Material Terms Revisited

The need to ensure that material conditions in a contract are brought to the attention of a client is clearly illustrated in a case study published by the Short-term Ombud. This applies equally to direct insurers, as is the case here:


The complainant had two cell phone handsets which were used interchangeably with the same SIM card. One of the handsets was stolen from his gym bag and the complainant lodged a claim with his insurer. The claim was declined on the basis that the insured SIM card was not in the insured phone at the time that it was stolen. It was pointed out to the complainant that cover was excluded if the SIM card noted on the policy was not in the insured phone at the time of loss. The complainant submitted that he was never made aware of that particularly limiting clause in the contract of insurance. However, the insurer was adamant that the policy wording was handed to the complainant at sales stage.

The Ombudsman’s View

It often happens that individuals purchasing insurance policies are not aware of the nature of the policy or the extent of indemnification at the time that the policy is purchased. In order to ensure that there is clarity regarding the agreement entered into between the insurer and the insured, section 4.3(i) of The Policyholder Protection Rules (hereinafter referred to as “PPR”) was enacted. This section requires from a direct marketer of an insurance policy that concise details of any limiting clauses be disclosed to the insured in a language and manner appropriate to the individual to ensure that there is an understanding, prior to the inception of the policy, so that an informed decision may be made by the policyholder regarding the purchase of the policy.

As evidence of compliance with PPR, the insurer produced a signed insurance proposal. It was however the view of the Ombudsman that the conditions printed in fine print on the back of the policy, (which is simply handed to an insured for signature at sales stage), was not evidence that the limiting clause, which is the subject of the complaint, had been highlighted to the complainant at sales stage.

It was also the view of the Ombudsman that such a unique and extremely limiting clause of a policy would require the insurer to show that the condition or term was explained at sales stage as it went to the core of what the complainant understood he was purchasing. It was suggested that where such a unique clause exists, the clause should be clearly printed on the policy proposal with a field for acknowledging that the specific condition was explained and not just that the insured was informed that there are terms and conditions which must be taken note of after the inception of the policy.

The insurer responded to this by submitting that the complainant also had a duty to ensure that he availed himself of the terms and conditions of the policy before simply signing the document.

It was pointed out to the insurer that PPR places a duty on the insurer in that the insurer is in a much better position to ensure that there is clarity at sales stage than the complainant in any event. The fine print on the back of a page is often missed, considered unimportant and impractical to read while concluding a face to face transaction.

The insurer was accordingly requested to settle the claim, which they agreed to do.

In response to a previous article on this matter, a reader responded as follows:

“No broker can possibly explain every single clause in a multi-page legal contract to the client, and even if they did (over the course of a month or two), the client would simply deny it.”

This is very true. No-one has a crystal ball to enable them to foresee what may happen in the future and, unfortunately, we know that the dice are often loaded against an adviser when a complaint is made, especially in some forums.

Conversely, the incident discussed above makes it very clear that simply handing a client a contract and expecting him to read and understand it, is not good enough.

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