Professional indemnity insurance

June 1st, 2019
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Centriq Insurance Limited v Oosthuizen and Another (SCA) (unreported case no 237/2018, 14-3-2019) (Cachalia JA) (Mbha, Mathopo JJA and Dlodlo and Rogers AJJA concurring)

The Supreme Court of Appeal’s (SCA) recent dismissal of an appeal in the case of Centriq Insurance Limited, highlighted the need for professional indemnity (PI) insurance providers to ensure certainty when it comes to their exclusion clauses. If too ambiguous, these clauses could hold insurance providers liable for actions of an insured person whom the insurer never intended to cover. The judgment also highlights the importance of financial advisers fully understanding the investment vehicles they recommend to clients, as their fiduciary duties are taken seriously by the court.

The facts

The facts of the matter, in brief, are as follows: Mrs Oosthuizen was left widowed after her husband’s death due to a shooting incident. Mr Oosthuizen’s life policy subsequently paid out an amount of R 3,4 million. As a school teacher, Mrs Oosthuizen sought to provide a financially stable future for herself and her child by investing a portion of this pay out. Two million rand was invested in Sharemax Investments (Pty) Ltd after she was advised to do so by Mr Castro. Mrs Oosthuizen was informed by Mr Castro that the investment would relate to a shopping complex and that dividends would be earned from the moment of full subscription of the shares. The apparent dividends would pay out 10% after tax. Mr Castro convinced Mrs Oosthuizen of his confidence in the investment, even though numerous newspaper articles criticised the investment as being a ponzi scheme (at para 14).

Mrs Oosthuizen then made her investment in the scheme but apart from receiving a payment of R 1 400, received no returns before the development ultimately failed. The failure was due to a Reserve Bank investigation, which found that Sharemax had been taking deposits illegally (at para 3).

To recoup her initial investment plus interest, Mrs Oosthuizen instituted proceedings against Mr Castro who in turn sought indemnification from Centriq Insurance Limited. Centriq, however, denied such indemnification on the grounds that an exclusion clause in the policy existed in their favour. The exclusion released them from indemnifying an insured member in respect of any claims against such member arising from depreciation in the value of any investment or claims as a result of the performance of an investment. Based on these two arguments Centriq approached the SCA to dismiss the order granted in Mrs Oosthuizen’s favour and additionally to hold Centriq liable for Mr Castro’s actions (at para 6).

The court, in dismissing the appeal, and with reference to Professor J Bird (MacGillivray on Insurance Law 14ed (Sweet & Maxwell 2018) at para 11-007-1-008) stated that: ‘The consequence of adopting a business-like or commercially sensible construction of an insurance policy is that the literal meaning of words read in their context may have to yield to a fair and sensible application where they are likely to “produce an unrealistic and generally unanticipated result”, which is  at odds with the purpose of the policy.’ The court further held that courts are not entitled to lean to a construction more favourable to an insured person than the language of the contract permits in cases where the policy seems ‘to drive a hard bargain.’ The insured person would only be entitled to that, for which they are insured. In cases of real ambiguity, the courts would use the doctrine of contra proferentem, interpreting the plain language of the policy as against the insurer who inserted the exclusion as per Fedgen Insurance Ltd v Leyds 1995 (3) SA 33 (A) (at para 18).

Addressing both exclusions, Cachalia JA observed that the investment resulted in a complete loss of capital, therefore, not triggering the first exception relating to depreciation. Regarding the second exclusion, Mr Castro was aware from the onset that Mrs Oosthuizen’s intention was focused on the security of the investment and not its guaranteed performance, thereby negating its use (at para 30). Mrs Oosthuizen had no previous background or experience in investing and trusted Mr Castro as he was previously her late husband’s adviser. Furthermore, Mr Castro misled Mrs Oosthuizen as to the investments fundamental character (at para 30). For these reasons the court negated the use of the exclusionary clause.

Conclusion

This judgment will have interesting consequences on the future of exclusion clauses and their drafting in relation to PI insurance. It further creates the precedent of ensuring that exclusion clauses be more effective, and that insurers are to specify the content of such exclusions in as much detail as possible. If this is done as part of the policy, then its use will be relied on in whatever manner it is so laid out, as that would constitute what the parties contracted for. Only in cases of ambiguity, would alternate interpretations be considered and even then, it would be to whatever ends the court finds it to be commercially acceptable. Such a route would leave the door open to an outcome neither party expected when entering into the contract in the first instance.

Jared Poole LLB (UWC) is a candidate legal practitioner at SchoemanLaw Inc in Cape Town.

This article was first published in De Rebus in 2019 (June) DR 25.