The High Court in Johannesburg has upheld the exception applications by the auditor and compliance officer of Insure Group Managers Limited (IGM) against being joined in claims brought by seven short-term insurance companies.
An exception, in legal proceedings, is a formal way of bringing attention to an issue or objection that one party has regarding the case, indicating there is a legal or procedural concern that needs to be addressed by the court.
IGM, which collected premiums on behalf of insurers, was placed under curatorship in September 2018, after it emerged that the intermediary had liquidity problems.
Seven short-term insurers are engaged in litigation with IGM, currently in liquidation, to recover about R1.7 billion in premiums. The insurers are Hollard, Santam, Bryte, Constantia, Guardrisk, Old Mutual, and New National.
In 2020, the FSCA debarred Charl Cilliers, IGM’s director and key individual, and Diane Burns, its director and representative, from rendering financial services or acting as key individuals for five years. The FSCA said Cilliers and Burns “caused or permitted” IGM to invest premiums in illiquid assets, contrary to section 45 of the Short-term Insurance Act and the relevant regulations.
The Financial Services Tribunal upheld the debarments in November 2022.
Read: Directors of Insure Group Managers take their debarments to the FST
The insurers allege IGM unlawfully appropriated the value of about two months’ worth of premiums and invested them in illiquid assets.
They also allege that the “misappropriation” of the premiums resulted in IGM failing to maintain an adequate balance sheet to qualify for a guarantee from the Intermediaries Guarantee Facility (IGF). As a result, the insurers allege, the IGF refused to issue IGM with a guarantee after August 2018, and IGM failed to pay the amounts they were owed on 15 September 2018.
The Financial Services Board launched the IGF in 1989. At the time, the Short-term Insurance Act barred insurers from allowing third-party intermediaries to collect premiums on their behalf, unless there were special guarantees in place. The IGF had a restricted licence that allowed it to issue annual “demand guarantees” to third-party collection agencies, essentially a form of collateral that told insurers their money was safe.
The insurers joined IGM’s statutorily appointed auditor, Horwath Leveton Boner, and compliance officer, Compliance Monitoring Systems CC, as co-defendants to the action, suing them in delict. On the other hand, the insurers have sued IGM for breach of contract.
The insurers’ claim against Horwath was primarily based on an alleged statutory duty it owed to the insurers.
Horwath argued that the duties it owed were to IGM and its shareholders, not to the intermediary’s creditors and clients.
The insurers’ claim against Compliance Monitoring Systems was based on its alleged failure to have submitted certain compliance reports to the FSCA.
Compliance Monitoring Systems argued that the claim against it was for pure economic loss, which is not prima facie wrongful. It also argued that the insurers failed to prove a causal link between its alleged failure to submit compliance reports and the damages suffered by the plaintiffs.
No legal duty owed to the insurers
The High Court found that the duties the insurers wished to place on Horwath would potentially expose it to countless other creditors of IGM with whom the auditor has no relationship. “Therefore, the spectre of the second defendant being liable to an undeterminable amount and undeterminable class will become real.”
It said Compliance Monitoring Systems was obliged to report any misdemeanours to the FSCA only; it owed no legal duty to the insurers.
The insurers did not plead any facts that established that Compliance Monitoring Systems had a statutory obligation towards the plaintiffs. Furthermore, they did not plead a clear, recognisable causal link between the breach of such duty and the damages the insurers allegedly incurred.
As with Horwath, placing on Compliance Monitoring Systems an obligation of the kind sought by the insurers could give rise to the “twin dangers of numerous plaintiffs and indeterminable liability”.
Consequently, the court upheld the exception applications and ordered the insurers to pay Horwath’s and Compliance Monitoring Systems’ legal costs.
