Mo­men­tum’s mis­take

The Witness - - OPINION - Robert W. Vi­vian

THE ex­ec­u­tives of Mo­men­tum in­sur­ance ap­peared re­cently to have been co­erced un­der pop­u­lar pres­sure into mak­ing pay­ment of a void pol­icy, up­end­ing over 250 years of sound global ap­pli­ca­tion of com­mon law.

Mo­men­tum ini­tially de­clined to ad­mit the claim be­cause the in­sured did not cor­rectly an­swer the clearly posed ques­tion of “whether or not at the present time or ever be­fore, he had suf­fered from raised blood sugar lev­els”, and also pro­vided in­cor­rect an­swers to sev­eral other med­i­cal ques­tions. On five oc­ca­sions be­fore fill­ing in the form, the claimant had tests that in­di­cated raised sugar lev­els, the last be­ing just two weeks be­fore he ap­plied for the in­sur­ance. The mat­ter was re­ferred to in­de­pen­dent rein­sur­ers and twice to the Long Term As­sur­ance Om­buds­man led by an in­de­pen­dent judge, all of whom con­firmed Mo­men­tum’s ini­tial de­ci­sion.

How­ever, the claimant was not sat­is­fied and made an im­pas­sioned plea to the court of pub­lic opin­ion.

It is clear that the in­surer’s ex­ec­u­tives, the gov­ern­ment spokesper­son rep­re­sented by na­tional Trea­sury, and the new “mar­ket con­duct” reg­u­la­tor did not ap­pre­ci­ate the se­ri­ous na­ture of what had oc­curred. The duty to dis­close all ma­te­rial facts when ap­ply­ing for in­sur­ance is not new. It is not even con­tro­ver­sial. It is a fun­da­men­tal re­quire­ment of the gen­eral law of con­tract that was crys­tallised by Eng­land’s Chief Jus­tice Lord Mans­field over 250 years ago.

In­sur­ance is a con­tract of good faith. An in­di­vid­ual who ap­proaches an in­surer with an ap­pli­ca­tion to in­sure a par­tic­u­lar risk knows a great deal about the par­tic­u­lars of that risk, while the in­surer knows lit­tle. The in­surer has to rely on what is dis­closed by the in­di­vid­ual. If the in­for­ma­tion dis­closed is in­cor­rect, in­com­plete or mis­lead­ing, there is no con­sen­sus ad idem (meet­ing of minds) be­tween the par­ties and thus no con­tract comes into be­ing. In the words of Mans­field: “The un­der­writ­ers are de­ceived and the pol­icy is void ab ini­tio.”

This duty to dis­close has since been con­firmed and ap­plied by courts across the globe. It is too fun­da­men­tal a prin­ci­ple of the law of con­tract to be in doubt.

Not only were ma­te­rial facts not dis­closed, the in­sured ap­par­ently know­ingly rep­re­sented that the fact did not even ex­ist, thus in­duc­ing the un­der­writer to en­ter into a con­tract it would not other­wise have en­tered into. There was clearly no con­sen­sus ad idem and the con­tract was there­fore void ab ini­tio.

The pub­lic and reg­u­la­tor’s mis­con­ceived re­ac­tion was partly be­cause the con­cealed facts were not re­lated to the cause of death. Mo­men­tum did not repu­di­ate the claim be­cause a term of the pol­icy was breached. It did so be­cause it was void from the start.

This is not an ex­am­ple of un­der­writ­ing at the claim stage ei­ther. At the un­der­writ­ing stage, Mo­men­tum had to ac­cept that the in­for­ma­tion pro­vided was true and cor­rect. When deal­ing with the claim, it sought to ver­ify that in­for­ma­tion, a nec­es­sary in­sur­ance pro­ce­dure.

And yet, not­with­stand­ing the clear le­gal po­si­tion, Mo­men­tum bowed to so­cial pres­sure. Bow­ing to pub­lic pres­sure is a par­tic­u­lar prob­lem since sev­eral in­sti­tu­tions ex­ist to re­solve such con­trac­tual dis­putes. These have been un­der­mined. Apart from its in­ter­nal pro­cesses, Mo­men­tum con­sulted an in­de­pen­dent rein­surer and ex­pert om­buds­man. There are fur­ther in­sti­tu­tions avail­able; an om­buds­man ap­peal sys­tem and courts of law. All of these func­tion as the law it­self within the rule of law. Mak­ing pay­ments out­side of any le­gal obli­ga­tions re­places the rule of law with an ar­bi­trary pub­lic out­cry sys­tem. All these in­sti­tu­tions have now been un­der­mined, re­placed and su­per­seded by pop­ulism.

In­sur­ance cre­ates the prob­lem of “moral haz­ard”. Full dis­clo­sure is one of the mech­a­nisms de­signed to deal with this prob­lem. Where this can­not be con­trolled, in­sur­ance can­not ex­ist. No­bel Lau­re­ates have demon­strated that it is only in those lim­ited cir­cum­stances where moral haz­ard is man­aged, that in­sur­ance ex­ists. The courts, over the cen­turies, ap­ply­ing the com­mon law of con­tract, be­queathed to so­ci­ety a work­able sys­tem that man­ages moral haz­ard. Un­der­mine this sys­tem and the in­sur­ance mar­ket will cease to ex­ist. At best, if what Mo­men­tum did be­comes the norm, con­sumers, in­clud­ing the hon­est ones, will pay more for in­sur­ance. Fur­ther, they will find its ac­qui­si­tion dis­tinctly more dif­fi­cult. — Free Mar­ket Foun­da­tion.

• Robert W. Vi­vian is pro­fes­sor of fi­nance and in­sur­ance, Univer­sity of the Wit­wa­ter­srand.

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