An insurer (like any other erroneous payer) can recover a benefit erroneously paid under an insurance policy if its conduct in making that payment was not inexcusably negligent.
In deciding whether the erroneous conduct is excusable, the court will take into account a number of factors, including:
- the relationship between the payer and the recipient;
- the conduct of a payment recipient;
- whether the recipient was aware that they were not entitled to receive the payment in question;
- whether the recipient’s conduct contributed to the erroneous payment; and
- the payer’s state of mind and the justifiability of its ignorance in making payment.
In Johannes TH van Niekerk v Liberty Group Limited the defendant took out a life insurance policy with the insurer on the life of his mother. The defendant was the beneficiary under the policy, and paid the premiums. The defendant ceded a portion of the benefit under the policy to his brother as security for a debt owed by the defendant to the brother. The cession was to remain in force until full payment of the debt. In terms of the general conditions of the policy, the insurer was obliged to make payment to the cessionary.
After the death of the defendant’s mother, the defendant claimed the full benefit under the policy, which he requested the insurer deposit directly into his account, and the insurer did. At the time, the defendant was still indebted to his brother, and the cession remained in place.
Subsequent to payment of the full benefit to the defendant, the defendant’s brother inquired why he had not been paid his portion secured by the cession. The insurer then realised that it had mistakenly paid the defendant the full benefit under the policy; and thereafter paid the defendant’s brother his share. The insurer instituted action to recover the erroneous payment from the defendant alleging that its error was excusable.
Although there was some degree of inattention on the part of the insurer, the court found the insurer’s conduct to be excusable. The court held that the defendant’s conduct contributed to the erroneous payment. When the defendant completed the claim form, he was fully aware that the cession was still in existence; that he had not paid the secured debt; and that he was not entitled to payment of the full benefit. Most importantly, in claiming the full benefit, the defendant declared that what was stated in the claim form was true, and that he had not withheld any material information from the insurer.
The rule that the error must be excusable does not apply in all instances. The courts could, for policy considerations, refuse to enforce this rule. For example, the court has previously refused to enforce this rule against a medical scheme, because the members stood to be prejudiced by the loss of funds. The court would similarly refuse to enforce this rule in the case of liquidators and trustees who pay more than what is owing to a creditor.