South Africa: Publication of proposed amendments to the Policyholder Protection Rules
A new trend is emerging in South Africa with businesses starting to institute claims against their insurance brokers failure to extend cover under the Business Interruption sections of their insurance policies for the COVID-19 pandemic. This article examines the duties of insurance brokers and looks at whether these claims against brokers have any merit.
The ongoing COVID-19 pandemic has resulted in extreme hardships for many businesses across South Africa, particularly for those who have had to close their doors at varying stages of the State of Disaster, even if just for a period of time. As a result of the various lockdowns, businesses have lodged claims with their insurers for the losses caused by the business interruption (BI). For insurers, these claims have proven to be unfamiliar territory which has required much intervention from insurance experts in order to determine whether cover for a pandemic, such as the COVID-19 pandemic, exists within the respective policies.
However, a new trend is emerging involving broker negligence due to the claims not being covered under the respective policies. Claimants have started instituting claims against their brokers for their brokers’ failure to ensure that they had extended cover under the BI sections of the policy. These extensions may have potentially protected them from the effects of the COVID-19 pandemic had they been provided with it in the first place. Indicative of this trend is the recently instituted claim by Untouched Adventures against its insurance broker PSG Konsult Limited for approximately R4.7 million. Untouched Adventures alleges that PSG was negligent by failing to ensure that Untouched Adventures had BI cover against the lockdown triggered by the COVID-19 pandemic in 2020.
It is alleged that Untouched Adventures did not have the requisite cover as they did not request BI cover on its application form and as such, PSG did not obtain the requisite BI cover. However, in other matters, allegations are being made that insurance brokers should have ensured that BI cover in respect of a pandemic was procured. The crux of these matters is that this cover was never requested by claimants at the outset, nor could the parties have foreseen the need for such arising. This brings to the forefront the question as to whether a broker is duty bound to advise a client of all the risks that need to be guarded against and provide an option to select appropriate cover.
While brokers have numerous duties, the relevant duties of brokers are clearly established by the Financial Advisory and Intermediary Services Act (FAIS Act) General Code of Conduct, which are, as follows:
This entails that the broker performs his or her mandate in the interest of the insured, that the broker must be honest with the insured and they may not make a secret profit.
In terms of the common law, a broker is required to properly advise an insured as to the suitability of the product recommended by the broker. In so doing, a degree of care and skill has to be exercised by the broker, which the reasonable broker (not the reasonable person) would have exercised.
A broker is required to evaluate the insurance needs of the insured and to either recommend or take out appropriate insurance cover. However, the duty to obtain cover is not absolute and the broker only has to make a reasonable attempt to obtain cover for his or her client. If cover is obtained, the broker must advise the insured of the terms of the cover. Should it not be possible for the broker to obtain appropriate cover, the client must likewise be notified.
The FAIS General Code of Conduct requires a broker to provide a reasonable and appropriate general explanation of the nature and material terms of the relevant contract or transaction to the prospective insured, to disclose all information that would enable the prospective insured to make an informed decision regarding the cover in an open and straightforward manner and to provide the prospective insured with material contractual information.
From the above, it is evident that a broker must make an assessment of the prospective insured’s insurance needs which exist at the time of the request, in order to make a recommendation based on such needs, and to properly advise a prospective insured on the suitability of the recommended cover.
Once an assessment and recommendation has been made, the prospective insured is provided with an opportunity to instruct the broker to procure the relevant cover or not to. In other words, the prospective insured has, after having an opportunity to consider the proposed cover, agreed to the extent of the cover after it has been explained by the broker. Practically, this makes it more difficult to prove that the broker should have recommended and taken out a particular type of cover which was not required at the time of the assessment and which was also not agreed upon between the parties. The implications here are, firstly, that a broker is duty bound to recommend cover based on the risks which may eventuate. In this regard the question that needs to be addressed is whether or not the broker is duty bound to advise on all possible risks or only probable risk. It would be impossible to advise on all possible risks which may eventuate given that a broker is expected to exercise a reasonable duty of care as opposed to a special set of skills.
In this regard, it is important to have regard to the English case of Harvest Trucking Company Ltd v PB Davis t/a PB Davis Insurance Services  2 Lloyds Rep 638 (QB) which has been quoted in many prominent South African judgments on the same or similar questions of law. In the Harvest Trucking Company case it has been said that,
“The ordinary function of the insurance broker or other intermediary is to receive instructions from his principal as to the nature of the risk or risks and the rate or rates of premium at which he wishes to insure, to communicate the material facts to the potential insurers and to obtain insurance for his principal in accordance with his principal's instructions and on the best terms available…In no case does the law require an extraordinary skill on the part of the agent but only such a reasonable and ordinary degree as a person of average capacity and ordinary ability in his situation and profession might fairly be expected to exert…The precise extent of the insurance intermediary's duties must depend in the last resort on the circumstances [of the] particular case, including the particular instructions which he has received from his client. In many cases those duties will include advising his client on the type of insurance best suited to his requirements and, subject to his client's instructions, exercising reasonable care to obtain insurance which will best meet those requirements…”.
Secondly, the prospective insured has agreed to the cover to be taken out, which cover was explained to the prospective insured. The cover is (at least in most instances) available and most policies address pandemics/epidemics, however, in some cases even where pandemics have been catered for, given the unique and unanticipated manner in which the Covid-19 pandemic has presented itself, and more specifically how governments have chosen to deal with it, cover is not necessarily provided for under those policies. A further difficulty in relation to potential claims that needs to be guarded against is where such advice is provided, but no record thereof is kept. Unfortunately, many brokers are in the habit of recording advice only in respect of the cover which was procured – such practices are likely to result in one being found professionally negligent in claims such as these.
In these cases the broker against whom the claim is instituted will have their conduct evaluated by a court as against the FAIS Act’s General Code of Conduct and should it not be found to comply fully, they will likely be found to be negligent. However, as is seen in the case of any new claim with which a court has not had to deal with previously, each case will be dealt with based on its own merits.
The learned Judge of Appeal, Schultz, in the matter of Durr v Absa Bank Ltd and another
 3 All SA 1 (A) stated that “Hindsight is not vouchsafed the common man as he picks his course through life. This must be kept constantly in mind in a case like this one, where all is so obvious now.” This notion could not be more applicable than at a time like this given the current and pending cases which brokers will likely face in the wake of the Covid-19 pandemic.
In these instances, each case will have to be assessed on its own merits because although some may be similar, the slight differences in each case presents a possibility for varying outcomes.
For further information about COVID-19 and insurance policies, please contact Deon Francis or Tarryn Venter.