In this Supreme Court of Appeal judgment the court confirmed that insured persons are under a duty to act in good faith in their dealings with insurers.  Accordingly, the wilful lodgement of a false claim by the insured constitutes the breach of a duty of good faith which entitles the insurer to terminate the policy.

That would relieve the insurer, in the absence of an express term to the contrary, of liability under the policy from the time of termination of the policy, although rights and obligations that had accrued before termination would remain unaffected by the termination.

The court also said that fraud clauses including forfeiture clauses of the kind under consideration are common features in insurance contracts.  And they are viewed as valid and therefore enforceable.  They are designed to protect the insurer against fraudulent claims and to “discourage attempts to gain undue advantage [by the insured] by lodging falsely inflated claims”.  If unbeknown to the insurer, the insured submits a fraudulent claim which is then paid out, the insurer is entitled to recover the full amount paid out to the insured.

In this case, following the occurrence of the risk insured against, the insured submitted a single 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 first was for the cost of repairs to the insured’s residence and damage to household contents.  The second was for emergency accommodation.

The claim for emergency accommodation was tainted by fraud.  That was not in dispute.

The insurer paid the claim.  But once the evidence of fraud came to light, the insurer notified the insured of cancellation of the policy with retrospective effect from the date of the incident that had triggered the claim, as it was entitled to do in terms of the policy and the insurer claimed repayment of the full amount it had already paid out to the insured.

The insured failed to repay the amount claimed prompting the insurer to sue the insured successfully for the refund.

We deal with fraud clauses in Part 2.