In the recent case of Delphisure Group Insurance Brokers Cape v Dippenaar and others 2010 (5) SA 499 SCA, an insurance broker was found liable for negligent misstatements (which the court calledmisrepresentations) causing a pure financial loss. This is the first case involving an insurance broker where the doctrine of negligent misstatements, specifically, has been evoked. It is for this reason an interesting case.
Robert W Vivian, Professor of Finance and Insurance, School of Economic and Business Sciences, University of the Witwatersrand
Ms Jowariya Mahomedy, MCom student, School of Economic and Business Sciences, University of the Witwatersrand
In a particular area, farmers purchased crop insurance. The main insurer is Mutual & Federal. However a broker, Delphisure, decided to market a rival scheme supposed to be underwritten by Lloyd’s. Crop insurance has peculiarities of its own. Like all insurance, it has to be bought before the loss has occurred. With crop insurance, it has to be bought at a point of time before it is clear the crop has failed. So, beyond this point in time, it cannot be sold. Secondly, in order to spread the risk, the number of independent insureds must cover a wide area. It is no use insuring everyone in one area and if the crop of one fails, all crops fail. In this instance, there is no spread of risk. Thus, to insure this class of risk, Lloyd’s decided it could not decide until it had received all the applications and from these determine if there was a sufficient spread of risk. With this arrangement, prospective insureds are caught in the so-called Catch 22 situation. If they filled in a proposal to be insured with Lloyd’s, they would not know if they were in fact insured with Lloyd’s until it was too late to acquire insurance from other insurers. In this event, they would be uninsured and uninsurable.
The anticipated occurred. Farmers applied for insurance via Delphisure and, in the end, Lloyd’s decided not to offer the insurance. By this time, the farmers who applied for insurance were uninsurable. Farmers then suffered a loss when their crops failed and sued the broker and marketing agent. As is becoming common nowadays when insurance fails, the broker is sued. In this case, the broker was sued despite the fact that no insurer was ever on risk.
The Delphisure case involved two of the farmers who sued the broker. The basis of the two farmers’ action was that the broker (and marketing agent) had made negligent misstatements which caused them to suffer a pure financial loss. The farmers alleged that the brokers in marketing the scheme had negligently represented to them that Lloyd’s cover was in place and, acting on this information, they applied for Lloyd’s cover. Because they believed the Lloyd’s cover was available, they did not pursue other cover. Had they known the truth, that the Lloyd’s cover was not in place, they, so the argument goes, would have purchased the cover which was available and not suffered the loss.
Liability for negligent mis-statements which cause pure financial loss
Liability for pure financial loss
This, in the first instance, is a claim for a pure financial loss. As pointed out in numerous articles in COVER (1) there is no basis in the Roman-Dutch law of delict for liability for a pure financial loss. Despite this, the courts in recent years have handed down hundreds of decisions involving liability for pure financial loss. And (2) despite all these cases no objective legal basis, or test, on which liability for a pure financial loss can be determined, has evolved.
Negligent mis-statements as the basis of liability for pure economic loss
When courts first began to suggest liability for a pure financial loss did, indeed, exist, it was on the basis of negligent misstatements. The missing objective basis or test was negligent misstatements. So the Delphisure judgment is interesting; it is, so to speak, a return to the roots of this development. The first South African case where the issue arose is that of Cape of Good Hope Bank v Fischer 1886 SC where the bank unsuccessfully sued Fischer, the Cape Registrar of Deeds. Fischer had issued a duplicate set of title deeds which omitted to indicate that a mortgage bond was registered over the property. Based on the duplicate deed, the bank advanced money, to be protected by a bond, which it believed would be a first mortgage bond. When the bank attempted to recover based on the bond it found the existence of the earlier bond, the first bond, and after this had been settled, insufficient funds existed to satisfy the bank’s second bond. The bank accordingly suffered a financial loss which it attempted to recover from Fischer. The bank alleged it suffered the loss because of Fischer’s negligent false representation that no bond was registered over the property. The bank, in fact, lost the case because the court was not convinced the alleged negligent false representation was indeed the cause of the bank’s loss. The bank’s case failed for causation.
Nearly 70 years passed before the Appellate Division had the opportunity to consider the matter in Herschel v Mrupe 1954. This is what today would be considered as a Road Accident Fund (RAF) case. In those days, RAF cover was provided by individual insurers and the injured party would have to know the identity of the correct insurer. The lawyer acting for the injured party contacted the ‘insured’ who provided the incorrect name of the insurer. The lawyer, unaware of the error, sued the wrong insurer which duly entered appearance to defend. It was only when the matter proceeded to trial that the error was detected and the case quickly dismissed. The injured party decided to sue the ‘insured’, alleging that he (the injured party) had incurred wasted legal expenses (the pure financial loss) because of the negligent misstatement which provided the incorrect name. This action also failed, the reason for which is not clear because the different judges delivered separate judgments which cannot be reconciled on most important points. Once again, it could not be said the misstatement was the alleged cause of the loss. The legislation laid down a specific procedure to be followed to obtain the name of the insurer. This procedure was not followed and, if followed, the mix-up would not have occurred. Once again, the case failed for lack of causation.
Twenty-five years later, liability for pure financial misstatements was finally recognised in Administatuer, Natal v Trust Bank 1979. The Trustbank wrote to the Administrator advising that it was acting on behalf of the owner of property which the province was expropriating. Eventually, the Administrator paid over expropriation money to the owner named by the Trustbank, only to discover at a later stage that the so-called owner was not, in fact, the owner. The Administrator then attempted to recover the amounts it had erroneously paid to the so-called owner from the Trustbank, alleging that it had suffered the loss because of the negligent misstatement by the Trustbank that the person it was representing was indeed the owner. In this case, the court went to great pains to explain why the phrase ‘negligent misstatement’ was preferable to ‘negligent misrepresentation’. The court then clearly, for the first time, recognised that liability for pure financial loss may well exist. It is for this reason that this is the seminal case on liability for pure financial losses. But, once again, in fact, the Administrator lost the case. A factual examination of the evidence indicated that the source of the misinformation was the Administrator, not the Trustbank. He had initially identified the Trustbank’s client to be the owner of the property and the Trustbank was merely acting on the information given to it by the Administrator! From all of these early cases, it can be seen that the sole basis of liability for pure financial losses was the negligent misstatement. To the extent that an objective test can be said to exist, it was the negligent misstatement.
After the Trust Bank case, the court has dealt with hundreds, if not thousands, of cases involving pure financial losses. The latest genre is liability for prospective loss (future profits not made). The basis of the supposed liability has long since migrated from solely being negligent misstatements to a multitude of other causes. So, in a sense, it is refreshing to read the Delphisure case where the matter once again is framed within the negligent misstatement framework.
It is odd to note the Delphisure judgment refers to negligent misrepresentation, and not negligent misstatements, in view of the discussion in the Trust Bank case as to why negligent misstatement is preferable.
It appears as if Delphisure, a broker, had designed the crop insurance product, Farmsure, to compete with the policy provided by Mutual & Federal. Lloyd’s was approached to underwrite the product and indicated an interest providing sufficient spread of risk could be obtained. The product was then marketed through another company called Baxsure. Farmsure was a new product. Accordingly, it was not supported by any claims experience or existing underwriter. In April 2004, general manager of Delphisure addressed a meeting of interested farmers and explained the new product. There is a difference of opinion as to what was, indeed, said at the meeting, but the courts accepted the general manager announced that the product was indeed available and underwritten by Lloyd’s. The courts found that this constituted a negligent misstatement. At the time, the product was not, in fact, underwritten and hence was not available. In a very real sense, Delphisure was caught in a classic Catch 22 situation. If it announced it was not available and not underwritten, no one would have signed up. If it announced it was available, farmers signed up, but if insufficient farmers signed up to give Lloyd’s the necessary spread of risk, the farmers would be uninsured and uninsurable. As it turned out, in the end, some but insufficient farmers signed-up. Baxsure, the marketing agent, acting in the belief that the insurance was in place held a further marketing meeting. Two farmers who signed up but ended without insurance sued Delphisure and Baxsure. They suffered the uninsured losses and sued on the basis of the negligent misstatements which was made indicating that that insurance was in place. The claim against Baxsure was dismissed by the trial court, but the two farmers succeeded against Delpisure. This decision was taken on appeal to the Supreme Court of Appeal (SCA). The SCA agreed that a negligent misreprentation was indeed made, but, as in the previous cases discussed above, the court turned its attention to the question of causation. In the case of the one farmer, when the surveyor visited the farm, the farmer indicated great unhappiness with the wording of Mutual & Federal’s policy and indicated that the policy was unacceptable to him. The SCA was thus unconvinced that that farmer would have purchased the Mutual & Federal cover and, without making that decision, it cannot be said that that farmer had suffered a loss by the non-availability of the Lloyd’s cover. That farmer would have been uninsured in either case. The SCA thus accepted that only one farmer had proved his case. And thus we have the first successful case against a broker invoking liability for a pure financial loss caused by a negligent misstatement (or misrepresentation if the current wording is accepted).
Approaching broker’s liability cases from the point of negligent misstatements could result in a narrowing of broker’s liability. Some years ago, it may be recalled, an investment broker was held liable when asked by a friend, at a braai, it if was true that a scheme existed offering very good returns for bridging finance in the case of property-sale transactions. The broker advised that this was indeed true. The friend then sought out the scheme operations and invested money in the scheme which was subsequently lost. The broker was successfully sued for the information passed on at the braai! In this case the statement was not a misstatement – it was perfectly true. The judgment is that case is difficult to accept in any event, but if approached from the original basis of negligent misstatements, it is unlikely the court would have found the broker to be liable.