In a determination dated 18 December 2015, the Ombud ordered the Respondents to pay R273 715 to a complainant for “…failure by the financial services provider to update the sum insured under the business interruption section of the complainant’s short term insurance policy.”
The complainant had two business policies:
- An “Etana” policy with a sum assured of R17.5 million, being the gross profit of the complainant’s business and
- A “Mirabilis” policy, underwritten by Santam with a sum assured of R4.2 million. The purpose of the latter, it appears, was to provide cover for “business interruption”.
- Both policies contained a business interruption section, but the insured events under which it would pay out, differed.
Following a machinery breakdown on 30 September 2013, the complainant submitted a claim in terms of the ‘Machinery Breakdown’ section of the Mirabilis policy. The claim, which was in respect of business interruption, was reduced from R427 370.75 to R98 600.19 as a result of average being applied by the insurer.
Background to the claim
On 13 February 2013, the complainant submitted a “calculation of loss of income” with the request that the respondent confirm with the insurers that the method of calculation was correct. In support of this calculation the complainant included an extract from its financial statements. The calculations indicated an insured amount of R17.5 million.
The complainant followed up on 21 February 2013, and again, in writing, on 25 May 2013:
I cannot remember if I instructed you to adjust the insured value for the loss of income. It must be adjusted to the amounts as set out in the attached document.
The banking details of the business and farm as well as the loss of income policies must be changed. The new bank information is attached hereto …..’
The bank account details were duly amended; but not the gross profit sum insured, which remained at R4 112 500.
In the view of the Ombud, “It is this negligence that led to Complainant being underinsured, in consequence whereof average was applied by the insurer.”
The complainant became its client on 13 August 2012. At this point there were two policies with Santam and Mirabilis respectively.
The respondent conducted a thorough investigation into these policies, including a detailed discussion on the amount of cover.
‘At this point we changed the policy of Santam to Etana (normal Business Policy) but kept the Mirabilis policy (Machinery Breakdown) in place. The policies were discussed in detail and HF discussed the principle of average with client. He was not interested to increase the Machinery Breakdown Consequential Loss simply because of the cost involved. At that stage the amount insured under Business Interruption under the Mirabilis policy was R4.2m and the additional cost would have been R4 138.98 which would have increased the insurance premiums by 425%. As the client was very sensitive about premiums this was not done.’
In support thereof the respondent points to an email dated 15 August wherein it advised the complainant that the only way to prevent average being applied to the machinery breakdown policy, was to insure each machine for its new replacement cost. This required a replacement quotation for each machine. Respondent states that Complainant failed to act on this advice.
As for Complainant’s email of 27 May 2013, the respondent contends that this followed a discussion about the Etana policy. Adverse business conditions had caused a fall in profits and this email was a follow up of a discussion between HF and the complainant. In this regard, the respondent also replied thereto on 14 June 2013; attaching an Etana policy schedule and advising the complainant that the loss of income had been adjusted.
The complainant then replied to respondents’ email of 14 June 2013, indicating that aside from a car that had to be removed at an earlier date they were happy.
The respondent again followed up on the 27th June 2013, when it sent the Mirabilis machinery breakdown renewal schedule to the client advising them that Mirabilis required the turnover for the previous year as well as the projected turnover for the following year. The complainant was also advised to both check the insured values and advise the respondent of any changes in risk. The risks of average were also pointed out.
This was followed up with a reminder on 15 July 2013.
The policy was then renewed without any changes. In view of all of the above, the complainant knew exactly what they were covered for as well as the danger which underinsurance posed. The respondent further states that it was clear that the main purpose of the Mirabilis policy was to cover the machinery itself.
“In dealing with this matter I am continuously drawn back to the simple inescapable fact that the insured amount under the Santam/Mirabilis policy was wrong.”
That it may have been wrong when Respondent took over the role of financial adviser is no excuse for it was at that point that Respondent should ‘take reasonable steps to seek from the client appropriate and available information regarding the client’s financial situation, financial product experience and objectives to enable the provider to provide the client with appropriate advice”.
The respondent was then required to analyse this information and identify the financial products appropriate to the client’s needs.
The respondent contends that Complainant was not interested in increasing the machinery breakdown consequential loss because of the cost of the additional premiums. If so, why was this advice not recorded when section 8(4) (b) of the Code requires that where a client `elects to conclude a transaction that differs from that recommended by the provider, or otherwise elects not to follow the advice furnished, the provider must alert the client as soon as reasonably possible of the clear existence of any risk to the client, and must advise the client to take particular care to consider whether any product selected is appropriate to the client’s needs, objectives and circumstances.’
On the face of it, it appears that the client was indeed aware of being underinsured on the Mirabilis policy. The broker, despite informing the client of this on two occasions, was deemed to have erred in not putting this in writing.
It would be very interesting to know what the Appeal Board’s view on the matter would be, should an appeal have been lodged against the determination.
Click here for a copy of the full determination