Insurance & Reinsurance
Misrepresentation occurs frequently in the life insurance context and is the subject of much litigation in South Africa. Disputes usually centre on the following issues: was the fact that was misrepresented or not disclosed material? Did it induce the insurer to enter into the insurance policy? Did the insurer waive the duty of disclosure? In this article, we look at how misrepresentation could impact the insurance policy and address the key issues all parties should be aware of.
There are many reasons why one person may wish to take out insurance on the life of another. Financial dependence on someone, in a family context, is one example, such as a life insurance policy by a husband (as the insured) in relation to the life of his wife (as the life insured). It may also occur in a business setting, such as:
It is well established that an insured must not misrepresent (or fail to disclose) material information which may induce the insurer to issue an insurance policy on the terms that it did or at all. If it does, the insurer can avoid the insurance policy from inception. But what happens when the misrepresentation is made not by the insured but the life insured? After all, it is usually the life insured that provides most of the information to the insurer and it is this life insured that is being underwritten and is the subject of the risk. In the context of the examples, can the misrepresentation by the wife/key person or shareholder result in the avoidance of the husband/ enterprise/surviving shareholders' policies?
As a general rule, a misrepresentation committed by the life insured will not entitle the insurer to avoid the insurance policy. A misrepresentation must be made by or on behalf of the insured for an insurer to be able to rely on it  Practically, what this means is that if the insured:
If a life insurer wishes to protect itself against misrepresentations by a life insured, it is recommended it should canvass this directly with its insured during the sales process by, for example, requesting the insured to agree that the life insured is authorised to speak for it in concluding the insurance policy, or including a provision to that effect in the proposal documentation. If an insurer adopts this approach, however, the consequences of this should be made clear to the insured, in the same way that an insured is invariably cautioned about the effect of making misrepresentations itself.
Often the life insured does not stand to benefit from the policy himself or herself and may treat the very important proposal with less attention than they should. The life insured and the insured (and the brokers advising them) should, however, be warned that a misrepresentation or non-disclosure by the life insured can result in disastrous consequences for the insured and that the financial product it is hoping to give it security (and is probably paying for) could be rendered worthless by the life insured being economical with the truth at the proposal stage.
 Reinecke et al South African Insurance Law 2013