We recently discussed two determinations made by the Ombud for Financial Services Providers in which she found that the respondents were lacking in their duty to provide clients with a reasonable explanation of material terms of their contracts.
Julian Lavagna of Moonstone Compliance discussed this matter in the Protector Post, an educational publication for members of Moonstone’s Protector Service for one person businesses. He used an earlier finding in the JPH Victor v Tectum Portfolio Services (Pty) Limited determination to provide guidance in what is a very tricky minefield.
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 insured his motor vehicle with ABSA Insurance via his broker. About a year later the motor vehicle was stolen and ABSA Insurance 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 insured 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 their client. The endorsement required the insured to fit a tracking device as a condition upon which indemnity against theft and hijacking would be met.
In its 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 the insured. It was held that it was incumbent upon the intermediary to pertinently draw the insured’s attention to the additional terms on the policy schedule which was not included in the initial quotations.
The complaint was upheld and the brokerage was ordered to pay the insured an amount of R87 300.
How does this impact 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 will also be 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.
- Once your client has accepted a quote, inform your client by way of written form of any special conditions and/or circumstances in which benefits associated with the policy will not be provided.
- Inform your client by way of written form to notify you of any changes to his or her insurable interest (you may wish to add this to 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.