Consumer Information

Author : Millers Attorneys

Pleading Ignorance can be an Excuse (It Seems)

Although a person is normally considered to be bound by that which he signs (under the common law rule of caveat subscriptor – “beware of what you sign”) – which includes documents specifically and expressly referred to in that document – our Court of Appeal seems to be lending more towards public policy and fairness, rather than the letter of the contract.

Very recently, the full bench of the Highest Court of Appeal unanimously came to a conclusion, on the following facts. An insurance company issued an insurance policy to a client, which was intended to cover the client against the effects of an adverse cost order, which may result from litigation it had already undertaken against another party. This type of insurance is novel to South Africa and is by its nature, extremely high risk for the insurer. What it in effect does, is the following: In the event that the client loses the case and ends up with an order against it to pay the other side`s costs, the insurer will cover the client`s legal fees (up to a predetermined maximum amount), which could be limited to his own legal team`s fees and / or also include his opponent`s fees.

In return the insurer levies a hefty premium, and in addition, charges a certain percentage of any settlement amount, or award that may be made in the client`s favour. The insurance is only provided once the insured has provided an opinion by his legal team, that he has a reasonable prospect of success. The insurer also has two payment options – one, whereby the premium is paid up front or the other, where the premium is deferred until the matter is successfully resolved in its client`s favour – but in the latter case, the premium is much, much more. In this particular case the client took out the deferred option, and took out cover for its own and the opponent`s costs. The total premium payable upon success of the matter was R1.3 million – irrespective the size of the award!

At a certain stage of the proceedings, the Defendant (i.e. the other party who the client of the insurance company had sued) changed his defence, which resulted in a 180-degree turnaround in the client`s legal team`s views of their chance of success. The result was that the insurance company decided to discontinue its cover, and demand payment of its premium. In terms of its policy document, it was entitled to do so under such circumstances.

The client however then challenged the insurer`s right to a premium if it discontinued cover, on the basis that the insurer`s broker had misrepresented the contents of the policy document to it, when it took out the insurance, in that it had never been made aware of such a right of cancellation. If it had, so it claimed, it would never have taken out the cover. To cut a very long story short, the Appeal Court held that there was not any misrepresentation, but rather, a lack of consensus between the parties. The Court held that the insurer could only hold the client to the agreement if it could prove that it was reasonable of the insurer to believe that the client was aware of that particular clause, and that it had intended to be bound by it.

Despite the fact that (1) the client was a seasoned business man; (2) the quotation which the client signed, specifically stated that the terms of insurance would be governed by the policy document; (3) a copy of such a policy document had been given to the client two days before he accepted the quotation to study it, and (4) he was represented by an attorney and two Advocates at the time he took out the insurance, the court still held that – given the novelty of such a type of insurance in the country; the fact that the broker did not specifically draw the client`s attention to that clause; the fact that a “frequently asked questions and answers” sheet which was given to the client at the time he had to make his decision, did not address that particular cancellation clause at all; and the fact that the client had testified that had he known of the clause he would not have taken out the cover – the insurer could not be seen to have been reasonable in believing that the client was aware of that clause. Strange, but true…