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New SCA decision lays it on the line: stay on the right side of the truth with your insurers

Many people grew up believing a story that George Washington, then only six years old, refused to tell a lie, choosing to face his father’s wrath rather than deny having damaged his cherry tree. Unfortunately, the story itself is a lie, something made up by an early biographer of Washington, the USA’s first president. Centuries later, people – children and adults – are still telling lies about all kinds of things, big and small. Sometimes it’s a social ‘white lie’, but sometimes it’s way bigger and the consequences can be dire. Take the case of Tshamunwe Masindi, whose story to his insurers was partly true and partly false. The result has been a court decision that will surely be devastating to him.

Read the judgment here:

Even the Supreme Court of Appeal (SCA) thought the question it had to deal with in this case was ‘interesting’, a word not often found in judicial decisions. For the rest of us, it’s also interesting, though for different reasons. The court simply dealt with an unusual legal conundrum; for the public, however, the case contains a very serious warning.

At the centre of the dispute was Discovery client, Tshamunwe Masindi, who had claimed from his insurer. As the SCA put it, the claim was ‘partly fraudulent and partly genuine’, with both the true and the false elements arising from the same incident. The problem for the courts to decide was whether, because of the fraudulent aspect to part of it, his whole claim should be forfeit.

What were the facts? Masindi took out a policy for specified insured risks, for his home in Pretoria and the household contents. Among other provisions, the policy said that if the risks insured against came to pass, making his home unfit for human habitation, Discovery would be ‘obliged to compensate’ Masindi for the resulting damage to the buildings and household contents. Where applicable, Discovery would also reimburse his out-of-pocket expenses for ‘emergency accommodation’.

Portion of the claim was fraudulent

But the policy further said that if any portion of a claim was fraudulent, Discovery could cancel the policy ‘with retrospective effect’ from the date of the reported incident or the date of the actual incident, whichever was earlier. In the view of Discovery, this meant it had a right to reclaim ‘all amounts’ paid to a client after a policy was cancelled on account of a fraudulent claim.

In November 2016, a storm caused damage to Masindi’s home, and he put in a claim under the building section of his policy for the losses caused by the storm damage. His claim had two parts. One dealt with the costs of repairs to the residence and the damage to household contents. The other dealt with the emergency accommodation he said was needed in the wake of the storm.

In response, between December 2016 and May 2017, Discovery paid a total of over R1.5m to settle both parts of the claim. Of that, both sides agree, R675 000 was to settle his claim for emergency accommodation, the part of the claim that, it later emerged, was ‘tainted by fraud’. The balance, more than R970 000 was paid to Masindi to settle his claim for damage to his home and the contents of the house. Again, both sides agree: this section of his claim was ‘untainted by fraud and [was] therefore, legitimate.’

Not tainted by fraud

Later, Discovery’s investigations showed the accommodation part of the claim was fraudulent, and the policy was cancelled. The company also claimed repayment of the full amount it had already paid to him, for both the fraudulent and the legitimate claim. When Masindi didn’t repay the money, Discovery took the case to court.

Among Masindi’s arguments was that the policy didn’t spell out that he would have to repay all the benefits paid by Discovery, including the amounts paid for claims ‘not tainted by fraud’.

The high court held that Discovery was only entitled to repayment of the money paid for the fraudulent claim. But was that correct? Discovery didn’t think so and challenged the outcome in the SCA.

Discourage fraudulent claims

There, the judges said that the courts had on many occasions noted that fraudulent insurance claims were not a ‘rare phenomenon’, in fact, the number of such claims was rising, unchecked. In response, insurers had resorted to clauses that would protect themselves against such claims.

One way they did this was to say that someone who put in a fraudulent claim would forfeit the benefits an insured person would ordinarily receive in the case of a genuine claim. This step was designed to protect companies against fraudulent claims and ‘discourage attempts to gain undue advantage by lodging falsely inflated claims’.

Masindi’s counsel agreed that his client would have to repay the money that settled his fraudulent claim but argued that he should be able to keep the funds for the genuine claim to repair his house. Counsel said that the policy didn’t specifically say this would be the result of a fraudulent claim.

Policy was clear and “unambiguous”

But the SCA said the policy was ‘clear and unambiguous’ on this question and had to take effect: it said that when the contract was breached by a fraudulent claim, Discovery could terminate the policy with retrospective effect from the date of the incident giving rise to the claim, in this case the storm that caused the damage on 10 November 2016. This meant that when Masindi lodged the claim on 11 November, he had ‘already forfeited all the benefits under the policy’.

Put another way, once the policy was terminated on 10 November 2016 ‘there was no policy [in place] under which [Masindi] could claim any of the benefits that would otherwise have been available to him had the policy not be terminated a day earlier.’ And Discovery had no obligation to pay any of the claims related to the storm made by Masindi between December 2016 and May 2017, ‘because the policy had, on 10 November 2016, already terminated.’

Having reached that conclusion, the SCA found in favour of Discovery’s appeal. Masindi must now repay the company all that he had received from the insurer for both his fraudulent and his genuine claims, with interest of 10.25% from June 2017 to the date of his final payment. He was also ordered to pay the legal costs.

Significance of insurance contract

The judgment explains the true significance of a provision in the insurance contract that people may not fully realise when they sign on: if you put in a fraudulent claim, then the insurer will retrospectively cancel the policy with effect from the date of the incident that gave rise to the claim. That might sound innocuous, but it means that at the time of the incident that gives rise to your false claim, in Masindi’s case the storm, you will not be insured; you won’t be able to claim, and if you’ve claimed, and been paid out, you’ll have to give it all back.

It’s a tough lesson for Masindi – but that’s obviously what insurance companies are looking for. They want to reverse the trend highlighted by the appeal, that fraudulent claims are increasing, unchecked. What better way to do this than by showing what can happen to someone who makes such a claim, and is found out?