A R10 million oversight – the consequences of inadequate disclosure to an insurer

In the recently decided Supreme Court of Appeal case of Regent Insurance Company versus King’s Property Development, the court considered what was a material non-disclosure which would entitle an insurer to reject a claim on insurance.

In the case, King’s Property, the owner of a commercial building, insured the building against fire and other possible losses. Regent Insurance provided the insurance cover. The building burnt to the ground in 2010, and King’s duly lodged an insurance claim for approximately R10 million. Regent rejected the claim.

Regent stated that the building was let by King’s to a business which manufactured trailers using fibreglass and resin, both highly flammable materials. It had not been informed of this fact, and would not have agreed to insure the building had it been so informed. It alleged that it was not liable under the insurance policy as King’s had committed a material non-disclosure.

The fire had indeed arisen from a manufacturing process within the building, done by the tenant’s staff.

King’s approached the High Court for an order compelling Regent to pay out. The High Court was sympathetic. It noted that, when King’s took out the insurance policy, its broker had requested that Regent do an urgent survey of the property, which Regent apparently agreed to do but did not do. King’s was unaware that the survey was not done, and paid the premiums in the belief that the building was properly covered by the insurance policy. Under the doctrine of estoppel, so the High Court held, the insurer could not now reject the claim, as it had misled the insured into believing that the premises had been surveyed and the insurance was valid. The High Court ordered the insurer to pay out the R10 million.

Regent took the matter on appeal to the Supreme Court of Appeal, relying pertinently upon the non-disclosure by King’s that the premises were let to a business manufacturing goods with fibreglass and resin. King’s had disclosed that the property consisted of a warehouse and offices and, so they argued, the insurer should have realised that a warehouse could involve manufacture utilising flammable goods. By failing to undertake a survey as agreed, King’s argued, it was Regent’s own fault that it did not establish the extent of the risk, and by nevertheless accepting premiums in those circumstances, they waived the right to rely upon non-disclosure of the risk and were estopped from now doing so.

The SCA noted that King’s had at no time informed Regent that its tenant manufactured using flammable materials on the site. The presence of this tenant had a substantial impact on the risk to the insurer. The court reasoned that the reasonable person would have found this fact to be material and thus would have disclosed it to the insurer. The agreement that the insurer would undertake its own survey did not relieve King’s of the duty to disclose. Regent was able to show the court that its standard operating policies would have led to insurance being declined had it been aware that the building’s use fell into a high fire risk category. Thus the non-disclosure had induced it to enter into an agreement which it would otherwise have declined. The proven fact that another insurer had been satisfied with the management of fire risk at the property and had earlier extended insurance cover, did not detract from this.

With regard to estoppel, the SCA found that the prejudice to King’s had arisen from its own non-disclosure of the extent of the fire risk – and not from Regent’s failure to survey the premises as agreed.

The SCA accordingly reversed the ruling that the claim of R10 million be paid out, instead confirming that the claim was rightly rejected.

This case highlights the importance of ensuring that all material facts are disclosed to an insurer when insurance cover is sought.

In addition to disclosing particulars of the uses of tenanted commercial premises, it is wise for commercial landlords to include provisions in their leases with commercial tenants, directed at preventing any actions or omissions by the tenant which might affect the landlord’s insurance cover.

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