If an insurance claim is partially genuine and partially fraudulent, does the insured forfeit the entire the claim, and if so, must the insured pay back to the insurer whatever amounts have already been paid out?
The Supreme Court of Appeal (SCA) answered those questions when it heard an appeal brought by Discovery Insure Limited against a policyholder, Tshamunwe Masindi.
In May 2016, Masindi took out a policy with Discovery to insure his home in Pretoria and household contents. The policy also provided for Masindi to be reimbursed for expenses for emergency accommodation if the property was damaged to the extent that it became uninhabitable.
The policy stated that if any portion of a claim lodged by the insured was fraudulent, Discovery would be entitled to cancel the policy with retrospective effect from the earlier of the date of the reported incident or the actual date of the incident.
In November 2016, Masindi submitted a claim under the building section of the policy for losses caused by storm damage to his residence. The claim was made up of two components:
- The cost of repairs to the residence and damage to household contents; and
- Emergency accommodation.
Between 7 December 2016 and 25 May 2017, Discovery paid Masindi a total of R1 594 980.12 in settlement of both components of the claim. Of the total, R675 000 represented the amount claimed for emergency accommodation.
Part of the claim was fraudulent
Investigations by Discovery found that the emergency accommodation component of the claim was fraudulent. According to the SCA’s judgment, that part of the claim was fraudulent was not in dispute.
Discovery cancelled the policy with retrospective effect from the date of the incident (10 November 2016) that triggered the claim. In addition, Discovery claimed repayment of the full amount it had paid out to Masindi.
Masindi failed to repay the amount reclaimed, prompting Discovery to institute proceedings in the High Court in Johannesburg in December 2017. Discovery sought repayment of R1 647 592.67, together with ancillary relief and legal fees.
Masindi asserted that the policy did not contain an express provision to the effect that, on the retrospective termination of the policy, he would be liable to repay all the benefits already paid by the insurer before termination, including benefits relating to claims “not tainted by fraud”.
Discovery contended that, in terms of the policy, it had 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), not from the date on which the insurer discovered the fraud.
The relevant clauses
In both the High Court and the SCA cases, the outcome hinged on the interpretation of two clauses in the Plan Guide (policy schedule) and the Agreement of Loss.
Clause 5.13, headed “Fraud, misrepresentation and inaccurate information”, read as follows:
“All benefits in terms of this plan in respect of any claim will be lost and this plan may be voided or cancelled at our discretion:
- Where there is a misrepresentation, non-disclosure, misdescription by you or anyone acting on your behalf; or
- If false or incomplete information is supplied for any fact and/or circumstance in connection with an application for cover or in connection with a claim in terms of this plan by you or anyone acting on your behalf; or
- If any claim or part thereof under this plan is in any way fraudulent, or if fraudulent means or devices are used by you or any acting on your behalf to get any benefit under this plan is occasioned by your intentional conduct or any person acting on your behalf or with your involvement;
- If any fraudulent information and/or document whether created by you or any other party is provided to us by you or anyone acting on your behalf or with your involvement in support of any claim under this plan and whether or not the claim is itself fraudulent.
- If the size of any claim is inflated by you or anyone acting on your behalf or with your involvement, for any reason whatsoever, and whether the claim itself is fraudulent.
Where any benefit under this plan is forfeited in circumstances set out in this section, we will have the right to cancel your plan retrospective to the reported incident date or actual incident date, whichever is the earliest.”
Clause 5.5, which was headed “Breach of conditions requiring your assistance”, read:
“We reserve the right to cancel your plan and claim repayment from you for any amounts we have paid in settlement of your claim if you breach or fail to comply with our procedure and the rules set out in this Plan Guide.”
Accrued rights
In its judgment handed down in 2021, the High Court held that:
- The cancellation clause did not affect Masindi’s genuine claims.
- Masindi had acquired accrued rights to the payment of the genuine portion of his claim, and those rights remained intact, unaffected by the subsequent fraud.
- The 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. Thus, its enforcement would – to the extent that to do so would enable Discovery to recover the amount paid in settlement of the genuine portion of the claim – result in disproportionate prejudice to Masindi.
The High Court ruled that Discovery was not entitled to repayment of the full amount claimed, only to that portion of the claim tainted by fraud.
Meaning of the clause is clear
But the SCA said the meaning of clause 5.13 was “clear and unambiguous” and thus effect must be given to it.
To construe clause 5.13 as Masindi would have it would subvert the well-established tenets of the interpretation of documents. The purpose of the clause was to protect Discovery against fraudulent claims and to discourage attempts by insured persons to gain undue advantage by lodging falsely inflated claims. To interpret the clause as contended by Masindi would undermine its very purpose.
The SCA held that the doctrine of accrued rights did not apply in this matter because there could be no rights accrued, as the forfeiture clause applied with retrospective effect from the date of the incident that gave rise to the claim.
When Masindi purported to submit his claim on 11 November 2016, there was no longer an extant insurance policy because it had already been terminated with retrospective effect from 10 November 2016 – the date of the incident – pursuant to clause 5.13.
‘Straying outside the facts’
The SCA said it was unnecessary to delve into the argument that the forfeiture clause (clause 5.13) was a penalty clause and was therefore not enforceable.
It pointed out that neither party had raised this issue in their pleadings, nor was it canvassed at the trial. It emerged for the first time in the High Court’s judgment.
The SCA said it has repeatedly cautioned against judges straying outside of the facts presented to the court by the litigants.
High Court’s interpretation was incorrect
In summary, the SCA did not agree with the High Court’s interpretation of clause 5.13.
The High Court’s interpretation “entirely overlooked” the fact that clause 5.13 explicitly provides that upon breach of its terms, Discovery would be entitled to terminate the policy with retrospective effect from the date of the incident giving rise to the claim (10 November 2016).
“Bearing in mind this crucial consideration, we are driven to the conclusion that when the respondent lodged the claim on 11 November 2016, he had already forfeited all the benefits under the policy,” said the judgment, which was written by Judge Xola Petse, the deputy president of the SCA.
“Simply put, once the policy was terminated on 10 November 2016, there was no policy in extant under which the respondent could claim any of the benefits that would otherwise have been available to him had the policy not been terminated a day earlier.
“Concomitantly, Discovery was under no obligation to pay out any moneys to the respondent on 5 December 2016 onwards because the policy had, on 10 November 2016, already terminated,” Judge Petse said.
The SCA upheld Discovery’s appeal, with costs. It ordered Masindi to refund Discovery the R1 594 980.12, plus interest of 10.25% a year calculated from 8 June 2017 to the date of final payment.
