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Can an insurer refuse to pay your claim on the grounds that you failed to make full disclosure when taking out the policy?

In law, all contracting parties must act toward one another in good faith.

Some contracts, however, require a higher standard than simple good faith.

One such contract is that of insurance. A person who completes an insurance proposal form in applying for insurance cover must not only reply truthfully to all questions that are asked, but must of his own accord disclose all facts relevant to the policy. Failure to do so may entitle the insurer to repudiate the policy and refuse to pay a claim.

At common law, where a party to a contract of insurance contract gives a “warranty”, that is to say, binds himself to an essential term of the contract, then such warranty or term must be strictly complied with. If the warranty is breached, the insurer, at common law, was entitled to repudiate the contract and refuse to pay the claim, irrespective of whether or not the breach of the warranty had any bearing on the actual loss that had been suffered.

To prevent insurers from repudiating liability under insurance policies on the grounds of an irrelevant misstatement or non-disclosure, section 53(1) of the Short-Term Insurance Act now provides that a policy is not invalidated and the obligation of a short-term insurer is not excluded or limited – "on account of any representation made to the insurer which is not true, or failure to disclose information, whether or not the re-presentation or disclosure has been warranted to be true and correct unless that representation or disclosure is such as is likely to have materially affected the assessment of the risk under the policy concerned..."

A representation or disclosure is “material” where it would affect either the risk which was being insured against or the insurer’s determination of the amount of the premium.

In Andrew John James Hollely v Auto & General Insurance Co Ltd which came before the Johannesburg High Court in 2008, the question was whether the insurer was liable under a policy of comprehensive insurance in respect of Hollely’s car which had been damaged beyond repair in an accident.

The facts were that Hollely’s fiancée had taken out the insurance on his behalf, and in answer to a question as to whether the insured had claimed for any accidents or theft since first taking out insurance, had answered “no, not at all”. When asked whether the insured had made any insurance claims in the past two years, she again answered in the negative.

Hollely, however, had made an insurance claim after having been involved in a motor accident a year before, when another vehicle had run into the rear of his car. Hollely was clearly not at fault.

Was Hollely (represented by his fiancée) obliged to disclose that prior accident, in which he had not been at fault, and was the insurer now entitled to repudiate the present claim on the ground of the misstatement and non-disclosure as to that prior accident?

The court said yes, the insurer was entitled to repudiate the policy and refuse to pay the claim. The insurer, said the court was entitled to form its own view as to whether such information about the prior accident and claim would affect the premium it would charge in respect of the policy, and in particular, whether or not it should give Hollely the benefit of a no-claim bonus.

The misstatement and non-disclosure, said the court, had the effect of inducing the insurer to take on the risk under the policy at a lower premium than it might have done if there had been full disclosure

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