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