The Policyholder Protection Rules (PPR) of December 2017 introduced a prohibition on the “negative-option” selection of policy terms and conditions. Negative-option selection means that a term or condition of which a policyholder may not be aware applies unless he or she specifically selects an alternative term or condition.
PPR 5.1 states: “An insurer or any person acting on behalf of the insurer may not, where more than one option in respect of a policy term or condition (including, but not limited to, options relating to a premium increase, variation of benefits or exclusion) is available to the policyholder, potential policyholder, member of a group scheme or potential member of a group scheme on entering into, varying or renewing the policy or becoming a member of a group scheme, stipulate that a specific term or condition will apply except if such person explicitly elects a different term or condition.”
This rule came into play when the Ombudsman for Short-term Insurance (OSTI) dealt with a complaint by an insured whose claim for accident damage to his motor vehicle was rejected.
The vehicle was insured for use as a shuttle service when it was placed on cover.
During the validation of the claim, the insurer established that the vehicle was registered for use as a taxi with a taxi association. The insurer concluded that because the vehicle was used as a taxi to carry fare-paying passengers, this use fell outside the scope of cover.
The insured’s version
The insured said the vehicle was used to transport children to and from school and pensioners. The insured submitted that he disclosed this to the sales consultant, who noted the vehicle as a shuttle service.
The insured said the vehicle had to be registered with the taxi association to operate as a shuttle and maintained that the vehicle never operated on the main routes as a taxi because the taxi association would have confiscated it.
The insured also argued that the distinction drawn by the insurer between fare-paying passengers and passengers on a shuttle service was redundant because passengers in a shuttle service also pay a fare.
The insured argued further that the accident happened on a Sunday when the vehicle was not being used as a taxi or a shuttle but for personal use. The policy covered personal use.
The insurer’s submission
The insurer referred to the following provisions in the policy:
- A shuttle service transports people back and forth, from one point to another. A shuttle is a vehicle which travels a short route and is usually for a predetermined fee. Shuttle services have designated drop-off and pick-up points, and shuttle vehicles run between the two points at regular intervals. The most common type of shuttle service is an airport shuttle service offered by hotels to their clients.
- If your vehicle is used to transport fare-paying passengers, or for a different route/destination other than the daily route/destination, or for any other reason other than a shuttle service, there will be no cover.
- We do not indemnify you for: Vehicle used to earn an income or for racing. If the insured vehicle is used to carry persons for reward (whether it be financially or in any other way) or fare-paying passengers, or if it is used for hiring, racing or competition, unless otherwise selected and reflected on the schedule for that specific vehicle.
The insurer submitted that during the validation of the claim, the insurer interviewed the insured and the incident driver. The insured told the insurer that the incident driver took people from town to various places. The driver confirmed that the vehicle was used to transport school children and fare-paying passengers to town.
The insurer submitted that when the vehicle was placed on cover, the insured advised that the vehicle would be used as a shuttle service to transport children to and from school. The insured did not mention that the vehicle would be registered with the taxi association.
The insured was informed there would be no cover if the vehicle was used to transport fare-paying passengers.
The insurer submitted further that, in terms of the policy, there was an obligation on the insured to disclose important details or changes in the risk that may affect the insurer’s acceptance or continuation with the policy.
There was an obligation on the insured to inform the insurer that the vehicle was going to be used as a taxi. The insurer submitted that the insured did not disclose that the vehicle would be used as a taxi to carry fare-paying passengers, therefore, it did not get the opportunity to properly assess the risk.
The insurer did not refute that the vehicle was being used for personal use at the time of the accident. However, the fact that the incident driver used the vehicle to carry fare-paying passengers was material to the acceptance of the risk and in breach of the policy terms and conditions.
According to the insurer, the misrepresentation was material to the underwriting of the risk because the risk would not have been accepted if the insured had disclosed that the vehicle would be used to carry fare-paying passengers.
The insurer argued further that the definition of “shuttle service” and the exclusion did not apply to a specific incident but to the cover. The insurer emphasised that in terms of the policy, there was no cover if the vehicle was (ever) used for any purpose other than a shuttle service.
OSTI’s findings
The OSTI listened to the sales call between the insurer and the insured. The OSTI noted that the consultant asked the insured about the type of business he was in. The insured said he was in the business of transporting school children. The consultant then informed the insured that his business would be noted as a shuttle service.
The consultant proceeded to read the definition of a shuttle service to the insured.
Further in the conversation, the consultant asked the insured whether he was going to carry any goods with the vehicle. The insured said he would be carrying business goods using a trailer. This was not taken any further by the consultant. The consultant did not engage fully with the insured regarding the nature of the business.
The OSTI referred the insurer to Rule 5 of the PPR and pointed out that the consultant should have provided the available options to the insured and left it to the insured to decide which category best suited his business. Instead, the consultant presented the insured with a negative option, in which the insurer read out the definition of a shuttle service and expected the insured to advise the insurer if the business did not fall within the definition of a shuttle service.
Even after hearing that the insured’s business went outside the scope of a shuttle service, the consultant did not advise the insured correctly.
The OSTI was of the view that there was no misrepresentation on the part of the insured because the negative option would have influenced or limited the insured’s disclosures. The OSTI disagreed that there was a misrepresentation justifying the voidance of the policy and the rejection of the claim.
Furthermore, the OSTI stated that even if the vehicle was being used as a taxi, it was not material in this case because the vehicle was not being used as such at the time of the accident. The exclusion for fare-paying passengers relied on permitted the insurer to reject the claim but not to void the policy.
The OSTI recommended that the claim should be settled, and the insurer agreed.
