CR296 Misrepresentation -Telesale of credit life policy

Misrepresentation CR296

Telesale of credit life policy – sales agent representing retrenchment benefit to be full amount owing on credit card – policy providing for a limited benefit– Appeal Tribunal ruling that insurer to be held to the representation


1. An agent of the insurer telephoned the complainant and offered to sell him a policy. The conversation was recorded. The recording revealed that the agent had told the complainant that, on the happening of an insured event, said to be death, disability or retrenchment, the policy would cover the amount outstanding on his credit card up to a maximum of R50 000. The method of calculating premiums was discussed, as were exclusions on the policy. The complainant asked some questions, which were answered. The complainant thereupon accepted the offer. The agent told the complainant that a policy would be sent to him, and that he could cancel it within 30 days of receipt if it was not what he wanted.

2. In October 2008 the complainant was retrenched and he submitted a claim. The outstanding balance on his credit card was R17 305, but the insurer paid a benefit of R6 699 in accordance with the formula for retrenchment set out in the policy:

“The benefit is payable in the event of the insured suffering loss of employment before the date of the insured’s 60th birthday, as a result of the implementation of a staff reduction programme by his employer. The benefit shall be the monthly amount equal to 10% of the average outstanding balance of the previous month for the duration of unemployment limited to 4 monthly instalments in total and payable after a deferred period of 30 days…”

3. There was thus a significant difference in the policy between the benefits payable on death or disability (the outstanding balance), and the benefit payable on retrenchment.

4. It later turned out that the insurer had actually calculated the retrenchment benefit in terms of the policy formula incorrectly – instead of R6 699 it should have been R3 967. The insurer did not seek, however, to reclaim the overpayment.

5. A provisional ruling was made to the effect that the insurer had paid the correct benefit as set out in the policy and had thus met its obligations. The complainant objected, stating that during the telephone conversation he had not been alerted to the different benefit for retrenchment.

6. The matter was re-allocated and further investigated. It was pointed out to the insurer that the sales agent had at no stage mentioned that the retrenchment benefit was different to the outstanding balance payable on death or disability. Payment of compensation was suggested, in view of the misleading sales conversation. The insurer offered R1 500 in compensation, which the complainant rejected. He also mentioned at this stage that he had never received the policy.

7. A final ruling was subsequently made in which the insurer’s position was upheld. It was pointed out to the complainant that he had been advised by the agent that a policy would be sent to him, and that he could cancel it within 30 days if it was not what he wanted. If he did not receive it, it could reasonably have been expected of him to have followed up and asked the insurer for a copy. The policy explained the retrenchment benefit. We said that the legal remedy (on the misrepresentation) would be to rescind the contract and for the insurer to refund premiums, which would place the complainant, having been paid R6 699, in a worse position than he was in.

8. The complainant appealed against the decision. The Appeal Tribunal, a retired judge, allowed the appeal, setting aside the Ombudsman’s final determination and ordering the insurer to pay the full balance of the amount outstanding on the credit card at the date of retrenchment. His reasons were as follows:

“In terms of the written policy there is thus a significant difference between benefits paid out in consequence of death or disability and those resulting from retrenchment. It is therefore clear from the telephone conversation that this material distinction was not explained to the appellant by the agent. In my view it was represented to him that if he was retrenched the full balance then owing on his credit card up to a maximum of R50000 would be covered by the insurance and paid out to him. He therefore in my opinion concluded the contract on the strength of this material representation. Now assuming in favour of the respondent that it had subsequently furnished the appellant with the statutory documentation pertaining to this insurance (as undertaken by the agent during the conversation) that in my view would not have availed it. Having materially misrepresented the situation there rested a heavy burden on it to take steps to draw the appellant’s attention to the correct information because, quite simply, in all the circumstances the appellant would have been entitled to assume that the terms of the written contract of insurance submitted to him accorded substantially with what he had been told. This is a well-known principle of our law of contract – see Shepherd v Farrell’s Estate Agency 1921 TPD 62.

In my opinion, applying principles of equity, which the Ombudsman is enjoined to do in terms of his rules, the appellant is entitled to relief. I consider that it is just and equitable that he be awarded damages which will place him in the position he would have been had the representations in regard to the terms of the contract been true.”

9. The insurer accordingly paid the complainant R10 606, being the difference between the outstanding balance of R17 305 and the R6 699 already paid.

March 2011

CR247 Mandate Misrepresentation by insurer that its financial adviser was independent



Misrepresentation by insurer that its financial adviser was independent—cancellation of contract of mandate


The complainant took an early retirement package from his employer. His pension money was invested with insurer X. An employee of insurer X referred him to an “independent” financial adviser, Ms B, for advice on where to invest his money. On her advice he invested his retirement money with X. The investment did fairly well.

The complainant later discovered that he had been misled by X’s employee into believing that the adviser was independent, whereas she was in fact employed by X. Not only did Ms B herself bring him under this impression but X openly allowed her to represent herself as an independent adviser. The complainant claimed that he would not have entered into a contract with an adviser employed by X involving not only an initial fee of 1.5% but also an annual fee of 1%. He explained that if he had been aware of Ms B’s true status he would have obtained, and paid for, independent advice elsewhere.

The insurer made certain offers to resolve the complaint but the complainant did not accept any of them.


We had no doubt that the requirements for liability based on mis- representation inducing a contract were met. Ms B had after all been held out by X as an independent adviser while she was not. The contract in question was a contract of mandate in terms of which certain services had to be rendered in exchange for commission.

The usual remedies for a misrepresentation inducing a contract are rescission and/or damages. For purposes of rescission it was imperative to determine whether the contract of mandate was between the complainant and Ms B or between the complainant and X because if the contract had been between the complainant and Ms B in her personal capacity, rescission on the grounds of misrepresentation would have to be sought from Ms B and not from X.

We took into consideration that Ms B was employed by X and rendered her services within the course of her employment with X. Furthermore, the rate of commission in terms of the contract of mandate was recorded in the application form issued by X. It therefore seemed probable that the contract was intended to be between the complainant and X. Ms B was in other words not only instrumental as far as the conclusion of the contract of mandate between the complainant and X was concerned, but she also acted on behalf of X for purposes of executing the contract. We therefore took the view that the contract of mandate was indeed between the complainant and the insurer, which X accepted.

In consequence of the rescission of a contract the performances rendered by both parties in terms of the contract must be returned. A claim for a return of what has been performed is in pursuance of restitution and is therefore not a claim for damages. The possibility that it would have been at a price that the complainant might have engaged another adviser was accordingly of no relevance, and could be of no benefit to X for the purposes of restitution. The complainant’s performance was the commission he paid for the services. That is the amount that by way of restitution had to be repaid by X in the event of a cancellation of the contract. On the other hand, X had not paid the complainant anything by way of performance, so there was nothing which the complainant could be required to return to X.

The complainant did not allege or prove any damages.


We decided that the contract of mandate between the complainant and X had to be set aside, and therefore that the commission he had paid had to be returned. The insurer complied.

CR230 Misrepresentation – Alleged misrepresentation


Misrepresentation – Alleged misrepresentation; poor disclosure/poor service; optional cash withdrawal reducing sum assured.


The insured was in need of some extra money for his son’s wedding. He telephoned the insurer’s call centre on 14 December 2005, to ask whether he could take a loan on his ten-year old whole life policy. According to the recording of the conversation the call centre operator told him that he could take either a loan or an optional cash withdrawal; if he took the latter it was not repayable, but the value of the policy would be reduced by the amount withdrawn. At that stage his sum assured was R225 600. Withdrawal forms were faxed to him and he filled these in, ticking the box which offered him the option of a quotation. He then went in to the insurer’s local office and was given a quotation which he signed, together with the forms. He was paid the amount of R 3 800. The insurer stated that an endorsement was sent to him by post to his usual address indicating that the cover had reduced to R186 789, although according to his wife this was never received. The insured died a couple of months later. The complainant, his wife, was aggrieved that the death benefit was R38 800 less, after a withdrawal of R3 800.

The insurer in response stated that the risk on the life cover was increased after the withdrawal, resulting in “the recalculation of cover applicable to the client’s current age, using current rates and also taking into account the additional risk of the withdrawal from the fund value”. The reduction in cover, according to the insurer, also resulted in “the extension of the guaranteed term”, from 23 years to 38 years (age 90). The insurer’s view was that the quotation indicated the reduced cover, and that the endorsement was sent to the insured after the alteration; since he did not try to cancel it within the 30 day cooling-off period, he must be taken to have decided to withdraw the funds even though this had such a negative effect on his policy.


We did not understand why the guaranteed term had been unilaterally extended, and after correspondence on this point, the insurer agreed that the guaranteed term be left at 23 years. This would increase the death benefit by R6 200, which the insurer offered as a gesture of goodwill, while standing by the rest of its submissions.

In our view, after listening to the tape recording of the conversation with the call centre operator, it was very clear that the insured was given the wrong impression that if he took an optional cash withdrawal the value of the policy would be affected by a reduction of the benefit by the amount withdrawn. The words of the call centre operator were “If there is a death claim, whatever was withdrawn from the policy is deducted from the death claim value”. When the insured asked “So it just reduces by that amount?”, the reply was “Yes”.

We examined the application for withdrawal, the quotation, and the endorsement.

The application contained the declaration that “I/we acknowledge that taking an optional cash value could substantially affect the future cash values, death claim value and ultimate maturity value of my/our policy” (our italics). It did not state that this would always be the case.

The quotation which the insured signed did not in our view clearly indicate that the insured amount would reduce. The page entitled “Quotation of policy alteration” set out a sum assured but did not itself indicate that this sum assured was reduced. That conclusion could only be reached by comparing the page entitled “Image before policy alteration” with the quotation. The fact that the two pages needed to be compared was not stated anywhere, and could easily have been missed by the insured, who would in all likelihood only have concentrated on the document entitled “Quotation”. The amounts under “sum assured” were out of alignment with the headings and were in small computer print, interspersed with other figures, without an “R” to indicate rands, and with no written cues to alert the reader to their importance. On the quotation itself, more prominently displayed and higher up on the quotation, was the statement “Cover reduction %…: .00”, which to the average reader would in our view have indicated that the reduction in cover was nil.

The endorsement did clearly indicate the reduction in cover, in a transparent manner which contrasted strongly with the unclear communication in the quotation. However, the late policyholder’s wife maintained that he never received this endorsement.

On the strength of the facts regarding the telephone conversation with the call operator, we took the view that this should be seen as a case of pre-contractual misrepresentation, which induced the insured to enter into the contract of withdrawal. The remedy would be to rescind the withdrawal, and place the parties in the position they occupied before the withdrawal was concluded, by restoring what had been performed. Taking into account, however, that there had been a quotation (even though it was extremely unclear), and that an endorsement was sent to the insured after the fact (which on the probabilities he received), it would be appropriate that there should be a settlement, reflecting the relative merits.


After prolonged negotiation, with the assistance of our office the parties agreed to settle on the basis that the insurer paid 50% of the disputed amount, ie R19 400, to the complainant.
May 2007

CR229 Misrepresentation – Post Contractual

Misrepresentation – Post Contractual


The deceased was the policyholder of a policy, administered by the insurer, which provided for the payment of a percentage of the sum assured in respect of certain specified benefits. So for example, hospitalisation would be calculated as Day 1: General Ward 0.225%, High Care 2.70% or Intensive Care 5.175%.

The deceased was on her way to work when she purchased a packet of naartjies from a street vendor, unaware that the fruit contained a poisoned organic substance used in the spraying of fruit trees. After having eaten of the fruit she took ill and later had to be hospitalised for poisoning. Due to further complications her condition worsened and she died.

The complainant, the son-in-law of the deceased, approached our office following the insurer’s refusal to settle the balance of the hospital account. According to the complainant his mother-in-law became ill on 8 August 2005. She was admitted to the Medi-Clinic in Tzaneen.

Within hours of her admission she underwent an operation and was admitted to ICU under an induced coma that lasted for two weeks. On 10 August 2005 the complainant made contact with the insurer’s call centre to arrange for an authorisation number that would be utilised for the payment of hospital bills that were to accrue. He alleged that the call centre consultant assured him that cover would be unlimited and that the hospital staff also telephoned the call centre the following day and was also re-assured of unlimited cover.

The insurer subsequently made two payments in terms of the hospital bill, i.e.
R321 135-44 and R194 684-45. The complainant’s family was left with a shortfall of approximately R400 000-00 in unpaid bills.


We were of the view that the policy benefits, on a proper interpretation of the contract, were determinable as a defined percentage of the sums assured and, as such, that it was not indemnity insurance. Cover was limited not in the amount that may have ultimately been paid but by the formula used to determine such amount. That, however, was not the nub of the complaint. The complainant contended that he was given the assurance by the call centre consultant that the cover would be unlimited and that the hospital staff were also reassured of unlimited cover. We later obtained a letter from the clinic supporting the complainant’s contentions.

We were of the view that the information given out by the call centre, both to the complainant and to the hospital, would have been misleading to a layman and may well have induced the family of the deceased to decide on treatment they would not otherwise have considered.

The insurer, on the other hand, maintained the view that it had met its contractual obligations.

The insurer made an offer of R20 000-00 which was declined by the complainant and resulted in us proposing that a meeting be held between the parties.

Relevant factors were:
• that the terms of the contract were clear that cover was not unlimited;
• that the insurer’s product was not an indemnity policy, i.e. the policy did not purport to settle the balance of an outstanding amount in the event of a defined occurrence;
• that in terms of the contract the insurer was liable for the benefits provided by the policy and that in the light of the feedback provided by the insurer, it had met its contractual obligations;
• that there was an obligation on the family to consult the terms of the policy, especially when matters took a turn for the worse and it became apparent that heavy expenses would be incurred;
• that the insurer’s offer of R20 000-00 was inadequate, in the light of the impression created by the insurer’s employees when enquiries were made.


A meeting was held in Johannesburg. After discussion the insurer agreed to reconsider it’s offer. It increased the amount to R150 000-00 which was again declined by the complainant. We proposed that the offer be enhanced by a further amount and both parties eventually settled on R185 000-00.

May 2007

CR192 Misrepresentation


Misrepresentation – insured wrongly informed by insurer’s client service department that claim was covered – liability of insurer for post-contractual misrepresentation – compensatory award.


The insured held a policy covering functional impairment. He had a stent implanted and enquired per e-mail from the insurer’s client service department whether his claim was covered. He was told that his enquiry had to be referred to the underwriting department. Having consulted with the underwriting department, client service confirmed per e-mail that the implantation of a stent was indeed covered under the functional impairment benefit. When the claim was brought to the attention of the claims department they made an about-turn. They informed the insured that his claim did not fall under the benefit in question because there was no functional impairment. The insurer refused to pay. The insured objected and asked us for assistance.


The insured could not dispute the insurer’s explanation that the claim did not qualify in terms of the provisions of the policy. However, he relied strongly on the e-mail advising him that the claim was covered and contended that the insurer could not go back on its word. The insurer in turn admitted that the complainant was provided with the wrong information but denied that, as a result, it incurred contractual liability. The insurer also denied that the employee who sent the e-mail had any actual or ostensible authority to amend the policy.

The e-mail clearly was not an acknowledgment of debt and neither could it be construed as an amendment of the terms of the policy. It simply was bad advice amounting to a post-contractual misrepresentation.

We explained to the complainant that a misrepresentation is seen as a wrongful act or delict. It is conduct that should never have happened. Consequently the insurer had to compensate the insured in order to put him in the financial position in which he would have been in had no representation been made. However, in the present case there was no evidence that the insured was financially worse off because of the misrepresentation.

We also pointed out to the complainant that a person, like the complainant, who had been misled is not entitled to be placed in the financial position in which he would have been had the representation been true. This meant that the insurer could not be compelled to pay a claim which never existed. Conversely, if an insurer wrongly advised the insured that he had no claim, the existence of a valid claim would not be affected by the wrong information. In short, misrepresentation has no bearing on the existence or non-existence of a contractual claim.

Where an insurer made a misrepresentation it admittedly may be estopped from relying on the true facts (such as that there was no claim) but only if the insured, as a result of the false impressions, acted to his prejudice. Because of an absence of proof of any prejudice this doctrine could not be relied on in this instance.

Although the giving of the wrong information in the circumstances did not ground a delictual claim for damages, it nevertheless caused distress for the insured. Such conduct was not befitting the reputation of the insurer and neither was it the norm of the insurance industry. Hence we suggested to the insurer that this was a suitable case for compensation under our rule 3.2.5.


The parties settled the dispute on the basis that the insurer had to pay an amount of R2500 as compensation for the non-patrimonial harm resulting from its bad service.

November 2006

CR171 Advice – intermediary – intermediary’s obligation, if any, to furnish advice?


Advice – intermediary – intermediary’s obligation, if any, to furnish advice?

The issue

Advice, seriously given, be it gratuitous or for reward, must always be appropriate. But is an intermediary, who holds himself out to be a professional financial adviser, whether he is an independent broker or is associated with a particular insurer, legally obliged to tender advice to his customer? That question surfaced in a trio of recent cases, discussed below.

In general

The adequacy of advice will always be assessed against the circumstances under which it was given. Was it solicited or gratuitous? Was there a mandate to furnish advice? If so, the terms of the mandate will be the cornerstone for any enquiry on whether the advice, not given, should have been given or, if given, was bad – whether the advice, in short, was missing or misselling.

Misselling has its own set of considerations which is dealt with elsewhere on this website. (s.v. Papers and Presentations and Topics and Cases). If the cause of the complaint arose after 1 October 2004 it would of course be a matter for the attention of the FAIS Ombud.

The cases under discussion concern a different and anterior issue: when is there a duty on an intermediary to furnish advice, either on his own initiative or if invited to do so?

Such a duty would normally arise and be defined by a contract although even unsolicited gratuitous advice, if bad, can lead to delictual (as opposed to contractual) liability.

Contractually there will of course be a difference between the nature and extent of the duties owed to a client by an independent broker as opposed to an intermediary who is employed by or associated with a particular insurer (a so-called tied agent). What is said below refers in the main to the latter.

The terms of the contract, and hence the mandate to furnish advice, must be sought in the contractual relationships between:

(a) policyholder and intermediary;

(b) insurer and intermediary;

(c) policyholder and insurer.

There may of course be an overlap between these relationships.

What is pertinent will be:

(a) the intermediary’s letter of appointment, if any, be it from the policyholder or the insurer;

(b) the policyholder’s application form for insurance;

(c) the policy itself;

(d) a consistent course of conduct from which a mandate to give advice can be inferred;

(e) an ad hoc arrangement between the policyholder and the intermediary to furnish advice.

In each instance it will become a matter of interpretation whether there was a duty to furnish advice and, if so, how far that duty extended.


The commission payable to an intermediary, be it up-front, in instalments or as an on-going fee, may also serve as an indication of the extent of his or her duties. Such commission, for instance, may be for:

(a) introducing a customer to a product provider or a particular product. Such advice would be pre-contractual;

(b) responding to a policyholder’s queries and liaising on his behalf with the insurer. Such interaction would be post-contractual;

(c) monitoring or reviewing an investment on an on-going basis e.g. by updating information. Such a duty would be post-contractual;

(d) furnishing on-going advice on whether an investment should be moved when the market fluctuates. Such a duty would once again be post-contractual. This would include advice on whether the policyholder should surrender or make his policy paid-up or whether he should switch to a product which is better suited to his or her current needs.

So too, it is a matter of interpretation whether the intermediary is to take the initiative in furnishing advice (e.g. to move the investment in the case of a living annuity) or whether the intermediary is only obliged to react when he or she is asked to give advice.

The answer to these questions will invariably depend on the express or tacit terms of the mandate and the circumstances of the case.

Against that background we turn to the three individual cases mentioned above.

First case

Advice – duty to furnish post-contractual advice – delay.


The complainant in 1997 took “a package” which in effect meant that his pension money was made available to him to invest at will. He made enquiries and spoke to one of Company X’s advisers, Mr A. Mr A recommended a preservation fund and so it was done. That was the end, at least initially, of Mr A’s involvement for which he received an agreed commission from Company X.

In 2000 the complainant realised that the investment was performing poorly and he decided of his own accord to switch to an overseas portfolio in the hope of achieving improved growth.

This investment, as so often happens, flourished to begin with but gradually began to deteriorate.

The complainant on occasion met Mr A on the golf course. In May 2002 he canvassed him for advice about his overseas investment. According to the complainant he asked Mr A to move his money to a fund in Company X where it would not diminish. Mr A was reluctant to give the complainant any advice on his overseas investment since he did not feel qualified to do so. He did, however, promise to speak to his area manager, Mr B. Nothing, however, happened for months. Mr A, on being confronted with the long delay from May to November 2002, tried to excuse himself on the feeble ground that he was not au fait with Company X’s newer products.

A meeting was eventually arranged between the complainant and Mr B. Mr B advised the complainant, in accordance with the generally prevailing wisdom at the time, not to withdraw his investment from the overseas market.

The complainant heeded that advice but when the investment continued to perform poorly he took the initiative in responding to an advertised invitation from Company X to ask for advice by email. This elicited a response from another adviser employed by Company X, Mr C. Mr C advised the complainant to move from the old style product in which he was invested to one of Company X’s newer products which was essentially a money market fund. Complainant did so and his investment stabilised.

The issue

The question the complainant posed in his complaint to this office was whether he was entitled to hold Company X liable for the overall loss in his investment due to Mr A’s tardiness in advising him to move his investment to a safer haven which was available from Company X’s range of products at the time; and that Mr A’s delay in doing so caused him his loss.


The first difficulty facing the office was that there was a dispute of fact on whether the complainant gave Mr A a firm instruction (which was accepted) to move the investment or whether it was merely a general request for advice. The onus to prove such a mandate was on the complainant. On the evidence adduced that onus was not discharged.

The next question was whether Mr A was contractually obliged to respond to the complainant’s request for advice.

As stated earlier, Mr A’s fee, which he received from Company X, was geared to the introduction of the complainant to the company and to its product. In terms of his agreement with Company X, and hence with the complainant, he was not obliged to furnish post-contractual advice.

On his own evidence Mr A never undertook or even presumed to advise the complainant about moving his investment either at all or by a specific date.

Mr B, on the other hand, voluntarily undertook to furnish the complainant with advice. Such advice had to be appropriate. Viewed objectively against the circumstances prevailing at the time, his advice not to move the investment, could not be said to have been inappropriate, a conclusion the complainant did not challenge.

That left the question of Mr A’s delay to arrange a meeting for the complainant with Mr B. On the evidence it could not be found that the complainant gave Mr A an instruction (which Mr A accepted) to arrange a meeting by a particular date. He could accordingly not be held liable for mora debitoris.


In the circumstances we came to the conclusion that we could not assist the complainant on the merits to recover his losses on the investment from Company X. But we did persuade Company X, having regard to Rule 3.2.5, to offer complainant R2500 on condition that it would be in full and final settlement of any claim against Company X.

The complainant, as was his prerogative, was not prepared to settle the matter on that basis. We accordingly made an unconditional award of R2500 against the insurer and closed our file.
November 2006

Second case

Inappropriate investment advice – failure to provide information regarding performance of off-shore portfolio – failure by intermediary who received a yearly revision fee to provide any advice and/or information. Whether the insurer can be held liable for “loss” incurred and/or quality of service.


The complainant was 68 years of age in 2000 when her policy with Company X matured. She contended that she was persuaded by an intermediary of Company X to invest the maturity proceeds of R66 611 in an off-shore portfolio for five years and, in addition, to make further monthly contributions of R500 to such policy. She received no information from Company X and was never contacted by the intermediary until she received a statement in 2005 informing her that the expected maturity value would be R79 000. Her total contributions amounted to R103 241.81 (R66 611.21 initially and ongoing contributions amounting to R36 630.60).

The complainant contended that if she had received regular information on the performance of the portfolio, she could have taken timeous corrective action.

Although she argued that the advice she was given was inappropriate and also raised other aspects relating to costs, it seemed doubtful to us whether these aspects were worth pursuing. The available information indicated on a balance of probabilities that she was aware of the risk involved in the off-shore investment and that she agreed to the costs concerned.

The issues

Two aspects (extracted from Company X after some protracted correspondence) were, however, relevant with regard to the complainant’s contention that:

(a) she was deprived of the opportunity to take corrective measures and thus prevent the “loss” she suffered as a result of Company X’s failure to provide her with information on the performance of the portfolio; and

(b) the intermediary failed, notwithstanding the fact that he received an ongoing “adviser’s fee”, to provide her with any advice or information.

In Company X’s first response it was stated that it “dispatches portfolio statements to clients annually”. The complainant was adamant that she never received such statements up to 2005 (the year that the policy matured). Company X eventually conceded that “According to our records, we did not send annual portfolio statements, except for 2005 which the client has received”.

A second aspect relates to the commission received by the intermediary. In spite of specific questions as to whether the intermediary received an on-going commission and after we were provided with a copy of the application on which it was clearly indicated that the intermediary would receive an ”investment review fee annually of 0.6%”, Company X eventually conceded that such a fee was paid, but it argued that that was not an on-going commission.

The issue

The first issue was accordingly whether an intermediary (who received such a fee) was under an obligation to inform and/or advise the policyholder.


Although the investment in fact represented a substantial portion of her total portfolio and factors such as the age of the investor and the degree of risk may cast some doubt on the appropriateness of the particular investment, it seemed that the investor was aware of the nature of the investment and the risks involved. Company X could accordingly not be held liable for inappropriate advice.

However, Company X’s failure to provide the policyholder with portfolio statements and the failure of the intermediary to contact the policyholder at any stage after the conclusion of the contract, in spite of the annual revision fee received, supported the complainant’s argument that Company X should take responsibility for not keeping her informed so as to enable her to make educated decisions regarding the replacement of funds. The purpose of an annual revision fee, after all, is to compensate the adviser for taking time at least once a year to consult with the client and review the client’s portfolio.

The nature of the particular product was such that knowledge of the performance of the portfolio and input by the financial adviser were factors that would assist the complainant in the taking of decisions that were required from time to time.

There seemed to us to be room for the argument that the failures by company X and the intermediary to inform the complainant of any trends or changes in the performance of the portfolio may have left her with the impression that there had been no deviation from the initial performance of 15% growth and that she had thereby been deprived of the opportunity to take decisions which may not only have preserved the investment, but have provided for at least some growth.


We provisionally held that, as far as the merits were concerned, Company X was in principle liable for the failure of the intermediary to comply with his obligation (for which he received a fee) to give advice, which was compounded by Company X’s failure to provide the policyholder with performance statements.

The insurer was also invited to comment of an appropriate method of determining the quantum. This would require information regarding the performance of other available portfolios compared to the particular off-shore portfolio. In the light of the complainant’s concession that she also had some responsibility to monitor the performance of the investment, an apportionment of damages would also be relevant.

This matter was eventually resolved on a very practical basis in that the insurer pointed out that the tide has turned in the interim and that the value of the portfolio had increased to more than the value of the premiums paid.

The complainant accepted the insurer’s offer to pay that value and terminate the contract.
November 2006

Third case

Adviser erroneously failing to afford complainant the advice to switch out of offshore fund that he gave to all his other clients; complainant claiming compensation for his losses.


In March 1997 the complainant purchased a single premium endowment policy which did well and grew from R70 000 to R182 216 over five years. In March 2002 he decided to reinvest this money for a further five years on the advice of his adviser, an agent in the employ of Company X, in “more of the same”. The adviser recommended an offshore equity fund, with which the complainant was happy. However within months the investment had nosedived in value as the rand strengthened. The complainant decided to hold on to the investment, hoping for an up-turn. However it continued to deteriorate, and the complainant cashed it in on 8 February 2005, when it was worth R117 922, some R64 000 less than the amount invested at the outset.
It emerged that the adviser had a list of 85 clients invested in the same offshore equity fund, and he had telephoned all of them in October 2002 advising them to switch out of this fund and into a guaranteed fund. Most had done so and had switched back into the market again in May 2003, thereby avoiding the losses which the complainant suffered. The adviser admitted that, due to a clerical error, the complainant’s name was not on the list although it should have been, and thus the complainant did not receive the advice which the other 85 investors received. The complainant wanted the insurer to make good his losses.

The insurer maintained that in the absence of a specific mandate, there was no general obligation on the adviser to have advised any of his clients to switch. The adviser apologized for the fact that the complainant was not contacted, and the insurer offered to refund him all the advice fees (initial and on-going), with interest.


If the complainant had received the same advice as the other investors, and had switched out of the fund in October 2002 and back in in May 2003, his “loss” would have been restricted to the difference between the value of his portfolio in October 2002 and May 2003, which we were advised was some R13 000. The question was whether there was a basis on which he could claim that loss from the insurer.

We found that there was no mandate to the adviser to manage the investment for the complainant. The responsibility for monitoring the investment lay with the complainant, and for this reason investment reports were sent directly to him and not to the adviser. As set out in the investment summary, he was free to consult the adviser at any time with any queries, or to make any changes to the investments, or for the purpose of investment review. It appeared that the complainant was indeed monitoring the progress of his investment and making decisions based on his evaluation from an early stage, without any recourse to the adviser.

Absent a mandate and thus a contractual duty on the part of the adviser to manage the investment for the complainant, we could not make a finding that there was a legal duty on the part of the adviser, for which the insurer could be held vicariously liable, to take the initiative to advise his clients to switch or not to switch, as the case might be. The fact that the adviser had done so in some cases did not render him legally liable if he failed to do so in others. In our opinion he would however have been obliged to give advice when asked for it. That was not the position in this case.


Nevertheless, we found that there could be no doubt that the adviser by his own admission had rendered poor service in discriminating between the complainant and the other clients on his list. In terms of our Rule 3.2.5 we are entitled to order an insurer to award compensation for omissions or maladministration, including incompetent service, on the part of an insurer which led to distress or financial loss by a complainant. We held this to be an appropriate case to invoke this rule, and made a provisional ruling that R5000 be paid in compensation, in addition to the refund of the advice fees in the amount of R5 600. This was accepted by the parties, and thus became the final ruling.

November 2006

CR147 Misrepresentation


Misrepresentation – offering of a conditional prize by insurer to proposer for insurance – effect on ensuing contract – section 45 of the LTIA


The complainant contended that when he phoned about the insurer’s ‘cash on call’ scheme he was told that he had won a cash prize of R5000. That is why he consented to take out accident insurance. A policy was sent to him. He later on made another phone call, this time in response to the ‘double money giveaway’ scheme. An extra R5000 was, according to him, promised to him. Subsequently his insurance premiums and benefits were doubled. His complaint was that he did not get the prizes promised to him and he therefore insisted that the insurer pay him the prize money. He also demanded that no further premiums be collected from his bank account.

On an analysis of the transcript of the discussion that took place between the complainant and the insurer’s mouthpiece, it was clear that the complainant was mistaken as to the terms of the prizes in issue. He was only told that he was eligible to win these prizes and that he would be informed if he in fact had won. The complainant, therefore, had no grounds to claim any prize money. But could he cancel the agreement and claim a refund of the premiums paid by him?


The question is whether the offering of a prize to proposers for insurance is in contravention of section 45 of the Long-term Insurance Act 52 of 1998 (LTIA). The section provides:
“No person shall provide, or offer to provide, directly or indirectly, any valuable consideration as an inducement to a person to enter into, continue, vary or cancel, a long-term policy, other than a reinsurance policy.”

The insurer contended that its practice of offering prizes did not fall foul of the section because neither the requirement of “inducement” nor that of “valuable consideration” had been met.

We took the view that the legislative purpose clearly was to prevent the taking out of long-term insurance for reasons that had no bearing on insurance as such.

The term “inducement” is a well-known concept of the law of contract. It refers to causality. There is no denying that the offering of a prize was a marketing technique to attract customers. Why else would an insurer go to such expense? The mere fact that the conclusion of an insurance contract was not expressly stated as a requirement for the prize did not mean that the purpose of the scheme was something other than inducing persons to take out insurance. This interpretation is supported if due effect is given to the word “indirectly” in the section.

The suggestion that the offering of a prize did not constitute “valuable consideration” is likewise not convincing. Valuable consideration, in the present context, is not a narrow technical term but one of wide import. The offering of a prize would certainly be a prime example of the type of valuable consideration the legislature must have had in mind.

Having concluded that the offering of the prize in question was contrary to section 45, the next question was what the effect of the contravention was. Section 60 of the LTIA preserves the validity of a contract entered into in contravention to the Act while section 67 provides that an insurer which contravenes section 45 would be guilty of an offence.

We took the view that since the offering of the prize was in contravention of section 45, such an offer was an improper means of obtaining consensus, analogous to, for instance, misrepresentation. On that basis, the insured had an election whether or not to uphold the contract. If the insured should elect to cancel the contract he may claim a refund of premiums paid.


We ruled that the contract was voidable at the instance of the insured and that the insured in fact cancelled it. Consequently the premiums paid by the insured had to be refunded. The insurer was also liable to compensate the insured for any bank charges occasioned by the collection of premiums from his bank account. The insurer, while not necessarily accepting the correctness of the ruling, gave effect to it.

This marketing practice is currently being considered by the Financial Services Board.

April 06

CR146 Allegation of misrepresentation concerning basic life cover


Allegation of misrepresentation concerning basic life cover – universal life policy – insurer neglecting duty imposed by policy


The complainant had taken out two life policies during 1990 and 1991 respectively. At the time of applying for the life policies, the complainant was a 70 year old widow who anticipated that she would require financial assistance in years to come. She intended to request her 5 children to contribute equally to her maintenance and the 5 children were then named as joint beneficiaries in the two policies. She understood that policy 1 would have a death value of approximately R30 000.00 whilst policy 2 would have a death value of approximately R45 000.00.

In 2004 the complainant discovered that policy 1 had a lesser death value of approximately R20 000.00 whilst policy 2 had a lesser death value of approximately R28 000.00. She approached the insurer about the discrepancies in death values and alleged that if the lower values were the correct values, the intermediary who had arranged the policies had misrepresented the situation to her. The insurer investigated the position and advised the complainant that the policy contracts made provision for the higher death values to be payable but only if a constant annual growth of 15% were maintained. Because of the economic conditions that existed during the relevant period, the anticipated growth of 15% could not be maintained. The insurer therefore rejected the allegation that there had been misrepresentation.

The complainant approached our office for assistance.


Our office made enquiries and it transpired that the complainant had applied for and had been given life cover without any guaranteed amounts. The insurer indicated its willingness to increase the death values of both policies to the amounts required by the complainant, provided that she made lump sum injections of approximately R16 000.00 on both policies, alternatively, if she increased her premium payments. Since the complainant was 84 years old, neither of these options was acceptable to her. She then requested us to approach the insurer to convert the life policies to endowment policies. The insurer advised us that this was not possible.

The policy 1 contained a provision to the effect that “provided that appropriate steps were taken at contract reviews, the benefit payable on death is guaranteed not less than the initial Basic Life Cover”. The insurer acknowledged that since it had neglected to attend to the appropriate provision of the contract, it would pay in the proposed lump sum in order that policy 1 pay out the full value as stated.

We advised the complainant of the offer, but she insisted that the insurer pay in the required lump sum amounts in both policies as she maintained that there had been a misrepresentation.


Since there was no evidence of any misrepresentation and since policy 2 did not have a similar provision to policy 1 concerning the “appropriate steps”, we advised the complainant that we were not in a position to take the matter further and suggested that she accept the offer made by the insurer, which she eventually did.

April 2006

CR102 Key man insurance – misrepresentation by life insured


Key man insurance – misrepresentation by life insured – materiality of undisclosed facts – return of premium


In December 2002 a co-operative took out whole life insurance on the life of their chief executive officer which policy included benefits in respect of dread disease and accidental death. The policyholder was under the impression that the policy also included disability cover but according to the insurer the reference to disability in the policy contract was merely an option to take up disability cover in the future.

The life insured had been involved in a motor vehicle accident in 1988 in which he suffered an injury to his chest, left shoulder and the small finger on his right hand. Although the medical report did not reflect this, he had also suffered concussion. With a view to lodging a road accident claim the life insured consulted a clinical neuro-psychologist in January 2002. At the time of the consultation the life insured was complaining of bad memory, inability to solve problems and to concentrate over a period of time. There was also evidence of anxiety in interpersonal situations. He was advised that he would need treatment by a psychologist or a psychotherapist over a period of 5 years.

In September 2003 the life insured left the service of the co-operative for health reasons. Since he had been a key man, the co-operative, as owner of the policy, submitted a disability claim to the insurer. At the time of concluding the contract the life insured had disclosed that he had been involved in the motor vehicle accident in 1998. He failed to disclose that he had consulted a clinical neuro-psychologist in 2002 and that he suffered from residual mental deficiencies including post traumatic brain dysfunction, memory loss and difficulty to concentrate, all of which was as a result of the motor vehicle accident in 1998. The insurer denied liability on the grounds that policy did not provide disability benefits. It, moreover, regarded the non-disclosure as material to the whole risk and not only to any disability benefit. The insurer alleged that had it been aware of the history of the insured, the terms as contained in the policy contract would not have been offered. Consequently it cancelled the contract on the grounds of misrepresentation. The insurer also invoked a clause in the policy, which provided for the forfeiture of all premiums paid.


There were three issues that needed to be resolved, namely:

1. What is the liability of a policyholder for misrepresentations made by the life insured?
In principle a person is only answerable for his own misrepresentations. He will also be liable where his employee made a representation in the course of his employment; so too where the representation was made by his agent who had been authorised to make the representation. In this instance the misrepresentation came from a third party, namely the life insured, who had not disclosed certain facts of which the policyholder had no knowledge. But the life insured was also the CEO of the co-operative policyholder that had taken out the policy on the life of the CEO as a key man. Since the CEO was in fact the controlling mind of the co-operative, we held that the knowledge he possessed as the life insured should be imputed to the policyholder;
2. Was the insurer entitled to cancel the contract on the grounds of non-disclosure?
We were of the opinion that the facts were material for the purpose of the insurance contract and concluded that the insurer was justified in cancelling the whole policy;
3. Was the insurer entitled to retain all premiums paid (amounting to a total of R27827)? We argued that the penalty clause could be subject to a reduction in the amount payable if the penalty amount (the premiums paid) is out of proportion to the prejudice suffered by the insurer. We requested the insurer to advise us of the relevant amounts and when these were furnished it appeared that the policyholder would be refunded an amount of some R4 000. We questioned some of the insured’s disbursements that had been taken into consideration in calculating the amount of prejudice suffered.


The insurer recalculated the figures, reduced some of the disbursements and offered to pay an amount of R18 769 to the policyholder. The amount was accepted.

October 2005

CR37 Misrepresentation by independent broker prior to conclusion of contract


Misrepresentation by independent broker prior to conclusion of contract – complaint that quotations provided and representations made induced the complainant to enter into a contract which in a material respect did not comply with his requirement.


It was common cause that the complainant approached the broker for advice on appropriate investment of a lump sum for a period of five years and that his requirement included a reasonable monthly income and a guarantee of “return of capital”.

He was provided with five quotations. Four of these provided a guaranteed monthly income as well as a guaranteed maturity value at the end of the term equal to the full amount of the total proposed investment. The fifth quotation also guaranteed a monthly income over the period. Unlike the other quotations, this specific quotation did not as such contain a guarantee of payment equal to the full amount invested at the end of the term. It reflected projected values on the basis of assumed rates of return. The broker, however, provided the applicant in addition to the quotation also with marketing material and emphasized by marking it with a coloured highlighter statements in the marketing material that a return of 100% of the initial amount invested at the end of the five year term was guaranteed. This marketing material only related to the “investment” portion of the quotation.

The guaranteed monthly income, quoted in respect of the last mentioned product, was significantly higher than those in the other quotes. On the strength of the quotations and representations of the broker, the complainant applied for the last mentioned product.

On receipt of the contractual documents, the complainant noted that only a return of just over 50% of the total consideration paid was guaranteed at the end of the term. He complained to the broker. The broker’s initial responses to the complaints were rather evasive and may be interpreted as supporting the complainant’s stance that the total amount invested should have been guaranteed. The complainant submitted an affidavit in which he states that he was given assurances by the broker that the required guarantee will be attended to. He was, however, eventually informed that the contract was issued in accordance with his application and the quotation which was also signed by him. In response to enquiries by our office, the broker contended that the complainant was fully informed when he elected to enter into the particular contract.


The issue which under the circumstances seems to clamour for an explanation is why the complainant entered into a contract in accordance with the one quotation which did not meet his requirements of a guaranteed income and a guarantee of investment at the end of the term.

The complainant contends that the quotations were presented to him in such a manner that he was under the impression that they were in fact similar with regard to the guarantees of income and return. The broker, on the other hand, contends that the complainant was “fully informed”. Although given all opportunities to do so, the broker did not contend that the significant difference between the quotations were explained to the complainant. It is our perception that a reasonable prudent intermediary under the particular circumstances would have at least indicated this significant difference.

A more significant aspect is that a guarantee of a return of the amount invested was specifically emphasized by the broker. According to the complainant this was done in response to his enquiry as to whether the total investment amount was guaranteed. The contentions by the complainant in this respect was not denied by the specific intermediary. During our investigation of the matter we were provided with a memorandum by the intermediary which supported the impression that the intermediary was even at that stage, under the impression that the guarantee applied to the total amount invested in respect of both the annuity/income as well as the “investment” portion of the total amount paid by the complainant.

Our opinion was that the available information confirmed on a balance of probabilities that the broker represented to the complainant that the contract entered into contained the guarantee of return of the total investment consideration similar to the other quotations.

It was furthermore our opinion that in the light of the stated requirement of the complainant any advice to invest in a product which does not provide for a guarantee requested for, would fall short of the standard which may reasonably be expected from a broker in similar circumstances.


We recommended that the broker accept liability for any losses caused by the representations made and advice provided.


The matter was resolved in that the broker provided the complainant with a certificate signed by its executive director in which it undertook to compensate the complainant for any loss in respect of the total amount invested at the end of the term.