CR289
Mistake

Mistake excluding consensus – insurer mistakenly imposing exclusion wording which did not conform to its intention – on the particular facts complainant could not reasonably rely on impression that insurer had not made a mistake – contract void ab initio and premiums refundable

Background

1. The complainant had a policy covering him for sickness and permanent incapacity. In November 2006 he applied for increased cover. He disclosed on his application form that he suffered from and was being treated for rickettsial infection (the symptoms of which include malaise and fatigue). The insurer made a counter-offer to afford him the additional cover with an exclusion for “post-viral fatigue syndrome”. It also imposed an exclusion for “mental disorders” as it was evident from the medical information that he had a history of depression. The complainant raised no objection to the exclusions. The counter-offer was thereby accepted and a contract concluded accordingly.

2. In early 2009 the complainant claimed for a sickness benefit for a five month period when he had been unable to work because of a re-activation of his rickettsial infection. The insurer agreed to pay his claim on the original cover, but declined his claim for the increased cover on the grounds that the condition claimed for fell within the terms of the exclusion.

3. The complainant then pointed out to the insurer that the condition he suffered from was a bacterial infection, and thus could not be covered by the exclusion, which was stated to relate to viral infection.

4. The insurer then advised the complainant that it had made a mistake, as it had intended to exclude liability in the event of rickettsial infection, and that no other facts had been disclosed that would have led to the insurer to introduce an exclusion for post-viral fatigue syndrome. The insurer stated that it was correcting the error, and that “the correct exclusion therefore replaces the one that was initially placed from the date that the incorrect one was placed”. For this reason the claim for the increased cover, according to the insurer, could not be paid. It was stated that “the insurer accidentally placed an incorrect exclusion and as an insurer we are allowed to correct an error”.

Discussion

5. Our office pointed out that the basis for contractual liability is consensus supported by the serious intention of both parties to be legally bound by what they had agreed. The validity of the contract will be called into question, however, if a mistake occurs which excludes consensus.

6. The insurer’s intention had been to exclude its liability in the event of rickettsial infection, the condition which the complainant had disclosed on his application. but it was mistakenly worded in the exclusion as being for post-viral infection syndrome. The insurer’s subjective intention therefore differed from what was stated in the agreement.

7. In terms of the reasonable reliance theory, and looking at the facts from the point of view of the non-mistaken party, the complainant would be able to enforce the contract if he reasonably believed that there was subjective consensus between the parties. In other words the contract would be valid if the requirements are met, firstly that the insurer created the impression that it subjectively agreed to the contract; secondly that the complainant relied on this impression; and thirdly that his reliance was reasonable.

8. In this instance it was clear that the insurer created the impression that it subjectively agreed to the contract wording, so that the first requirement was met.

9. As to the second requirement the complainant would have to prove that he honestly believed that there was subjective consensus between the parties and that he actually relied on the impression created by the insurer’s incorrect declaration. If he was aware of the insurer’s mistake and nevertheless tried to enforce the declared agreement, this would be said to be “snatching at the bargain” i.e. knowingly trying to take advantage of the insurer’s mistake, which no contracting party is permitted to do.

10. As to the third requirement it also had to be proved that the complainant’s reliance was reasonable i.e. that a reasonable person would also have believed that there was subjective consensus between the parties. In our view a reasonable person would not have relied on the impression created by the wording of the exclusion clause. There would have been no reason for the insurer to exclude viral infection after assessing the complainant’s application, as he had not disclosed any prior viral infection. He had disclosed rickettsia which is a bacterial infection, and in our view a reasonable person would suppose that this was the condition which the insurer sought to exclude. In our view a reasonable person would have realised that the insurer had made a mistake, would have asked further questions on receipt of the insurer’s counter-offer with the exclusion wording, and would not have relied on the impression created by the wording.

Result

11. On the basis that the complainant’s reliance was not reasonable, a provisional ruling was made to the effect that the contract could not be enforced by him. In terms of the provisional ruling the contract was invalid (void ab initio, which means from the outset) because there was no consensus between the parties, and the insurer therefore had to refund all premiums paid by the complainant for the increased cover since the purported conclusion of the additional contract in November 2006.

12. The insurer and the complainant accepted the provisional ruling. The insurer refunded the premiums with interest but then tried to impose, in the original contract, a rickettsial infection exclusion from the date of the purported claim in 2009, and a mental disorders exclusion from November 2006. The insurer took the view that now that it knew about the complainant’s condition of rickettsial infection it could exclude any future claims arising from this condition. Our office explained to the insurer that this could not be done as the exclusions had fallen away with the void purported additional contract, and they could clearly not apply to the original contract which had been entered into before the rickettsial infection and depression conditions had manifested themselves.

13. Several weeks after the complainant indicated that he accepted the provisional ruling, his attorneys wrote to advise the insurer, without giving reasons, that he no longer accepted the basis of the office’s ruling, and that the matter would be taken further in due course. The insurer sent us a copy of this letter. A month later the complainant wrote to us to confirm that he no longer accepted the ruling, and set out suggestions for settling the matter. We advised the complainant that any further dealings would have to take place between him and the insurer directly.

SM
October 2009