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Sunday, February 1, 2004
Fraudulent claims rejected

The recent Appeal Court ruling in favour of Santam and Commercial Union (CU) against two claimants represents a victory by insurance companies against fraud and improper disclosure. “The companies’ dogged determination in defending these insurance claims, even at the risk of incurring heavy litigation costs, sends a strong message that insurers will not submit easily to claims they consider fraudulent, nor where improper disclosure has occurred,” comments Natasha Kapp, a partner at law firm Jan S De Villiers. The firm acted for both insurers in this matter.

The judgment saw the conclusion of an eight-year battle between, on the one side, Santam and Commercial Union (now Mutual and Federal), versus Afric Addressing Pty Ltd (AMA) and Press Supplies on the other.
The respondents hired the same Blackheath warehouse outside Cape Town, which was destroyed by fire in November 1994. Both were insured against the risk of fire and submitted unsuccessful claims to Santam and CU. AMA and Press Supplies then sued their insurance companies in separate actions. These were tried together in the Cape High Court, which upheld their claims but gave Santam and CU leave to appeal.
Santam maintained that AMA, a printing, packaging, and bulk mail business, had inflated its claims. It alleged that not all the stock claimed for was in the warehouse at the time of the fire and some had been sold, and that the insured knew this but had nonetheless claimed for it. On appeal, Judge Nugent concluded AMA had deliberately withheld the truth, exposing a clear intent to defraud. This constituted a breach of the insurance contract, relieving Santam of all liability for the claim.
“The Appeal Court extended the rule that if any part of a claim is thought to be fraudulent, all benefits can be forfeited,” says Kapp. “The Court held that should a claimant withhold the true facts, even if they only came to light after the claim was submitted, and the claimant does not then inform its insurer, that will also constitute fraud and a breach of the insurance contract.” In this case though, the court in fact found that the insured had submitted the claim with an intention to defraud.
The issue of disclosure was at the centre of CU’s defence of the claim by Press Supplies, which sold machinery and equipment to the printing industry. The Court dismissed Press Supplies’ claim on the grounds there had been a non-disclosure of material facts. A month before the fire, Press Supplies applied for an extension of its policy of insurance without disclosing that the company had stopped actively trading and was effectively dormant.
“The Court found there was a material distinction between the risk involved in insuring an actively trading company and one that was dormant. In the former, the insured would have a positive interest in avoiding the occurrence of the event it was being insured against. On the other hand, for a dormant company, such as Press Supplies, the occurrence of the event it was being insured against would likely be welcomed, for in this case, it would have relieved Press Supplies of unwanted stock, provided it then recovered under its insurance policy.”
Kapp said insured parties have a duty to disclose to the insurer any facts material to the risk or assessment of premiums. Breach of that duty entitles the insurer to avoid the contract of insurance.
The Court upheld both appeals with costs. It also awarded Santam punitive costs against AMA, affirming a clear message that the courts will not condone fraudulent insurance claims.
 

Copyright © Insurance Times and Investments® Vol:17.1 1st February, 2004
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