The impact of Policyholder Protection Rules 1.9 and 11 on the interpretation of an insurance policy

When a dispute arises between an insurer and a policyholder, the starting point for resolving it is the policy wording. This article considers how two of the recently amended Policyholder Protection Rules may affect the interpretation of an insurance policy if a dispute arises.

The amended Policyholder Protection Rules came into effect on 1 January 2018 and have been implemented in stages. These rules impose a number of duties on the insurer and the intermediary when extending insurance cover to a policyholder. In terms of the Short-Term Insurance Act, these rules do not apply to juristic policyholders with an annual asset value or annual turnover of more than R2 million. Rule 1.9 and Rule 11 (subject to a few exceptions in Rule 11) came into effect on 1 January 2019.

Rule 1.9 requires the insurer to take steps to reduce the risk of an intermediary providing incorrect advice to the policyholder. The rule states:

• Where advice is provided by an intermediary other than the insurer’s representative, rules 1.4(d) and 1.6(c) must be read to require the insurer to take reasonable steps to mitigate the risk of unsuitable advice. Such steps should take into account the nature of the business relationship between the insurer and the intermediary and any likelihood that such relationship may potentially influence the advice provided.

One measure the insurer can take to reduce this risk is to provide training to the intermediary on its policy wording.
Rule 11 requires an insurer to among others explain to the policyholder the nature and extent of the benefits, the exclusions or limitations contained in the policy, and the information provided by the insured that the insurer deems material to the risk. This explanation must be in plain and understandable language and in a format different to the policy wording.

If a dispute arises between the insurer and the policyholder over the interpretation of a policy, the insurer’s explanatory note will in all probability be considered with the policy wording.

Rule 11.3.1 states that “Any communication by an insurer to a policyholder in relation to a policy must (a) be in plain language; (b) not be misleading”. The remaining provisions require that the insurer informs policyholders of the duty of disclosure before entering into the policy, during the period of insurance, and upon renewal or variation of the policy.

Rule 11.4.2 details the information an insurer needs to provide to the policyholder. This includes, but is not limited to:

• the name of the insurer and its contact details;
• the type of policy and a reasonable and appropriate general explanation of the relevant policy;
• the nature and extent of policy benefits, including, where applicable, when the insurance cover begins and ends and a description of the risk insured by the policy; and
• concise details of any significant exclusions or limitations, which information must be provided prominently as contemplated in rule 10.15;

Rule 11.5 deals with the insurer’s duty of disclosure after inception of the policy. Rule 11.5.1 and 11.5.1(i) states:

• An insurer must at the earliest reasonable opportunity after inception of the policy, but no later than 31 days after such inception, provide the policyholder with all information referred to in rule 11.4 in writing, to the extent that any such information has not already been provided in writing by the insurer under rule 11.4, as well as the following information:
  • the representations made by or on behalf of the policyholder to the insurer which were regarded by that insurer as material to its assessment of the risks under the policy.

Rule 11.5.2 goes on to specify that “The information referred to in rule 11.5.1 must be provided to the policyholder in a format which is clearly distinguishable from the policy.” (Rule 11.5.1(i) and 11.5.2 will only come into effect on 1 July 2019.)

If an insurer decides to cancel the insured’s policy due to “material non-disclosure”, the insurer’s written communication to the policyholder in which the insurer lists the “representations made by the policyholder material to the risk” will also have to be taken into account to determine whether the non-disclosure is in fact material.

Insurers are therefore advised to ensure that any explanatory note they provide to the policyholder in line with Rule 11 (among others) of the Policyholder Protection Rules does not contradict the cover extended in terms of the policy wording and that all the representations made by the insured deemed material to the risk are in fact included.