This blog was co-authored by Anika de Kock, Associate and Lara Thom, Candidate Attorney.

In the case of Discovery Insure Limited v Masindi, the court had to consider whether a claim “tainted with fraud” lodged by a policyholder had the effect of rendering the whole claim voidable, even the parts not tainted by fraud and claims preceding the fraud.

On the 16 December 2016, the policyholder sustained damages to his insured residential property due to a storm and flooding. The policyholder lodged a claim with the insurer under the building section of the policy claiming a total amount of R972 592.67 for repairs and damage to household contents. The policyholder also provided a number of tax voices in respect of his emergency accommodation during the period 20 November 2016 to 16 May 2017. These invoices amounted to R675 000.00.

The insurer alleged that the policyholder had not made use of the emergency accommodation as the invoices were made out to a third party. As a result of the policyholder’s alleged fraud and misrepresentation, the insurer alleged that it was, in addition to recovering the money paid to the policyholder, entitled to cancel the contract with the policyholder with retrospective effect to the date of the incident.

Although the parties did not dispute the facts regarding the fraud and misrepresentation on the part of the policyholder, the dispute between the parties was on the basis that there was no express provision in the insurance policy that entitled the insurer to claim the repayment of all benefits paid before termination, including benefits received by the policyholder not tainted by fraud.

The court considered the following:

  1. What was the extent of the policyholder’s liability?
  2. Whether the policyholder’s fraud in respect of part of an otherwise valid claim, resulted in the forfeiture of the entire claim retrospectively from the date of the cancellation of the policy
  3. Whether the insurer was entitled to cancel the policy as well as reclaim repayment of all the amounts paid to the policyholder irrespective of whether those payments were made in response to the policyholder’s fraud.

In order to prevent policyholders benefitting from fraudulent deeds, insurance companies include forfeiture clauses in their policies. Although penalty clauses are enforceable under the Conventional Penalties Act1962, the penalty must not be out of proportion to the prejudice suffered.

The court referred to the judgement of Schoeman v Constantia Insurance Company Limited where the court found that if a policy does not have an express forfeiture clause, fraud will be confined to only the fraudulent part of the claim and will not result in the policyholder’s claim being forfeited.

This case is different. The insurer’s policy contained an express forfeiture clause. Clause 5.12 of the insurance policy provided that “All benefits in terms of this policy in respect of any claim will be lost and this policy may be voided or cancelled at our discretion”. The policyholder only committed the fraud after the first payment was made by the insurer and the insurer could only avoid the contract from that date onwards for the false accommodation claim.

If the policyholder were ordered to repay the amount paid by the insurer for benefits that rightly accrued to the policyholder and were both due and payable, the penalty imposed on the policyholder would be disproportionate to the breach by the policyholder. The court concluded that there was no justification for the enforcement of the penalty clause in the policy and the insurer was only entitled to recover the amounts paid in response to the fraud and misrepresentation on the part of the policyholder and not the entire amount.