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Insurance: Advisors vs Clients

This article, first published in the Van der Spuy and Partners newsletter, provides an objective, legal perspective on the obligations of the two parties involved in an insurance contract. Your newly gained knowledge of the FAIS Act should help you extract more value from the article.

We all have insurance and we all have worked with an insurance broker at one point or another. The media is also full of insurance advertisements that create the impression that the right insurance broker will cover you for all eventualities. But is this truly the case? And if not, where does the broker’s responsibility to ensure that you are sufficiently covered end and where does yours, as the insured person’s, start?

The relationship between an insured person and his broker is a relationship of the utmost good faith and each party must play their part to ensure that the insured person is covered against agreed damages at all relevant times.

As the insured, you are responsible to provide the broker with complete and true information regarding that which you want to insure. Should you hide, falsify, or not disclose relevant information regarding that which you want to insure or present information in a wrong manner, the insurer may refuse to pay out a claim.

On the other hand, the insurance broker performs a mandate on your behalf and accordingly owes you a duty to exercise reasonable care and skill in carrying out this mandate. This means that the broker has to take all reasonable steps to perform his duty, the nature and extent of the steps required depending on the circumstances of each case. The broker must however at a minimum ensure that he obtains and discloses all the necessary details from and to you to ensure that you are fully covered in accordance with your needs as disclosed to the broker.

If, for example, you are procuring motor vehicle insurance, it would be important for the broker to determine for what purpose the motor vehicle will be used and to inform the insured of any limitations in the insurance to cover the vehicle fully for this purpose. The broker must take reasonable steps to ensure that you obtain the cover you require for this specific purpose. It could happen that the cover you require is not available or not covered in full and the broker has the responsibility to inform you accordingly.

For example, you require the use of your motor vehicle also to travel outside the borders of South Africa but you only informed your broker that you will be using your vehicle for business purposes. When travelling in Zambia you are involved in a collision. Unfortunately, you claim is now repudiated by the insurer as your policy contained a territorial limitation which excluded cover for damage occasioned while the vehicle was being driven in Zambia.

Our courts have found that in similar circumstances a broker has a duty to inform an insured person of any territorial or other limitations on his policy or make such a policy available to him. The broker must further take reasonable steps to ensure that the insured obtains the required cover or inform the insured that the required cover is not available. If a broker neglects to do these things, the broker could be in breach of his mandate.

Another example is where you insure the contents of your home. You purchase a new property and move to your new house which happens to have a thatched roof. You inform your broker of your change of address, but don’t think of informing your broker of the fact that the house has a thatched roof. Your broker does not question you about the structure of the roof in the new house. A month later, a fire destroys your house and its contents and your claim is repudiated by the insurance company as the policy does not cover houses with thatched roofs. Our courts have also in such circumstances found that where a broker knew that the contents of a house with a thatched roof would not be covered by a policy, the broker could only have fulfilled his duty if by asking the insured the necessary question or questions regarding the structure of the roof, failing which the broker could have breached his mandate.

A broker is required to use all reasonable care to ensure that as the insured, you are appropriately covered. The standard by which this duty is measured is that of a person of experience and skill in the insurance profession. Whether a broker has fulfilled his mandate and acted with the required degree of skill will depend on the facts of each case. To assist in avoiding such issues, it is also advisable that you as insured provide as much information you believe relevant to your broker to assist in ensuring that you are not left with a repudiated claim because of a failure to disclose.

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