S Schoeman v Constantia Insurance Co Ltd

The appellant (Schoeman) held a household insurance policy with the respondent (Constantia Insurance Co Ltd) covering contents up to R250,000. In May 1998 her house was burgled. She submitted a claim form with the assistance of her broker (Mr Roedman) and personal assistant (Mrs Graham) for R107,230, including R62,630 for clothing and footwear. Part of the clothing claim included R20,000 for "various other items of clothing" that she could not itemize due to difficulty recalling all stolen items from her dressing room. The insurer appointed a loss adjuster (Mr Koekemoer) who ultimately assessed the total loss at R139,353.84, higher than the original claim. The insurer alleged the claim was fraudulent based on two facsimiles sent by the appellant after a polygraph test, in which she admitted to including "a slightly inflated figure" of 10% on the advice of her broker to guard against the insurer lowering the settlement. The trial court (Joffe J) dismissed the claim on the basis that she had fraudulently exaggerated her loss and forfeited her entire claim. The appellant appealed with leave.

• Whether, in the absence of an express forfeiture clause in an insurance policy, a term should be implied ex lege or tacitly that fraud in making a claim (even if only part of an otherwise valid claim is fraudulent) results in forfeiture of the entire claim
• Whether the appellant committed fraud by inflating her claim by 10%
• Whether overvaluation or exaggeration of a loss amounts to fraud in the context of insurance claims
• Whether fraud in relation to part of a claim forfeits the entire claim including the valid portion

The appeal was upheld with costs including costs of senior counsel. The order of the court a quo dismissing the claim with costs was set aside. The defendant was declared liable to indemnify the plaintiff for loss sustained in the burglary and ordered to pay costs of the hearing on liability. The case was remitted to the court a quo for further hearing to enable the plaintiff to prove her loss and the sum for which judgment should be given.

In South African law, in the absence of an express forfeiture clause in an insurance policy, there is no term to be implied ex lege or tacitly that fraud in making a claim results in forfeiture of the entire claim including valid portions thereof. Such a forfeiture rule would be fundamentally penal in nature and contrary to the anti-penal character of South African common law. Insurers who wish to rely on forfeiture for fraudulent claims must include express provisions to that effect in their policies. An insured who submits an exaggerated or inflated claim estimate in good faith, in difficult circumstances where precise quantification is not immediately possible, or as an opening negotiating position, does not commit fraud merely because the estimate exceeds what is ultimately proven or assessed. The mere fact that a claim estimate is found to be exaggerated does not prove fraud; it must be shown that it was knowingly exaggerated with intent to deceive and defraud.

Marais JA observed that even where express forfeiture clauses exist in insurance policies, they may be subject to limitation under the Unfair Contract Terms principles and potentially governed by the Conventional Penalties Act 15 of 1962, and provisions of the Long-term Insurance Act 52 of 1998 (s 59) and Short-term Insurance Act 53 of 1998 (s 53), though no opinion was expressed on these matters. The Court noted that various other sanctions are available to deter insurance fraud beyond forfeiture, including criminal prosecution, inability to obtain future insurance, punitive costs orders, and delictual liability for investigation expenses. The judgment also observed that where fraud is alleged, an insured may experience practical difficulties in having evidence accepted regarding even ostensibly valid parts of a claim, providing a natural deterrent effect. Marais JA expressed the view that the onus on an insured to prove loss and value, combined with heightened scrutiny where fraud is alleged, provides significant protection to insurers even without automatic forfeiture rules.

This case is a landmark decision in South African insurance law as it definitively rejected the English law rule that fraud in making an insurance claim automatically forfeits the entire claim, including valid portions, in the absence of an express forfeiture clause. The judgment reinforces the anti-penal nature of South African common law and protects insureds from losing legitimate claims due to exaggeration or overestimation made in good faith or difficult circumstances. It places the burden firmly on insurers to include express forfeiture provisions if they wish to rely on such penalties. The case also provides important guidance on what constitutes fraud in insurance claims versus legitimate estimation and negotiating positions, recognizing the commercial reality that claimants often put forward higher initial claims expecting negotiation. It affirms that the onus of proving fraud rests heavily on the insurer and that fraud is not to be lightly imputed.