Commercial property insurance is priced and underwritten not only on the building itself, but also on what happens inside it. In Regent Insurance Company Ltd v King’s Property Development (Pty) Ltd t/a King’s Prop (5/2014) [2014] ZASCA 176; 2015 (3) SA 85 (SCA), the Supreme Court of Appeal considered the consequences of not disclosing a tenant’s high-fire-risk manufacturing operation.
Source attribution: This article discusses the Supreme Court of Appeal decision in Regent Insurance Company Ltd v King’s Property Development (Pty) Ltd t/a King’s Prop (5/2014) [2014] ZASCA 176; 2015 (3) SA 85 (SCA).
What happened?
King’s Property owned commercial premises in Crown Mines, Johannesburg. Regent Insurance provided fire cover under a buildings policy. A tenant at the premises manufactured truck and trailer bodies using fibreglass and resin. That work involved highly combustible materials.
A fire started during the tenant’s manufacturing activities and caused damage exceeding R9 million. Regent rejected the claim on the basis that the tenant’s identity and the nature of its business had not been disclosed before cover was accepted.
The property owner argued that Regent could have found relevant information in its own records. It also contended that Regent had been asked to arrange a pre-cover survey and, having not done so, could not rely on the missing information. The trial court initially accepted that position. The Supreme Court of Appeal did not.
The key insurance question: was the missing information material?
Section 53(1) of the Short-Term Insurance Act 53 of 1998 dealt with misrepresentation and non-disclosure in short-term insurance. The court distinguished between two related questions.
1. Would a reasonable person regard the fact as important to disclose?
This is an objective test. The question is whether a reasonable and prudent person would have considered that the insurer should know the fact when deciding whether to accept or assess the risk.
The court held that the tenant’s fibreglass manufacturing work was plainly material to a fire policy. It changed the nature of the risk at the premises. Regent’s underwriting material treated fibreglass manufacturing as a type of risk it would decline.
2. Did the non-disclosure actually affect this insurer’s decision?
This is a subjective question. It concerns the actual insurer and its underwriting decision, rather than a hypothetical insurer. On the evidence, the undisclosed activity would have mattered to Regent’s underwriter. The court found that Regent had been induced to issue or continue cover without the information it needed to assess the true risk.
Why the requested survey did not save the claim
The insured relied on the fact that a survey had been requested before cover was extended but had not been carried out. The Supreme Court of Appeal held that this did not establish estoppel.
In practical terms, an insurer’s decision not to inspect premises does not automatically remove an insured’s duty to disclose material facts. A survey may be an important underwriting tool, but it is not a substitute for communicating information that is known to the insured or its broker and is relevant to the risk.
The court also found that the broker had not told Regent about the tenant’s identity or its fibreglass manufacturing activities. The non-disclosure was therefore not cured by the uncompleted survey or by the possibility that the insurer might have discovered some information elsewhere.
The outcome
The Supreme Court of Appeal upheld Regent’s appeal. The property owner’s claim was dismissed, with costs. The decision confirms that a material non-disclosure can defeat a claim where the omitted fact was relevant to the risk and actually influenced the insurer’s decision to provide cover.
What this case means for commercial property insurance
The case is particularly relevant where a property is let to businesses whose operations create a higher risk of fire, explosion, chemical damage or other insured events. The use of premises can be just as significant as their physical construction and security arrangements.
- Property owners should ensure that the insurer or broker has accurate information about each tenant’s business activity.
- A change in occupancy or operations may need to be raised with the insurer before, or as soon as, it occurs.
- High-risk processes, flammable stock and manufacturing materials can materially alter the underwriting assessment.
- Do not assume that an intended inspection, an insurer’s previous records or an insurer’s ability to make enquiries replaces disclosure of known risk information.
- Brokers play a central role in passing risk information to insurers, but the insured should take care that important details are communicated clearly and recorded.
Bottom line
Regent Insurance v King’s Property shows that commercial insurance cover can be jeopardised when the insurer is not told about a tenant activity that substantially changes the fire risk. The materiality enquiry is assessed objectively, while the question of whether the insurer was induced is assessed with reference to that insurer’s actual underwriting position.
This is general information about a reported South African insurance case, not legal, financial or insurance advice. Policy wording, disclosure questions and the facts of each claim remain important.