Unpacking justice, fairness, and equity in South African life insurance contracts: Elise Burns-Hoffman

The nuanced concept of ‘bona fides’ or ‘good faith’ in South African law, as expounded by Justice Fritz Brand, extends beyond mere honesty to encompass abstract values such as justice, reasonableness, fairness, and equity. Elise Burns-Hoffman delves into the principles of justice and fairness, particularly in the context of life insurance companies’ contractual dealings. While good faith is commonly associated with the duty of the insured, Burns-Hoffman emphasises the reciprocal responsibility of insurers. She critiques complex product designs that may impede claims assessment, citing instances where exclusion clauses seem excessive, questioning their alignment with principles of reasonableness and fairness. She urges life offices to reevaluate their stance on good faith, advocating for a balanced approach that upholds the values enshrined in the Constitution.

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The duty, disparity and divergence of good faith

By Elise Burns-Hoffman

The exact interpretation and application of the concept of bona fides or ‘good faith’ in South African law has consistently created discussion and debate.  Many have researched the topic, seemingly with the aim of determining the exact role of good faith in South African contractual law.

For the sake of this particular analysis, the definition of good faith has been drawn from Justice Fritz Brand of the Supreme Court of Appeal who noted the following: 

“In South African legal parlance, the concept of bona fides or good faith has acquired a meaning wider than mere honesty or the absence of subjective bad faith. According to this extended meaning, it has an objective content which includes other abstract values such as justice, reasonableness, fairness and equity.”

This article is primarily focused on the principles of justice, reasonableness, fairness and equity and how these values may sometimes be seen by the public to be lacking in the manner in which life insurance companies deal in contract.

Good faith is virtually unilaterally referred to in the context of being the duty of the insured in terms of honesty, transparency, full disclosure and so forth at the time of contract application and beyond.  There is generally very little mention of the responsibility of the insurer in this regard.  Given the contractual nature of the relationship it ought not to be forgotten that the duty falls equally in both camps. The insurer is not excused from practicing as much good faith as is required of the parties with whom it contracts.  This duty starts from the very first point of contact, when the potential life insured meets with the financial advisor.

Policy and benefit selection is typically focused on ensuring that appropriate protection is in place in the event of things going awry in the future life of the applicant seeking cover.  The most basic of these benefits include a life policy, disability insurance and a severe illness benefit. Products that were simply structured in the past however, have become increasingly complex, particularly in policies providing severe illness type benefits.  In fact, many definitions of illness have become virtually impossible for the non-medically qualified to understand, with a recent court judgment highlighting that even the assessors tasked with the assessment of claims lodged against certain criteria are vulnerable to the misinterpretation of contract. 

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Although complicated product design many not be a direct example of ‘bad faith’ it must surely be seen to invite the potential of being viewed as lacking in reasonableness and fairness, particularly when creating confusion and frustrating the claims assessment process as is illustrated in the above-mentioned case. Certainly the specifics of the matter did little to promote equity between the contracting parties.  

It cannot be reasonable for life offices to issue policies that they themselves do not know how to correctly interpret or assess, let alone force the life assured into a lengthy and costly litigation process in order to decipher their correct contractual meaning.  Furthermore one must bear in mind that such disputes arise at the very time that the life assured relies on having access to the insured benefit for which premiums have been paid.  Hardly a level playing field.

A recent matter highlighted the perceived lack of good faith practiced by the life office concerned when it chose to offer terms with an exclusion clause inclusive of the entire DSM-5 to the young graduate applying for cover.  Although she had been treated for attention deficit disorder during her teenage and young adult years, the applicant had never suffered any form of mood disorder; had completed her schooling and a four-year university degree without any difficulty and was actively engaged in a developing a professional career at the time of the application for insurance.  

The exclusion clause read as follows:  ‘The exclusion will include all conditions diagnosed according to the Diagnostic and Statistical Manual of Mental Disorder (DSM-5 or the latest version thereof at the time of claim).  For example adjustment, mood, post-traumatic stress, schizo-affective, somatoform, anxiety and stress-related disorders.  Even though not considered psychiatric disorders, myofascial pain syndrome, fibromyalgia and chronic fatigue syndrome of any aetiology and any related symptoms and the consequence thereof, are specifically excluded under this clause.’ 

An attempt to engage the life office on the deemed unreasonableness of the excessive nature of the exclusion clause was met with the response that: ‘… from our claims experience, as well as from literature, there is unfortunately a large percentage of adults with ADD / ADHD that develop a secondary anxiety disorder and / or mood disorder.  At the onset of our policy, it is impossible to predict which clients will be affected by such a secondary diagnosis, and which wouldn’t.  For that reason it is not possible to offer the benefits without the exclusion …’  

The effort made at inviting the life office to provide actuarially sound data to justify the extent of the exclusion clause; an offer to provide a full psychiatric assessment; the suggestion of a reduced exclusion clause more in keeping with the expressed concerns related to mood disorders fell on profoundly deaf ears.  Not only was no good faith demonstrated in the genuine attempt made to ‘meet the life office’ on their need to apply sound risk management principles, the dismissive approach of: ‘… we are at liberty to offer terms which we see fit; we have the discretion to decide on our risk appetite and we are not amenable to changing out stance’ smacked of ‘bad faith’ in-so-far as the applicant was totally blocked and rejected in trying to establish a sensible basis on which to contract, for both parties.  

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Although one accepts that a life office must assess risk in order to ensure that the business is sound, the sledgehammer approach taken in this case tends to speak far more to discrimination in excluding the young graduate concerned from support during a potential time of future need, than it did of differentiation in terms of real exposure to risk.  For example: there can be no possible sensible relationship between an unexpected traumatic life event that could give rise to a period of post-traumatic stress (PTSD) and a past, well-managed attention deficit disorder during a successful academic career.  PTSD can happen to anyone at any time for a host of reasons, particularly in a country ranked as having the third highest crime rate in the world. As for the inclusion of the rather random non-psychiatric disorders listed in the exclusion the better, the less said the better.

In a second matter, another graduate disclosed having taken an anxiolytic during the exam period of her final undergraduate year, which happened to be written at the height of the ‘fees must fall’ movement, in amongst considerable chaos.  In this case the medication was a once off script for a defined number of tablets, to be taken as needed.  There was no long-term diagnosis; no need to be seen again and no repeat script. 

By the time the graduate applied for cover, she had taken a gap year since the fees must fall crisis; had completed a further post-graduate degree and was commencing her professional life.  

The following exclusion was applied: ‘Any illness or disorder related to anxiety state, stress, depression or any other psychiatric condition requiring continuous treatment’. 

Whilst preferable to the excessive exclusion clause mentioned earlier, this kind of over-zealous underwriting is seen to be inappropriate in the context of the facts; particularly given the increasing knee-jerk use of ‘psychiatric exclusion clauses’ in a society in which a certain level of anxiety is endemic.  

The lifetime prevalence for a period of mental stress or a diagnosed disorder in South Africa was determined to be 30% in a study published in 2009, while 4% of the global population was cited to experience anxiety in 2019 making this the most common of all mental disorders.  A more recent South African study indicates that 25.7% of the population experience depression.  This begs the question as to whether the line between actuarially risk based differentiation and a form of discrimination against a large sector of possible applicants is becoming somewhat blurry, hidden behind the ‘liberty to offer terms which we see fit’. 

Lest we forget, the values underpinning the Constitution must be reflected in contractual relationships.

One must ask at what point the exclusion of providing cover falls on the wrong side of reasonableness, fairness and equity – as well as human dignity – when other options such as a limited exclusion clause; an annually reviewable clause; extra morbidity loadings or possibly even an increase in the base rate across the board, could better address the issue.   

It may be prudent for life offices to review their stance on, understanding and demonstration of good faith.  This duty does not fall to the life assured only. Reciprocity of good faith is best served when insurers actually appreciate that good faith is required of them too and act accordingly.

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*Elise Burns-Hoffman is a Disability, Incapacity and Claims Consultant who specialises in medico-legal assessments and the provision of independent opinions in life insurance contractual matters.  She has convened and lectured a UCT Law@Work life insurance claims management program since 2019, is a certified mediator and a business coach.

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