavagna, godfather of the Moonstone Protector Service for one-person businesses, kindly provided an article he shared with his clients some time ago that provides clarity on one’s obligations in terms of disclosure, based on an actual FAIS Ombud determination.
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 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 provides 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 of the case
The complainant, Mr. Victor, insured his motor vehicle with ABSA Insurance via his broker. About a year later the motor vehicle was stolen and ABSA Insurance repudiated Mr. Victor’s claim on the grounds that the insured did not abide by a policy condition to install a tracking device.
The only condition that Mr. Victor was aware of was a gear lock requirement which was met. On further investigation, it transpired that the broker failed to communicate two subsequent endorsement schedules from ABSA Insurance for onward submission to Mr. Victor. The endorsement required Mr. Victor 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 brokerage stated that the initial quote upon which the insurance was ultimately concluded, had no requirement for a tracking device. They 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 brokerage was negligent in that they never forwarded the additional terms and conditions to Mr. Victor. It was held that it was incumbent upon the FSP to pertinently draw Mr. Victor’s attention to the additional terms on the policy schedule which was not included in the initial quotations.
The complaint was upheld and the FSP was ordered to pay Mr. Victor an amount of R87 300.
How does this impact on you?
The determination highlights two very 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?
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).
As many repudiations are due to policy conditions that were not 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 e-mail or the record of advice).
It is also recommended that you 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.
- 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.
- Inform your client, in writing, to notify you of any changes to his or her insurable interest, or include this in 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 in order to confirm the proper execution thereof.