Fraud Unravels All

Insured ordered to pay back the money! Interpretation of forfeiture clauses in insurance policies – the duty of the insured to act in good faith

In Discovery Insure Limited v Masindi (534/2022) [2023] ZASCA 101, the SCA, on appeal, were faced with the interpretive issue of determining whether a part fraudulent and part genuine claim arising from the same incident would result in the complete forfeiture of the insured’s claim.

On 14 December 2017, Discovery commenced proceedings, in the Pretoria High Court, against its client Mr Tshamuwe Masindi (“Masindi”) in which they sought repayment of the sum of R1 647 592.67 on the basis that Masindi’s claim was tainted by fraud. At that stage, the court allowed the claim in part and ordered Masindi to pay R675 000.00 to Discovery together with interest thereon. Discovery thereafter appealed the finding.

Background

On 23 March 2016, Masindi took out a policy for specified insured risks, to insure amongst other things, his residence in Pretoria and household contents, against certain risks resulting in total loss or damage howsoever cause. In addition, the policy provided, that if the risks insured against eventuated, resulting in damage to his residence, rendering it unsuitable for human habitation, Discovery would be obliged to (i) compensate Masindi for the resultant damage and (ii) reimburse Masindi for his out-of-pocket expenses incurred for what the policy described as “emergency accommodation”.

Crucially, the policy further provided that: if any portion of a claim lodged with Discovery by Masindi is fraudulent, Discovery would be entitled to cancel the policy with retrospective effect from date of the reported incident, or the actual date of the incident – whichever was the earlier.

On 11 November 2016, following damage to his property, Masindi submitted a single claim, which was made up of two components: (i) costs of repairs to Masindi’s residence and damage to household contents, and (ii) emergency accommodation. Between 7 December 2016 and 25 May 2017, Discovery paid to Masindi the aggregated amount of R1 594 980.12 in settlement of both components.

It subsequently transpired that Masindi’s claim in respect of the emegency accomdation portion, was fraudulent. Discovery had requested that Masindi provide them with the tax invoices for his accommodation at a Boutique Hotel. He was unable to provide same and the Hotel were not able to confirm that he had stayed there and thus the fraudulent claim came to light.

When the evidence of the fraud surfaced, Discovery notified Masindi that it was exercising its right, to cancel the policy with retrospective effect from the date of the incident being 10 November 2016. In addition, Discovery claimed repayment of the full amount paid out, which Masindi failed to repay, prompting Discovery to institute action proceedings.

Masindi opposed the claim on the grounds that the policy did not contain an express provision that he would be liable to repay all benefits and not just those tainted by fraud. By that stage of the proceedings, it was common cause that the benefits paid to Masindi in relation to the emergency accommodation were indeed received on the basis of his fraudulent conduct.

The High Court held that Discovery was not entitled to repayment of the full amount claimed. Rather, it held that Discovery was entitled to repayment of only that portion of the claim tainted by the undisputed fraud. The High Court’s reasoning, in essence, had two bases: (1) the insured had acquired accrued rights to the payment of the genuine portion of this claim, and that those rights remained intact, unaffected by subsequent fraud, (2) the policy clause that provided for the forfeiture of claims tainted by fraud was, for all intents and purposes a penalty clause, in terms of the Conventional Penalties Act[1] (“the Act”), and that such a penalty would be disproportionate to the prejudice Discovery suffered as a result of the breach.

Arriving at this decision, the court relied heavily on the decision of the SCA in Lehmbecker’s Erthmoving and Excavators (Pty) Ltd v Incorporate General Insurances Ltd which held that all valid claims previously made and accrued to the insured remain unaffected by the forfeiture provision.

Issues on Appeal

The SCA was faced with three issues to be determined on appeal, they are as follows:

• The interpretation of clause 5.13 read with 5.5 of the Plan Guide – which is the schedule to the policy – and the Agreement of Loss, which is an integral part of the Plan Guide. The appeal raised the question whether these clauses, properly construed, entitled Discovery to repayment of all amounts paid to Masindi subsequent to the insured event, when he, with full knowledge of his misrepresentation, submitted a partly fraudulent claim;

• Whether the doctrine of accrued rights finds application in the context of the facts of this case, and if so, whether the relevant clauses, which are central to this appeal, operate to deny the compensation already paid to Masindi in respect of the genuine portion of his claim;

• Whether the High Court was correct in its characterisation of the relevant clauses of the Plan Guide, i.e. clauses 5.13 and 5.5, as constituting penalty clauses, thereby justifying the high court’s refusal to enforce the clauses in question.

Discovery, however, approached the courts to ascribe a meaning to the policy that expressly recognises the right to terminate the policy with retrospective effect from the date on which the incident that gave rise to the claim occurred (10 November 2016). The result of which being that Masindi would forfeit all amounts already paid to him. The question then is whether, in the context of the facts of this case, this is legally and contractually tenable. Discovery relied on Santam Bpk v Potgieter which held that retrospective forfeiture of the benefits meant that the insurer was entitled to repayment of all amounts previously paid to the insured.[2]

The SCA held that forfeiture clauses of the kind under consideration in this case are now a common feature insurance contracts, and as a general rule the clauses are valid and enforceable. Accordingly. It was accepted that the issues raised in this case fall to be determined with reference to the Plan Guide, and necessarily that Masindi is liable to pay back, at least, the ill-gotten gains because he was not entitled thereto in accordance with the ordinary principles of our law.

The SCA distinguished the present facts from the facts in Lehmbecker’s Earthmoving and Excavators (Pty) Ltd v Incorporate General Insurances Ltd where the insured lodged a fraudulent claim arising from an incident different to the one in respect of which the insured had submitted a genuine claim. In contrast, the present facts deal with one claim wherein the fraudulent portion of the claim and the genuine portion arise from the same incident.  This difference is significant as it affects the interpretation of the clause in question.

The SCA, held that Masindi’s argument was unsustainable, with direct reference to the wording of clause 5.13. and the underlying purpose of such a clause, namely, to protect Discovery against fraudulent claims and to discourage attempts to gain undue advantage.

In sum the SCA held that when Masindi purported to submit his claim on 11 November 2016 there was no longer an existent insurance policy because it had already been terminated with retrospective effect from 10 November 2016 – the date of the incident and pursuant to clause 5.13.

The SCA dismissed out of hand the High Court’s interpretation of clause 5.13 as a penalty clause, as neither party raised this issue in their pleadings, nor was it canvassed at trial, cautioned the High Court against straying outside of the facts presented. Further, the SCA re-iterated that the clause 5.13 explicitly provides that ‘upon breach of its terms, Discovery would be entitled to terminate the policy with retrospective effect from date of the incident giving raise to the claim’.

Therefore, when Masindi lodged the claim on 11 November 2016, he had already forfeited all the benefits under the policy. It is worth noting that the issue remains undecided as to the position where parties rightfully plead that such a forfeiture clause amounts to a penalty clause i.e.: that the harm suffered by the insured would be disproportionate to the prejudiced suffered by the insurer.

Accordingly, the SCA held that Discovery was entitled to a repayment of all the moneys previously paid out by it to Masindi.  

Whilst some might suggest that the finding by the SCA is somewhat harsh, it is a clear reminder to policy holders to understand and appeciate the nuances of their policies, when to invoke them, and to ensure that they act in good faith!

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[1] The Conventional Penalties Act 15 of 1962

[2] Santam Bpk v Potgieter 1997 (3) SA 415 (O).

Article by

Julia Penn – Director
Nick Roelf – Associate
Justine Paries – Candidate Attorney.