TOWARDS A CONSUMER-ORIENTATED INSURANCE INDUSTRY
In past years, insurance policies, legislation and the actions of insurers were all focused on protecting the insurer, rather than the insured. However, an examination of the 2003 Report published by the Ombudsman for Long-term Insurance, reveals that various South African statutes and the actions of insurance companies themselves indicate a move toward protecting the rights of the insured, or at least giving the insured some remedy when he feels he has been prejudiced by the actions of the insurer or its agent.
The common law provides that although an insurance broker acts as an intermediary (i.e. a broker) between the insured and the insurer the intermediary may be employed by the insured or the insurer. Therefore the intermediary may either be construed as the agent of the insured or insurer, depending on whose behalf he is acting. While some intermediaries are specifically appointed by the insurer, others are independent intermediaries who may be construed as acting on behalf of the individual intent on purchasing an insurance policy (“the proposer”) if the proposer retains the intermediary as his or her agent. However, when an intermediary fills out an application form on behalf of the proposer, it may, in some circumstances be incorrect to assume that the intermediary is the agent of the proposer, especially when the intermediary approached the proposer, rather than the other way around. It is therefore important to determine on whose behalf an intermediary is acting as this will determine to whom the intermediary owes his or her duties. Such duties include the duty to act with the care and skill expected from other brokers; the duty to obtain coverage for the insured within a reasonable time and without delay; and the duty to offer the correct advice to the insured as to the meaning of an insurance policy.
The role and liability of intermediaries has come under much scrutiny recently. The Ombudsman for Long-term Insurance, Mr. Justice P M Nienaber (“the Ombudsman”) recently reported in his 2003 Annual Report that the knowledge of an intermediary can prima facie be imputed to the insurer if the insurer gives the intermediary a mandate to fill in the insurance policy application forms or openly allows its intermediaries to fill in the forms. This issue arose in the context of a complaint made to the Ombudsman that a claim was repudiated by an insurer on the basis that the policyholder did not disclose in the application form a medical condition which affected the risk under the policy. The policyholder claimed that she had informed the intermediary of the medical condition but that the intermediary advised her that it would not be necessary to disclose it in the application form due to the fact that the application form did not specifically require that such a condition be disclosed. When the policyholder made a claim under the insurance policy, the insurer repudiated the claim on the basis of a misrepresentation in regard to the medical condition. The policyholder alleged that the intermediary’s knowledge of the medical condition could be imputed to the insurer on the basis of the doctrine of constructive knowledge – the insurer was held to have known facts which were known by its agent. The Ombudsman highlighted the importance of bona fides or good faith on the part of a policyholder who raises constructive knowledge as a basis for enforcing a claim which has been repudiated by an insurer. The Ombudsman found that the policyholder, in the circumstances, did not have bona fides in raising such a defence because she ought to have known that the insurer would be left in the dark because such a misrepresentation would not have been conveyed to the insurer.
Insurance products are often missold to policyholders, as such policies are not appropriate to the circumstances of the policyholder. However, one must bear in mind the distinction between misrepresentations (i.e. false statements or omissions) and “misselling” (i.e. bad advice) by intermediaries. A complainant may rescind the policy and claim a refund of all the premiums paid if the policyholder proves that a misrepresentation was made by the insurer or its agent. If the misrepresentation was intentionally or negligently made, the insured may in addition claim the damages he has suffered by concluding the policy. On the other hand, where the advice is simply inappropriate then the complainant is entitled to be placed in the same position which he would have been in had appropriate advice been given at the inception of the policy. In an attempt to discourage the giving of bad advice, the Ombudsman has emphasized that the circumstances of a policyholder must be objectively taken into account at the time of entering into the policy, having regard to the nature and purpose of the insurance product concerned.
In light of these and other decisions of the Ombudsman highlighting the insurer’s liability for intermediaries’ action, insurers clearly need provisions in place protecting them from the intentional or negligent actions of intermediaries. The contract regulating the relationship between an intermediary and an insurer should contain an indemnity clause in terms of which the intermediary indemnifies the insurer against any claims which can be brought against the insurer for any misrepresentations or misselling by the intermediary. On the other hand, where the intermediary is specifically acting on behalf of a policyholder, the policyholder should ensure that the intermediary warrants that he is acting with due skill, care and diligence and that he is not misrepresenting any information to the policyholder. If the intermediary does make a misrepresentation or provides bad advice, then the policyholder would have a right of recourse against the intermediary for breach of those warranties.
The regulator of the financial sector, the Financial Services Board, has introduced measures to monitor the standard of conduct of those who provide intermediary services, through the imposition of statutory duties of skill, care and diligence in terms of the Financial Services and Intermediaries Act, 2002, (“FAIS Act”) and the imposition of a licensing requirement. “Intermediary services” is defined in the FAIS Act to include any act, other than the giving of advice, which results in the entering into of a long-term or short-term insurance policy. Therefore even insurance brokers fall within the ambit of the FAIS Act. The Policyholder Protection Rules issued in terms of the Long-term Insurance Act, 1998 and the Short-term Insurance Act sets out conduct and disclosure requirements which must be adhered to by intermediaries, ensuring greater protection for the insured.
The Financial Services Ombudscheme Bill, the provisions of which are still under extensive discussion and consideration intends providing statutory recognition to voluntary ombudsmen schemes, such as the ombudsmen for Long Term and Short Term Insurance. The Bill too lays down minimum requirements for such schemes and deals with issues such as the jurisdiction of the various financial services sector ombudsmen.
The insurance industry, through its own self-created ombudsmen for Long-Term and Short-Term Insurance, also takes up complaints made against intermediaries by disgruntled policyholders. These non-profit making and voluntary organizations have the power to make decisions on written complaints brought before them which are binding on subscribing members of the insurance industry. However, policyholders who are unhappy with the decision of the ombudsmen are still able to pursue their claim through the civil courts. In recent years, many insurance companies have begun appointing their own internal ombudsmen to deal with complaints made against that particular insurance company. One company, in fact, has given the undertaking to be bound by any decision made against it by its own internal ombudsman if the complaint is decided in favour of the complainant. Although the appointment of internal ombudsman has been criticized because it raises concerns of impartiality, complainants are not prejudiced because they are still free to submit their complaints to the respective ombudsmen should they not be satisfied with the decision of the ombudsmen.
The insurance industry is steadily moving away from being insurer-focused, to more insured-focused and consumer orientated. The insurers would do well to monitor this trend, modifying their insurance policies on offer and their relationships with intermediaries or be left behind to operate in an industry where the rights of the insured may one day prevail extensively over those of the insurer.