When can an insurer repudiate a claim on the basis of non-disclosure?

An insurance contract is one of utmost good faith and in order to accurately assess the risk the insurer relies, almost exclusively, on information provided by the insured. There is therefore a duty on the insured to disclose all material information relevant to the risk that is to be underwritten.

In the matter of Regent Insurance Co Ltd v King’s Property Development (Pty) Ltd t/a King’s Prop 2015 (3) SA 85 (SCA) the insured, King’s Prop, had one of its buildings damaged by fire and claimed the costs of the repairs and lost rental from its insurer, Regent Insurance Co Ltd. Regent rejected the claim alleging that King’s Prop failed to disclose material information when it applied for the insurance policy. This non-disclosure was King’s Prop’s failure to advise Regent that the insured premises was occupied by a tenant (Elite Fibre Gauteng CC) which manufactured truck and trailer bodies using highly flammable materials - a risk that Regent would not have assumed had it known the nature of Elite’s business.

There were many requests for quotations for cover of the premises as well as various revisions to the policy between the insurance brokers of King’s Prop and Regent. Throughout these communications, however, King’s Prop did not disclose to Regent that a tenant was occupying the premises and using highly flammable materials to manufacture its products. Section 53(1) of the Short-Term Insurance Act, No 53 of 1998 (Act) states that a policy will not be invalidated on account of a failure to disclose information unless that non-disclosure is likely to have materially affected the assessment of risk under the policy. The Supreme Court of Appeal (SCA) stated that since the introduction of s53 of the Act, the test in respect of misrepresentations and non-disclosure is an objective one, involving a two-pronged enquiry: The insurer must first prove materiality of the non-disclosure and then prove that the non-disclosure induced it to conclude the contract. The SCA further noted that the question to be asked is whether a reasonable person would have considered the fact not disclosed to be relevant to the assessment of risk by the insurer.

In this matter the SCA found that while the insurance broker for Regent could have ascertained information about the premises from available records, what he would not have discovered was that the premises was being let by an entity manufacturing products using highly flammable materials. The SCA found that had Regent known that the premises was used to manufacture products made from highly flammable materials it would have refused the cover. The SCA found that Elite’s occupation of the premises, which King’s Prop failed to disclose, made a material difference to the assessment of risk. The SCA therefore found that Regent was induced to enter into the contract by the non-disclosure of Elite’s business.

It is clear that one of the prerequisites for proper assessment of risk by the insurer is for the insured to make a full disclosure of all information material to the insurer’s assessment of risk. Failure to do so entitles the insurer to repudiate a claim if that failure materially affects the insurer’s assessment of risk.