Insurers often insert forfeiture clauses in their insurance policies which are designed to protect them from fraudulent claims. However, the Supreme Court of Appeal (SCA) in Discovery Insure Limited v Masindi (534/2022) [2023] ZASCA 101 recently had to decide upon the consequences of a claim which ends up being partly legitimate and partly fraudulent. The question was asked as to whether the insurer has the right to reclaim the full amount paid out in settlement of a partly legitimate and partly fraudulent claim emanating from the same event.

It has long been established that fraud vitiates all, however, unscrambling the proverbial egg of a claim tainted by fraud is no simple task.

Background

The appellant was Discovery Insure Ltd (Discovery), a registered long-term insurance company, and the respondent Mr Tshamunwe Masindi, a client who entered into a contract with Discovery for, inter alia, the insurance related to risks or losses or damage to Masindi’s residential property and household contents. In terms of the insurance contract, not only was Masindi insured for damage to his residential property and household contents, he would also be entitled to claim for the costs associated with emergency accommodation upon the occurrence of an insured event which rendered his property uninhabitable

The insurance policy contained a clause contending that where a claim or part thereof was fraudulent, Discovery had the right of cancellation of the policy from the date of either the:

• reporting of the incident; or
• on the date of the incident.

The importance of these dates and this election was fundamental to the SCA’s finding insofar as, if the insurer elected to cancel the agreement from the date of the incident, then this would ultimately result in Masindi’s retrospective forfeiture of all benefits awarded by the policy after cancellation.

In November 2016, because of storms and flooding, Masindi’s residential property was rendered uninhabitable and he suffered damages to his residence and household contents. Masindi claimed reimbursement for expenses incurred for emergency accommodation, as well as household content, which was fully paid by Discovery per the insurance contract (the settlement amount). Following the settlement of the claim, investigations were conducted and Discovery found out that Masindi had falsely issued invoices for the emergency accommodation after the insured event had taken place. This fact was common cause on appeal.

In the High Court

Accordingly, Discovery instituted proceedings in the High Court for the repayment of the settlement amount that was paid to Masindi. It did so on the grounds that the full amount paid to Masindi was as a result of a claim that was tainted by fraud.

The High Court was able to quantify what portion of the settlement amount related to fraudulent emergency accommodation and the court held that Discovery was only entitled to recover that portion which related to the fraudulent emergency accommodation. The High Court said this based on the doctrine of accrued rights and held that at the time of the breach, the right to claim all benefits arising from the insured risk, which were paid by Discovery, had already accrued to Masindi. Further, the High Court held that termination on breach of the policy only finds application to a claim tainted by fraud and not to a right which has been settled (and accordingly accrued). In the circumstances, the High Court deemed the fraud clause contained in the insurance policy as being equivalent to a penalty clause in terms of the Conventional Penalties Clause Act 15 of 1963 (Act). Essentially, a penalty clause contained in a contract creates liability for the payment of a sum of money if a contractual obligation is not fulfilled either through an act or omission. The High Court consequently declined to enforce the clause because the fraud clause was deemed out of proportion to the harm that the fraud caused Discovery. This, in turn, led to Discovery taking the matter on appeal to the SCA.

Before the SCA

The SCA disagreed with the court a quo’s interpretation of the forfeiture clause as the High Court overlooked the express provision in the clause which stated that upon the breach of the terms contained in policy, Discovery would be entitled to terminate the policy with effect from the date upon which the incident which gave rise to the claim occurred. Upon such termination, there would be no policy in existence at the time of the incident to claim any benefit. Thus, there was no obligation on Discovery to pay out to Masindi because the policy had already been retrospectively terminated. Accordingly, no rights could have already accrued to Masindi. Ultimately, it was on this basis that the SCA ordered Masindi to repay the full settlement amount that was paid to him in respect of his total claim as well as costs and interest.

The SCA also looked at the case of Schoeman v Constantia Insurance Company Limited [2003] 2 ALL SA 642 (SCA), which Masindi alleged showed that the clause in Discovery’s policy did not go far enough so as to encompass genuine claims to absolve the insurer of liability to indemnify the insured in respect of rights that had already accrued prior to the fraud that led to the retrospective termination of the policy by the insurer. Schoeman found that the implications of a judgment where there is one incident that gives rise to a claim that is partly fraudulent is not entirely clear, but by virtue of the doctrine of accrued rights, where there is no express clause to the contrary, the liability of an insurer which arose prior to a fraud would not be extinguished.

The SCA stated that express terms providing for the forfeiture of the entire claim, even if only a part of the claim is fraudulent, are commonly used in insurance policies. However, the SCA also stated that the common law relating to fraud and insurance policies provides that there is no implied term that the overvaluation of loss amounts to fraud and ultimately the forfeiture of all claims under the policy. Be that as it may, the SCA interpreted the policy purposively and within the context of the entire agreement and found that there was an express term provided for in terms of the Discovery policy.

Accordingly, the Schoeman case shows us that the absence of an express fraud and forfeiture clause in a policy relating to the overvaluation of loss cannot be regarded as being tacitly included in a policy or having been so included by operation of law. The SCA found that on the one hand, the insured cannot be prevented from claiming what is owed under the policy by a subsequent fraud because the right to claim indemnification accrued prior to the making of the partially fraudulent claim. On the other hand, the fraudulent claim of the insured upon claiming a legitimate claim under the policy ultimately results in the forfeiture of all benefits and the cancellation of the insurance contract from the date upon which the incident gave rise to the claim.

Insurers, as the creators of their own contracts, cannot underestimate the importance of the wording of their elected forfeiture clauses in protecting themselves from fraudulent claims. In this instance, the election to terminate and the relevant dates for the triggering thereof salvaged what may have otherwise been deemed an accrued right. Not only are these important ramifications for insurers, but this stands as a moral reminder to society that the penalties for your crimes can extend far beyond the obvious consequences. It is vital, even in the private sector, to have forfeiture clauses like these applicable in insurance policies to deter society from fraudulent behaviour.