The Supreme Court of Appeal recently considered the effect of a partially fraudulent claim, which was discovered after the claim was paid. Overturning the High Court’s decision, the Supreme Court of Appeal found that, on the terms of the policy, the insured had to repay even the valid portion of the claim. 

The decision serves as a warning to insureds not to inflate claims and will be welcomed by insurers in an environment where fraudulent claims are on the rise. 

Background

Mr Masindi’s policy with Discovery Insure Limited covered specified risks to his home and its contents. The policy also covered his expenses in securing “emergency accommodation” if damage to his home made this necessary. 

Mr Masindi submitted a claim to Discovery after his home was damaged in a storm on 10 November 2016. He claimed for damage to his home and its contents (R972 597.67), and the costs of emergency accommodation (R675 000.00), supported by invoices from a hotel. 

After paying the claim, Discovery learned that Mr Masindi did not stay at or pay any money to the hotel. Discovery cancelled the policy with retrospective effect from the date of the storm, but Mr Masindi refused to repay the claim, prompting Discovery to institute legal action.

The fraud was not in dispute during the trial. Only the effect of the fraud was in dispute, which required an interpretation of the policy.

The policy

The relevant clause in the policy provided that: 

“All benefits in terms of this [policy] in respect of any claim will be lost and this [policy] may be voided or cancelled at our discretion: 

-    If false or incomplete information is supplied for any fact/or circumstance in connection with an application for cover or in connection with a claim…; or 

-    If any claim or part thereof under this [policy] is in any way fraudulent, or if fraudulent means or devices are used by you… to get any benefit under this [policy]; or 

-    If any fraudulent information and/or document… is provided to us… in support of any claim under this [policy] and whether or not the claim is fraudulent

”. 

The High Court decision

The High Court found that a policy can only be cancelled from the date on which there is a breach of the policy. By extension, it concluded that at the time of Mr Masindi’s breach, the right to claim a benefit in respect of the damage to his home and home contents had already accrued to Mr Masindi and this was unaffected by the cancellation of the policy. In doing so, it heavily relied on Lehmbecker's Earthmoving and Excavators (Pty) Ltd v Incorporated General Insurances Ltd (1984 (3) SA 513 (A)). 

The trial court also found that the terms of the policy entitling Discovery to recover all benefits in the event of fraud, misrepresentation or the submission of false information, amounted to penalty clauses in terms of the Conventional Penalties Act. The circumstances did not justify the enforcement of these terms because they were “disproportionate” to the prejudice caused by the fraud. Notably, Mr Masindi did not raise this argument, which appeared for the first time in the trial court’s judgment. 

The trial court therefore ordered Mr Masindi to repay the emergency accommodation portion of the claim, but disallowed repayment of the home and contents portion.

Unhappy with the trial court’s decision, Discovery appealed to the SCA, where it persisted with its argument that the terms of the policy allowed it to repayment of the entire claim. Mr Masindi agreed that the home and contents portion of the claim was repayable but disagreed that the emergency accommodation portion must be repaid. The SCA referred to Natal Joint Municipal Pension Fund v Endumeni Municipality ([2012] 2 All SA 262 (SCA)), where it was held that the interpretation of documents, including contracts, is the process of attributing meaning to words, having regard to the context of the contract as a whole, the circumstances surrounding the conclusion of the contract, and the purpose to which provisions are directed. A sensible meaning must be preferred to one that leads to insensible results.  The SCA observed in the first instance that insureds have a duty of good faith when dealing with insurers and that the wilful submission of a false claim breaches that duty, allowing an insurer to cancel the policy. While this is the position at common law, the SCA observed that insurers typically incorporate fraud clauses in their policy to provide themselves with additional protection from fraudulent claims, which are prevalent, and discourage insureds from gaining any “undue advantage”.

Insofar as the trial court’s reliance on Lehmbecker's, the SCA correctly observed that the facts are distinguishable. There, an insured had submitted a valid claim for of one incident, and a later fraudulent claim in respect of a different incident. The question was whether, in terms of the policy, the fraudulent claim entitled the insurer to repayment of the earlier, valid claim. It decided that it did not because the insured’s right to policy benefits for the valid claim accrued before the submission of the fraudulent claim. 

The SCA concluded that Discovery was entitled to cancel the policy retrospectively with effect from 10 November 2016 and the policy was technically not in effect when Mr Masindi submitted the claim. There was therefore no basis on which Mr Masindi could receive any benefit under the policy, even in relation to the portion of the claim untainted by fraud. The entire claim was repayable.

Turning to whether the provisions relied upon by Discovery constituted penalty clauses, the SCA declined to consider this, given that it was neither raised in the pleadings, nor argued at trial. With reference to Fischer ([2014] 3 All SA 395 (SCA)), it reiterated that it is not for a court to raise new issues not dealt with in the pleadings. Whilst a court may sometimes suggest an approach that the parties had not considered, it is up to the parties to take that approach further if they wish to do so.

Comment

The outcome is positive for insurers and issues a caution to insureds to act honestly in submitting claims. 

The decision also highlights the importance of clear and unambiguous fraud clauses (which vary widely in the market).

The judgment can be accessed here.