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2012
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[2012] ZAKZDHC 57
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PFC Food CC v Three Peaks Management (Pty) Ltd (5573/2009) [2012] ZAKZDHC 57 (10 September 2012)
33
IN
THE KWAZULU-NATAL HIGH COURT, DURBAN
REPUBLIC
OF SOUTH AFRICA
CASE
NO.: 5573/2009
In
the matter between:
P
F C FOODS CC
......................................................................................................
PLAINTIFF
and
THREE PEAKS
MANAGEMENT (PTY) LTD
.........................................................
DEFENDANT
JUDGMENT
SISHI J
Introduction
This case mainly
deals with the legal duties of a broker towards the insured. The
plaintiff’s claim against the defendant
arises out of an
insurance contract placed with Zurich Insurance Company South Africa
Limited, and in respect of which the defendant
was the intermediary.
The plaintiff averred that the defendant breached its obligations in
terms of its mandate in that when
the insured event occurred, it was
not paid the full amount insured by the insurance company.
The
Parties
The plaintiff is
PFC Foods CC, a close corporation duly incorporated and registered
in accordance with the laws of the Republic
of South Africa,
carrying on business as a café, bar and restaurant at Shop 1,
Summer Square, 37 Sol Harris Crescent,
North Beach, Durban,
KwaZulu-Natal.
The defendant is
Three Peaks Management (Pty) Limited, a company duly registered in
accordance with the laws of the Republic of
South Africa, carrying
on business as an insurance broker, and having its principal place
of business at 22 Underwood Road, Sarnia,
Pinetown, KwaZulu-Natal.
Background
The plaintiff at
the relevant time was a tenant at shop No.1 Summer Square, 37 Sol
Harris Crescent, North Beach, Durban where
it carried on business as
a café, bar and restaurant.
During the period
1 May 2008 to 28 May 2008, there existed an oral contract between
the parties in terms of which the defendant
held a mandate from the
plaintiff to act as the plaintiff’s insurance broker;
The terms of the
defendant’s mandate are set out in the particulars of claim as
follows:
The plaintiff
appointed the defendant as its insurance broker for the purposes of
arranging insurance cover, including cover in
respect of losses
arising from business interruption, for the business conducted at
Shop 1, Summer Square, 37 Sol Harris Crescent,
North Beach, Durban;
The defendant
would receive instructions from the plaintiff and, pursuant thereto,
would canvass the insurance market for appropriate
insurance cover
in respect of potential losses arising from, inter alia, business
interruption and arrange such cover with an
appropriate insurance
company;
The defendant
would exercise the degree of care and skill reasonably to be
expected of an insurance broker with a view to ensuring
that the
plaintiff was adequately covered from time to time, both in relation
to the type of insurance cover and the sum insured;
The defendant
would take reasonable steps to elicit and convey material
information from and to the plaintiff, in particular information
about the terms of any policy, which, in the event of a loss
suffered by the plaintiff following interruption of or interference
with its business in consequence of damage occurring during the
period of insurance at the premises, might leave the plaintiff
under
or uninsured in respect of such peril;
The defendant
would do everything reasonably necessary to draw the attention of
the plaintiff to the obligations imposed on the
plaintiff by any
policy of insurance issued to the plaintiff;
The defendant
would advise the plaintiff generally on its insurance needs and in
particular on the procedures to be utilized in
terms of the
requirements of any policy to ensure that the plaintiff was
adequately covered, inter alia, under the business interruption
section of such a policy.
Pursuant to its
obligations in terms of its mandate from the plaintiff, for the
period commencing from 1 May 2008, the defendant
arranged insurance
cover for the plaintiff with Zurich Insurance Company, South Africa
(Pty) Limited;
Pursuant to this
arrangement, Zurich Insurance Company South Africa Limited issued to
the plaintiff a contract of insurance under
policy number: SA
COM4572520; a copy of the policy schedule is annexure ‘A’
to the particulars of claim. The schedule
falls to be read together
with the terms and conditions of the Multimark 111 Policy, annexure
‘B’, to the particulars
of claim.
In terms of the
said policy, read with the said schedule with effect from 1 May
2008, Zurich Insurance Company South Africa Limited
insured the
plaintiff inter alia, against loss following interruption to the
business of the plaintiff, in consequence of damage
occurring during
the period of insurance, arising from fire.
On 28 May 2008,
and at the plaintiff’s premises, a fire caused damage to the
plaintiff’s machinery, stock, fixtures
and fittings. As a
result of the fire and the interruption of the plaintiff’s
business, the plaintiff suffered, inter alia,
loss of profit as a
result of business interruption, in the revised sum of R357 780.00.
The plaintiff’s
claim was originally completed in accordance with annexure ‘C’
to the particulars of claim which
reflected a short fall of R448
989.00. The claim has been amended and is now the sum of R357 780.00
as computed in A4 to Mr Furmage
expert summary at page 14 of the
bundle of expert summaries
The plaintiff
pleaded that the defendant breached its obligation in terms of its
mandate in one or more of the following respects:
It failed to
exercise the degree of care and skill reasonably to be expected of
an insurance broker in ensuring that the plaintiff
was adequately
covered under the business interruption section of the plaintiff’s
policy;
It failed to
comply with the plaintiff’s instruction to ensure that the
plaintiff was fully covered for any potential losses
arising under
the business interruption section of plaintiff’s policy.
The above has been
denied by the defendant in its plea.
Counsel placed on
record that the annual financial statements contained in volume 2 of
the bundle are admitted as is the standard
turnover figure reflected
on A4 of the attachment to Prissman’s expert summary in the
amount R3 110 165,00.
The
Evidence
14. The first witness
called for the plaintiff was Mr Brian Phillip Prissman who is
employed by AON Risk Solutions and who testified
that AON is the
biggest firm of brokers in the country and in the world. He testified
that he has had experience in business interruption
insurance since
1979, a period of thirty two years. He was very critical of the
manner in which the business interruption aspect
of the insurance had
been handled. He said so for the following reasons:
very few insurance
policies are placed for a period of six months and not twelve
months. The defendant needed to advise the
plaintiff on this;
cover of R600,000.00
for business interruption was too low and the defendant should have
advised the plaintiff thereon with
reference to turnover figures
and the plaintiff’s balance sheets;
the plaintiff should
have been advised that it is necessary to calculate the rate of
gross profit on the turnover figures and
then to add VAT and that
if this was not done, the risk was that the plaintiff would have
been under insured;
it would have been
necessary to have calculated the plaintiff’s rate of growth
and to perform a trending exercise for
eighteen months into the
future to ensure that if the risk occurred on the last day of the
indemnity period, the plaintiff
would not be under insured.
15. Mr Prissman testified
that when an intermediary considers the risk of business interruption
with a customer, it is important
to obtain the necessary information
from the customer in order to advise on the cover that ought to be
obtained and to explain
how insurers calculate a claim and in
particular, gross profit on the ‘
difference basis’
.
16. Mr Prissman testified
that an intermediary ought to perform calculations with the client so
as to demonstrate to the insured
that it understands the amount for
which the client is insured is not necessarily the amount which will
be paid in the event of
business interruption occurring.
17. Finally, such an
intermediary ought to record in writing what has been explained to
the client and if there is a danger of average
being applied, the
client should be made aware that there is such a risk.
18. Under
cross-examination it was put to Mr Prissman that if a client provides
an intermediary with the correct gross profit, there
will not be a
loss. He conceded that if in this case the sum of R1.8 million was so
provided, there would not have been a loss.
He explained however that
it is important to calculate the gross profit with the client and to
project the turnover for a period
of 18 months, to obtain the rate of
gross profit and to advise on the necessity to add VAT. This needed
to be done annually.
19 Mr Prissman said that
it is important that what is discussed is contained in writing and
signed by the client. AON has done this
for 15 years and this is not
a recent development in the industry as a result of that being a
requirement of the Financial Services
Board.
20. It was put to Mr
Prissman that if the client fixes the cover for R600,000.00 and
states that she is happy with that amount and
does not want it
increased then the broker has discharged his duty. Mr Prissman
testified that that instruction ought to be obtained
in writing but
that he would not simply leave it at that. He would advise the client
because in his experience clients do not understand
how business
interruption works. He would warn her that if she is under insured,
average would apply and the amount paid to her
would be less than the
sum of R600,000.00.
21. It was also put to Mr
Prissman that Mrs Flores Coehlo is an astute business woman and was
capable of working out gross profit.
Mr Prissman said that this
should never be accepted and should only be done with the assistance
and advice of an insurance broker.
22. The next witness
called was Penny Flores Coehlo who testified that she and her husband
conduct the plaintiff’s business
of ‘Neo Cafe’. The
witness testified that she and her husband purchased the business in
2004 and considered it necessary
to have the business insured. She
obtained insurance through the defendant and this included business
interruption cover in an
amount of R600,000.00 for a maximum period
of six months. The witness testified that she was under the
impression that should she
suffer an interruption of her business,
she would be paid an amount up to R600,000.00 for any loss. There is
no dispute that if
the plaintiff had been paid that amount, it would
not have suffered a loss and the amount would just have been
adequate.
23. Shortly after the
renewal date of the policy in May 2005 Mrs Coehlo met with Mr
Vandekan of the defendant and a number of amendments
to the policy
were effected. A number of items were deleted from the policy and
some cover was reduced that being for fire, money
and theft.
Otherwise the policy was renewed, including the business interruption
cover of R600,000.00. During cross-examination
it was suggested that
Mrs Coehlo was seeking ways of reducing the premium payable by the
business. She refuted that suggestion
and made the point that a
number of the assets that had been purchased were worthless and it
was therefore necessary to take them
off the asset register and the
policy of insurance. Fire cover was reduced to R600,000.00 because of
her valuation of the assets
in the business.
24. Neo Cafe is situated
in Summer Square in Sol Harris Crescent. It is close to a medical
centre in the shopping centre. On Thursday
24 November 2005 a fire
occurred which caused her loss as a result of soot and smoke. She
submitted a claim, including a business
interruption claim and was
paid the sum of R3,500.00. No average was applied. The Plaintiff was,
therefore, not aware that the
business was under insured.
25. On Thursday 23 August
2007 the sub-station at the corner of Playfair and Sol Harris
Crescent blew up as a result of which the
plaintiff’s business
lost a day’s trading. She submitted a claim including a claim
for business interruption and provided
details of her turnover
figures for three previous Thursdays. Her claim of R10,027.43 was
paid without the application of average.
Again there was no
indication that the plaintiff was under insured.
26. Mrs Coehlo testified
that yet another fire occurred in the shopping centre in a hair salon
later on in August which caused her
to reflect and consider whether
the business was properly insured. She testified that she was afraid
of a fire which may affect
the business. She accordingly arranged a
meeting with the defendant, the purpose of which was to review her
insurance and to make
sure that she was fully insured.
27. Mrs Coehlo testified
that she had previously met Mr Allan Moodley from the defendant who
had been introduced to her by Mr Vandekan.
He was introduced as an
expert in business interruption from S A Eagle Insurance company.
28. Although Mrs Coehlo
could not remember the date of the meeting she agreed with the
defendant that the meeting probably took
place on 3 October 2007. She
testified that Moodley attended that meeting. Under cross-examination
it was suggested to her that
the meeting took place when Mr Vandekan
introduced Moodley and that Vandekan was present during the meeting.
Mrs Coehlo denied
this but conceded that Mr Vandekan may well have
been present early on in the meeting but she definitely dealt with Mr
Moodley
when it came to discussing cover. She gave instructions that
a number of items be increased such as fire cover to R700,000.00 and
she also discussed with him business interruption cover. He did not
ask her for financial statements although she could have made
the
2004 to 2006 financial statements available to him which would have
shown that the business had grown substantially. She did,
however,
give him current sales figures for the period March to September 2007
which he jotted down and he said he would consider
and revert. There
was no discussion between her and Moodley about the formula with
which business interruption cover is calculated
and she left the
matter to Moodley.
29. When she received the
amended schedule from the defendant which reflected her instructions
for
inter alia
increasing fire insurance to R700,000.00, she
noticed that business interruption remained at R600,000.00. She
concluded that Moodley
had decided that that amount was adequate.
30. It was submitted that
the fact that the plaintiff undertook a review of the plaintiff’s
insurance after fires had occurred
in the shopping centre and
increased her insurance bears out that she was not ‘
penny
pinching’
when it came to the payment of premiums but
wished to be properly insured. She refuted the proposition put to her
under cross-examination
that she did not wish to change her business
interruption cover. The point she made was that she would have
expected advice from
the defendant and more specifically, information
which would have assisted her in arriving at an informed decision.
She made the
point under cross-examination that she understood that
if she suffered business interruption, she would be paid a maximum
sum of
R600,000.00. She stated that she relied upon her financial
advisor to guide her and provide her with advice on the question of
business interruption.
31. In one of the final
questions to the witness under cross-examination it was put to her
that Vandekan will testify that she knew
she was under insured. She
refuted this and said her understanding of the business interruption
section of the policy was limited
and that she was misinformed as to
the effect of the policy.
32. She stated under
re-examination that had she been properly advised on the business
interruption policy and assuming that the
premium would have been
three times the cost it was in 2007, the business could have afforded
it and she would have been willing
to pay the sum of approximately
R6,000.00, assuming that the 75% premium had not been incorporated
into the policy.
33. This is borne out by
the policy which D Schoeman & Associates CC put in place with
Zurich after the fire which provides
for business interruption for R4
million at a premium of R933.33 per month.
34. The plaintiff then
called another expert witness Mr Denver Furmage who is an accountant
and who for the last five years has
been employed by Commercial
Claims Services (Pty) Ltd, a company which calculates and formulates
insurance claims. Mr Furmage has
specialised in preparing business
interruption claims.
35. The witness testified
that the schedule annexure ‘C’ in the pleadings (at page
122) was an early calculation of
the claim which calculated a
shortfall of R448,989.00. He has since then been able to refine the
calculation and the result is
contained in the schedules attached to
his expert summary. The calculation of the claim itself is to be
found at page 14 of the
expert summary bundle and is marked ‘A4’.
Mr Furmage explained the manner in which the claim had been
calculated, the
result of which is that after deducting the amount
paid to the plaintiff by Zurich in the sum of R174,746.00, the amount
that remains
owing is the sum of R357,780.00 plus interest. The
reason for the claim is because the plaintiff only enjoyed coverage
at the rate
of 32.81% which demonstrates that she was under insured
and that average was applied.
36. Mr Furmage was
carefully cross-examined on the content of ‘A1 – 4’
but it was apparent from the cross-examination
that there is no
longer any dispute about the manner in which the amount had been
calculated. It was submitted, on behalf of the
plaintiff, that the
amount of R357,780.00 had been proven as the measure of the
plaintiff’s loss.
37. The plaintiff’s
final witness to testify was Mr Mike Gains who is a director of
Commercial Claims Services (Pty) Ltd and
the person who wrote a
letter to the defendant on 8 August 2008.
38. Mr Gains testified
that his company was instructed to assist the plaintiff formulating a
claim because he is a friend of Mr
Coehlo. He considered the claim
and formed the view that the plaintiff carried insufficient business
interruption cover and that
average would apply.
39. Mr Gains arranged a
meeting with the defendant which took place on 25 May 2008 at which
Mr Vandekan and Mr Moodley were present.
He spoke to them about the
claim and suggested that they notify their professional indemnity
insurers in order to obtain assistance
and also to ensure that their
client did not suffer any loss.
40. Although Mr Vandekan
was initially friendly, that changed when Mr Gains suggested to him
that the defendant ought to have obtained
financial statements from
the plaintiff to determine the adequacy or otherwise of the sum
insured for the loss of profits section
of the policy. He was adamant
that a professional broker need never obtain financial statements
from his client. He stated that
it is entirely the client’s
responsibility to determine the sum which it wishes to be insured for
in respect of loss of profits.
41. Mr Vandekan added
that he, Gains, should know that brokers never obtain financial
statements from their clients because those
statements are
confidential. This stands in stark contrast to the evidence given by
Mr Prissman.
42. The defendant’s
only witness was Mr Elaine Vandekan. He testified that he is a broker
and that the defendant arranged
insurance for the plaintiff in 2004
when she purchased the restaurant known as Neo Cafe and Bar. The
cover arranged for her was
as a result of the bank requiring
insurance for a loan that had been made to the shareholders of the
plaintiff. The cover was for
fire, theft, business interruption and
all risks. As far as the business interruption cover was concerned
the restaurant did not
yet have a track record under the new
management and Mrs Coehlo was suspicious about the figures given to
her by the previous owner,
she estimated the gross profit at
R600,000.00 per annum. She required cover for six months although it
is normal to obtain cover
for twelve months, it was felt that six
months would be sufficient as only the kitchen and bar would be
involved in a fire. A policy
was obtained from SA Eagle for the
period of May 2004 to April 2005. According to the witness, that
policy was automatically renewed
on 1 May 2005.
43. After the renewal,
however, Mrs Coehlo instructed the plaintiff to amend the policy and
those amendments are reflected in the
defendant’s file note
dated 6 June 2005.
44. Mrs Coehlo reduced
the fire cover from R640,000.00 to R600,000.00 and some other items
reflected in the file note. These amendments
are reflected in the
document entitled ‘
Renewal Comparison’
which
compares the plaintiff’s 2004 and 2005 premiums.
45. Although the witness
testified that the plaintiff’s motivation was to ensure that
fixtures, fittings and the contents
were insured at their proper
value, it was suggested that the true motive was to reduce the
premiums payable by the plaintiff.
It is inherent in this suggestion
that the plaintiff took upon itself the risk of under insurance.
46. Mr Vandekan testified
that at a meeting held on 6 June 2005 when the question of the
insurance was discussed with Mrs Coehlo,
the question of business
insurance was also discussed and he asked her whether the plaintiff’s
turnover had increased. He
stated that she felt that R600,000.00 was
adequate business cover insurance. The amendments to the plaintiff’s
policy were
brought about and the business interruption cover
remained at R600,000.00. The witness testified that the policy was
renewed in
May 2006 without making any changes thereto.
47. Before the next
renewal in 2008, however, a meeting was held at the plaintiff’s
premises on 3 October 2007. Mr Vandekan
testified that he and Mr
Allan Moodley had gone to the premises to introduce Mr Moodley and
that they had taken the plaintiff’s
file to the meeting. Both
Mr and Mrs Coehlo were present and a discussion then took place
regarding the plaintiff’s cover.
While Mr Moodley and Mr Coehlo
walked around the premises, Mr Vandekan and Mrs Coehlo sat on the
veranda talking about the plaintiff’s
cover. Moodley after a
while then joined the meeting and the discussion continued. An SA
Eagle new business form was used to record
changes to the plaintiff’s
insurance cover.
48. The changes to the
cover are reflected on the form and it is common cause that the
plaintiff increased its cover in a number
of respects. Fire risk was
increased to R700,000.00, the plate glass was increased to R25,000.00
and the theft cover was increased
to R20,000.00. These changes are
reflected in the instructions from the defendant to SA Eagle.
49. Counsel for the
defendant asked Mr Vandekan why the fire cover was increased. His
answer was that ‘
it would have been explained that they
would be under insured if a fire occurred’
.
50. Counsel for the
defendant also asked Mr Vandekan whether business interruption cover
was discussed. He was asked whether Mr
Moodley asked Mrs Coehlo for
sales figures which he supposedly jotted down. Mr Vandekan denied
that this occurred and said that
if anything had been said in this
regard ‘
it would be written down in our file’.
51. Mr Vandekan testified
that the fire occurred on 28 May 2008. He said that the defendant had
no further function to perform and
the claim was put in the hands of
the loss adjusters, GAB Robins.
52. The witness confirmed
that he was contacted by Mr Gains from Commercial Claim Services
(Pty) Ltd and that a meeting was held
with Mr Gains on 25 June 2008.
Mr Vandekan admitted that at that meeting Mr Gains had told him that
the business interruption cover
had been insufficient and that the
defendant should notify its professional indemnity insurers to submit
a claim in order that
the plaintiff would not suffer a loss as a
result of the defendant’s negligence. After the meeting, a
letter of demand dated
8 August 2008 was addressed to the defendant,
which records what occurred during the meeting.
53. Mr Vandekan testified
that the content of the letter is largely accurate. Under
cross-examination he was questioned about the
final paragraph on the
second page of the letter and first paragraph on the third page (see
pages 315 and 316 papers). He admitted
that he had told Mr Gains that
the defendant at no stage ever asked the plaintiff for financial
statements in order to determine
the adequacy of the cover. Mr
Vandekan disputed that he had told Mr Gains that a professional
broker need never obtain financial
statements from his client. He
admitted that it was likely that he had told Mr Gains that it is
entirely the client’s responsibility
to determine the sum which
is to be insured for loss of profits. He accepted that it is correct
that the establishment of a correct
sum insured under the business
interruption section requires insurance knowledge to determine both
the extent of cover and the
adequacy of the sum insured. He disputed,
however, that he had stated that he did not have the expertise to
determine the amount
of adequate cover. Mr Vandekan averred that he
did have sufficient knowledge and expertise to do so.
54. Mr Vandekan admitted
that the defendant did not respond to the letter and conceded that
the inference could be drawn from the
failure to reply that the
contents of the letter are accurate.
55. Under further
cross-examination Mr Vandekan conceded that he could have asked the
plaintiff for financial statements but he
stated that he considers
them to be confidential. He also conceded that he could have asked
Mrs Coehlo for turnover figures and
that he could have performed a
calculation in order to determine the value at risk with her but did
not do so. He also conceded
that business interruption cover is more
complex than fire or theft cover and that it requires expertise in
order to determine
adequate cover.
56. When Mr Vandekan was
pressed on with the question as the whether he explained the
mechanics of business interruption cover to
Mrs Coehlo, he said that
he had done so. It was pointed out to him by the cross examiner that
this had not been his case at the
outset and that he had not
testified to this in chief, nor had this been put to Mrs Coehlo. He
could not explain the change in
his evidence.
57. The witness also
testified that he did ask Mrs Coehlo for turnover figures but that
she did not give him those figures and misled
him as to the growth in
the business and in turnover. He could not explain why his client
would have misled him to her own detriment
and the only explanation
forthcoming was from a leading question from the defendant’s
counsel who suggested to him under
re-examination that it might have
been because Mrs Coehlo did not want to pay higher premiums for
business interruption cover.
This suggestion neither has any value
because of its leading nature nor is it logical. If Mr Coehlo did not
want to increase the
cover she would have said so. She did not need
to mislead her own intermediary.
The assessment of
the evidence
58. It is apparent from
the evidence and the cross-examination of the plaintiff’s
witnesses that the defendant’s case
is that Mrs Coehlo
initially set the business interruption cover of R600,000.00 at the
inception of the policy and that she did
not want it changed at the
meetings held on 6 June 2005 and 3 October 2007. It is further the
defendant’s case that the plaintiff
sought ways of reducing the
plaintiff’s premiums. This latter issue has already been partly
dealt with above. It completely
ignores the meeting of 3 October 2007
from which it is clear that Mrs Coehlo sought to increase her
insurance cover.
59. The defendant’s
case ignores the intermediary’s obligations as described by
Prissman. He made the point that he
carries a form with him which is
used to obtain information from the client regarding turnover and
turnover projections so that
the calculation may be done with the
client to determine whether the business has adequate cover. He also
advises the client on
the application of average, the implications of
under insurance and the necessity to add VAT to the calculation. He
thereafter
requests the client to sign the form for record purposes.
This is not a recent requirement of the Financial Services Board as
was
suggested to him under cross-examination but is a practice that
he has followed for close to fifteen years. This evidence by Prissman
was not disputed it being the defendant’s sole contention that
the level of cover had been set by Mrs Coehlo.
60. This defence raises
more questions than answers. Did it advise her that she was running
the risk of being under insured? Did
it advise her on the manner in
which value at risk is calculated together with its VAT implications?
The answer is no and it follows
that the defendant did not properly
advise its client.
61. The question also
arises why other meetings were not held with the plaintiff on an
annual basis. Prissman testified that this
exercise should be done on
an annual basis and the reasons therefor are quite clear particularly
in the case of a business which
is in a growth phase.
62. It was submitted that
Prissman was an excellent witness and that he is a highly experienced
intermediary specialising in business
interruption. His evidence
ought to be accepted as being what is required of an intermediary in
exercising reasonable care and
skill in performing its mandate.
63. It was submitted that
Mrs Coehlo was an impressive witness who testified in a forthright
manner and who was quite willing to
make concessions in favour of the
defendant when she considered it appropriate to do so. One such
example is the date of the meeting
in 2007. Mrs Coehlo could not
remember the date but she readily conceded that it may well have been
on 3 October 2007. A second
is the presence of Mr Vandekan at that
meeting. She testified that Mr Moodley was present at that meeting.
It was put to her that
Mr Vadekan had been present to introduce Mr
Moodley to her. Although she considered that she already knew Mr
Moodley, she readily
accepted that Mr Vadekan may have attended the
early part of the meeting but she was adamant that when the cover
that she required
was discussed, this was done in consultation with
Mr Moodley.
64. Her evidence that the
fires at the shopping centre had worried her and she wished to review
her insurance so as to ensure that
she was fully covered, sound
entirely true. It is common cause that a meeting took place on 3
October 2007 the purpose of which was to review the plaintiff’s
insurance requirements to ensure that it was fully insured.
This was
in fact done and her fire insurance was increased from R600,000.00 to
R700,000.00, the glass risk was increased to R25,000.00
and the theft
risk increased to R20,000.00.
65. Mrs Coehlo’s
decision to increase the fire section of the policy supports her
contention that she would have increased
the business interruption
cover if she had been advised to do so. The only person who is able
to testify as to whether Mrs Coehlo
provided details of the
businesses’ turnover is Moodley who has not been called to
testify.
66. There is no necessity
to traverse the evidence of Furmage as it is evident that there is no
dispute about the
quantum
of the claim.
67. The plaintiff’s
final witness was Mr Mike Gains who testified that after the fire he
was approached by Mr Coehlo, and
old school friend, to assist him
with the preparation of the claim to the insurance company. He
realised that the insurance for
business interruption was inadequate
and for that reason made an appointment to discuss the matter with
the defendant. A meeting
took place on 25 June 2008 during which Mr
Gains made the point that there had been inadequate business
interruption insurance,
that the insurer would apply average and that
the defendant ought to notify its professional indemnity insurers
because of their
negligence. He testified that during the meeting he
raised the question whether the defendant had ever obtained financial
statements
from the insured in order to determine the adequacy of the
sum insured for loss of profits. It was confirmed to him that at no
stage were the financial statements asked for and it was further Mr
Vandekan’s view that it is not necessary for financial
statements to be asked for as it is the client’s responsibility
to determine what sum is to be insured.
68. Mr Gains testified
that he pointed out to Mr Vandekan that the establishment of the
correct sum insured requires specialised
insurance knowledge. Mr
Vandekan told him that the defendant did not have such expertise.
69. After the meeting had
ended Mr Gains addressed a letter to the defendant dated 8 August
2008 which records what was said during
the course of the meeting and
which ends by notifying the defendant that it was the plaintiff’s
intention to commence legal
action against the defendant for the
recovery of the shortfall in cover which claim was calculated at that
stage in the sum of
R494,172.00. There was no reply to this letter.
70. It was submitted that
Mr Gains was a good witness whose evidence stood up under
cross-examination. He readily conceded that
his company operates on
the basis that it takes a contingency fee if the claim is successful
but because the claim is small, his
company’s fee will be
minimal. It was suggested to him that it was important for him to
‘
nail’
the defendant. He responded by saying that
he had no interest in doing so but that it is important that the
claim is properly formulated
and submitted. He was accused of using
words like ‘
preposterous’
to Mr Vandekan and he
admitted this by stating that the manner in which the defendant had
dealt with the plaintiff was ‘
preposterous and appalling’
.
He was also accused of going out of his way to ‘
put the boot
in’
to the defendant. He replied that there was no malice
on his part, and that he was simply appalled about the manner in
which the
defendant carried out its function as a broker.
71. In dealing with the
question of the financial statements, he said that when he asked Mr
Vandekan whether he had obtained financial
statements from the
plaintiff, his response was ‘
Mike, you should know brokers
don’t get financial statements from their clients.’
72. It was put to him
that a broker may rely upon the information given to it by its
customer and Mr Gains said that business interruption
insurance is
complicated and that it is critical to obtain the proper information
to ensure that gross profit is properly calculated.
73. It was put to Mr
Gains that Mr Vandekan denied saying that he could not read financial
statements and he further denied that
he did not have the necessary
expertise to deal with business interruption insurance. Mr Gains
confirmed that that is exactly what
was said during the meeting. Mr
Vandekan had told him that he did not have the knowledge to work out
the figures in respect of
business interruption cover.
74. It was submitted
correctly, in my view, that Mr Vandekan’s evidence was not only
improbable in a number of respects, but
that it was also untruthful.
It was improbable in two main respects. The first is in relation to
how the meeting of 3 October 2007came
about. Mrs Coehlo had testified
that she called the meeting because of the fires that had occurred in
the medical centre and in
the hairdresser and that she was concerned
about the plaintiff’s insurance cover. Mr Vandekan, on the
other hand, testified
that the meeting came about when he took Mr
Moodley to be introduced to Mrs Coehlo and he happened to carry the
plaintiff’s
file with him to the meeting. In my view, Mrs
Coehlo’s version is more probable in view of the fact that
there is no dispute
that several fires had occurred in the medical
centre and she must have been aware of the fact that there was a risk
of a serious
fire occurring. The second improbability relates to the
reason for the increase in cover. Mrs Coehlo testified that she
wanted
to be ‘
fully insured’.
It was for that
reason that she called the meeting and that insurance cover on a
number of items was increased. Mr Vandekan, however,
testified that
the increases were not made for the reasons Mrs Coehlo stated but
because there had been an increase in value in
stock. Mrs Coehlo’s
evidence must therefore be preferred on the probabilities.
75. There is, of course,
a dispute between Mrs Coehlo and Mr Vandekan on whether Mr Vandekan
attended the meeting of 3 October 2007.
Mrs Coehlo was adamant that
she and Mr Moodley discussed the question of insurance but she
conceded that Mr Vandekan could have
been there earlier on but had
left by the time that the discussion took place. Mr Vandekan
testified that he was at all times present
when the question of
insurance was discussed. He was untruthful about the reason for his
attendance. He suggested that he was there
to introduce Mr Moodley to
Mrs Coehlo. During Mr Vandekan’s evidence in chief he told the
court that Mr Moodley had joined
the defendant on 1 August 2007. When
he was cross-examined on the reason for him (Mr Vandekan) attending
the meeting, he said that
Mr Moodley had joined the plaintiff on 1
October 2007 shortly before the meeting. It is clear that this was
not true.
76. Mr Vandekan was
questioned on the discussion that took place on the 3 October 2007
regarding the plaintiff’s insurance
cover. According to him he,
Mr Moodley and Mrs Coehlo were present. When he was questioned about
what Mr Moodley said to Mrs Coehlo
about business interruption cover,
he eventually conceded that he could not say what Mr Moodley said or
what he told Mrs Coehlo.
He stated that he could not answer and would
not answer counsel’s questions in that regard. It was submitted
that this supports
Mrs Coehlo’s evidence that Mr Vandekan was
not present during that discussion. It follows, therefore, that the
defendant
could not contradict Mrs Coehlo’s evidence that Mr
Moodley asked her for turnover figures and that she gave him those
figures.
Mr Moodley, however, did not revert to her and the policy
was left unchanged in regard to business interruption cover.
77. It was submitted that
the plaintiff had discharged the onus of proving that the defendant
did not act with reasonable care and
skill. No attempt was made by
the defendant to explain even elementary aspects of business
interruption cover to the defendant.
No attempt was made to perform
any calculations with the plaintiff to ensure that the correct level
of cover was obtained. Mr Vandekan
conceded that neither was an
exercise performed to calculate the plaintiff’s rate of growth
nor was a trending exercise performed
as explained by Mr Prissman in
order to ensure that the plaintiff was adequately insured.
78. It was submitted on
behalf of the defendant that Vandekan did what was expected of him as
a broker in this case. He took reasonable
steps to elicit and convey
material information both from and to the plaintiff. At the outset,
and at a time when the plaintiff
had no financial records, he asked
Flores-Coelho to estimate her gross profit for the period to be
covered by insurance. The evidence
has demonstrated that
Flores-Coelho is a consummate and astute businesswoman. It has also
been shown through the evidence of Prissman,
the expert called by the
Plaintiff, that if the insured correctly forecasts his or her gross
profit and that is the sum insured
for business interruption, then
the insured will be fully covered. Prissman’s method is no more
than another way of arriving
at an estimated gross profit. As was
said in
Lappeman’s case infra
, the broker is not the
insured’s keeper. He does not, and cannot be expected to
control the business of the insured. He is
entitled to rely on the
truth of the information provided by the insured. That is exactly
what Vandekan did in this case. It was
also demonstrated in her
evidence that Flores-Coelho was well aware of the danger of under
insurance. She explained this when testifying
about the reasons she
increased the fire cover from R600 000,00 to R700 000,00 at the stage
of one of the renewals of the policy.
She also knew that what she was
insuring in the business interruption category was her gross profit.
It was the loss of gross profit
that was being insured. Throughout
every renewal her instructions were to leave the gross profit at the
same figure. Vanderkan
was entitled to rely on the truth of that
information provided by Flores-Coelho.
79. Counsel for the
defendant submitted that Flores-Coelho was untruthful when she
testified that she only dealt with Moodley on
3 October 2007 and that
on that occasion he asked for and she gave him sales figures for him
to use in estimating her profit. She
could not possibly have done so
for the very next day Moodley confirmed all changes agreed with
Flores-Coelho, and indeed in Vandekan’s
presence, by letter
dated 4 October 2007 addressed to Logan Naidoo of the Insurance
Company (page 536, Vol 2). Doubt having been
cast upon Flores
Coelho’s credibility, it was submitted that her evidence
regarding her understanding of loss of gross profit
insurance, could
not be accepted.
80. The witnesses who
testified on behalf of the plaintiff including the expert witnesses
were reliable and credible. They were
not shaken under cross
examination. I have no reason to doubt the reliability of the
evidence given by the witnesses who testified
on behalf of the
plaintiff.
81. The only witness who
testified on behalf of the defendant is Mr Vandekan, the broker. The
defendant did not call any expert
witnesses in this matter. Mr
Vandekan was not at all a good witness. There were inherent
improbabilities in his evidence. Mr Prissman’s
evidence, the
plaintiff’s expert witness was that he was very critical on the
manner in which the business interruption aspect
of the insurance had
been handled. The reasons therefor have been set out in his evidence
above. That evidence was largely not
disputed by the defendant.
82. There is clear
evidence from Mrs Flores-Coelho that Mr Moodley, at the meeting of 3
October 2007 did not ask financial statements
although she could have
made the 2004 and 2006 financial statements available to him, which
could have shown that the business
had grown substantially. This is
confirmed by the contents of the letter of 8 August 2008 from
Commercial Claim Services (Pty)
Ltd to Mr Vandekan. This letter was
written by Mr Gains who also confirmed the contents thereof when he
gave evidence on behalf
of the plaintiff. He also confirmed meeting
Mr Vandekan of the defendant where he expressed his view that the
business interruption
cover was grossly under insured. The last
paragraph of page 2 of this letter on page 15 of the papers reads as
follows:
“
Furthermore,
the insured advises that at no stage have you ever asked for
financial statement to determine the accuracy or otherwise
of the sum
insured of the loss of profit section of the policy. In fact, at our
recent meeting at your offices you were adamant
that a professional
broker need never obtain financial statements of his client and it is
entirely your client’s responsibility
to determine the sum
which is to be insured for ‘loss of profits’”.
83. The first paragraph,
on the last page of the letter on page 16 of the papers reads as
follows:
“
The
establishment of correct sum insured under this section of the policy
requires specialist insurance knowledge to determine both
the extent
of the cover and the adequacy of the sum insured. You confirmed to us
that you did not have the expertise to determine
adequate loss of
profits cover and this is evident from the manner in which you have
advised Neo Cafe in this instance and your
lack of professional
advice has resulted in substantial loss to your client”.
84. It is common cause
that this letter was not replied to and Mr Vandekan did not dispute
its content and the contents of the paragraphs
referred to above.
Despite such overwhelming evidence, Mr Vandekan denied that they did
not ask for financial statements and Mr
Moodley was not called to
give evidence in this regard. Mr Vandekan’s denial in this
regard falls to be rejected.
The Legal Position
and the Liability of Brokers
85. The nature of an
insurance broker’s duty to the insured is expressed in
Lenaerts
v JSN Motors (Pty) Ltd 2000 (1)
4 SA 1100
(W) at 1109 H-I
. Where
Potgieter AJ, after traversing several English authorities in this
regards stated:
“
I
consider that in our law, as in English law, the duty to exercise
reasonable care and skill in appropriate cases extend to the
duty to
take reasonable steps
to
elicit and convey material information both from and to the insured.
This
includes the information about terms of the policy which, if
contravened, might leave the insured without cover. It is part
and
parcel of the broker’s general duty to use reasonable care to
see that the insured is covered. ...”
The Court relied on the following English cases:
Harvest Tracking (Pty)
Ltd v P B Davies, trading as P B Davis Insurance Services 1991(2)
Lloyds Rep 638 (QB) at 643;
Mc Nealy v The Pennine
Insurance Company (Pty) Ltd, West Lanc Insurance Brokers Ltd &
Cornell 1978 (2) Lloyds Rep (CA).
In these cases the broker
was held not to have done his duty to use all reasonable care to
establish whether an exclusion as to
occupation applied to the
insured. He failed to do all that was reasonable to elicit relevant
and material information from the
insured as to his occupation.
86. Counsel for defendant
submitted that the Court in
Lapperman’s
case referred,
with approval, to two English authorities relied upon by Potgieter AJ
in Lenaerts case. The references to those cases
are set out in
paragraph [37] of
Lapperman’s
case. The Court quoted
extensively from the Harvest Trucking Co case, and I quote the first
paragraph of that quotation which sets
out the ordinary functions of
an insurance broker towards his client.
“
The
ordinary function of the insurance broker or other intermediary is to
receive instructions from his principle as to the nature
of the risk
or risks and the rate or rates of premium at which he wishes to
insure, to communicate the material facts to the potential
insurers
and to obtain insurance for his principle in accordance with his
principle’s instructions and on the best terms
available. The
liability of an insurance agent to his employer for negligence is
comparable to that of any agent. He is bound to
exercise reasonable
care in the duties which he has undertaken. In no case does the law
require an extraordinary skill on the part
of the agent but only such
a reasonable and ordinary degree as a person of average capacity and
ordinary ability in his situation
and profession might fairly be
expected to exert.”
87. Both Lenaert’s
case and Lapperman’s case were referred to and quoted from in:
Mutual & Federal
Insurance Co Ltd v Ingram NO
2009 (6) SA 53
(ECD) at paragraph [19].
88. In paragraph [31] of
Lappeman’s case the Court referred to the evidence of two
expert witnesses and stated:
“
Mr
John Hollinrake, agreed with the views expressed by Gallimore. He too
expressed the opinion that it is the insured who must provide
information to the broker, who offers insurance on the information
provided. The broker does not control the insured’s business:
he is entitled to rely on the truth of the information provided by
the insured.”
89. Again, in Lappeman’s
case, the Court said the following in paragraph [44]:
“
A
broker does not, and cannot be expected to, control the business of
the insured. Even the specialist broker’s duty does
not
encompass the duty to ensure that the insured complies with his
obligations under the policy. He is not the insured’s
keeper.
His duty, as a specialist broker, is discharged when he has done
everything reasonably necessary to draw the attention
of the insured
to obligations imposed by the policy. It is the insured’s
responsibility to ensure compliance.”
90. Counsel for the
defendant submitted that the Court referred to a ‘specialist
broker’ in
Lappeman’s
case. That case dealt with
peculiarities of the diamond trade. A specialist broker was
distinguished from an ordinary broker by
Schulz JA in the case of
Durr v ABSA Bank Ltd & Another
1997 (3) SA 448
(SCA) at 460 F
– 464 E
, where he held that a specialist broker must
demonstrate greater skill and knowledge than the ordinary broker,
just as the specialist
doctor must show greater skill than a general
practitioner
(Van Wyk v Lewis
1924 AD 438
at 444).
This was
quoted in
Lappeman’s
case at paragraph [35].
91. Counsel for the
defendant submitted, correctly in my view, that it is clear in this
case that the defendant is no more than
an ordinary broker, as
Lappeman’s
case,
supra
, dealt with a specialist
broker and the defendant in this case is not a specialist broker.
That case dealt with peculiarities of
the diamond trade. The level of
skill by which they are measured is that of the members of the
profession to which he belongs.
92. The decision in the
English case of
Mc Nealy, supra,
has received the approval of
the full bench in
Stander v Raubenheimer 1996(2) SA 70 (O) at 675
G-676 I.
In this case, the Court found that the broker was under
a duty to elicit all material information from the insured and to
convey
that to the insurer. The broker knew that the contents of the
plaintiff’s house would not be covered if they were damaged
or
destroyed in a house with a thatched roof but failed to ascertain
from the insured whether his house had a thatched roof. The
decision
was that the broker breached its contractual obligation to ensure
that the plaintiff’s goods were covered.
(See
: Lenaerts’s
case v JSN Motors (Pty) Ltd & Another supra at para 39.)
93. In assessing the
standard of care and skill, the court may accept the evidence of
another experienced member of the profession.
(See: Lenaerts v JSN
Motors (Pty) Ltd
(
supra
) 1106E-1108D.)
94. The duty to exercise
reasonable care and skill extends, in appropriate cases, to the duty
to take reasonable steps to
elicit and convey material information
from and to the insured
. This includes information about terms of
the policy which, if contravened, might leave the insured without
cover, it being part
and parcel of the broker’s general duty to
use reasonable care to ensure that the insured is covered.
(See: Lenaerts v JSN
Motors (Pty) Ltd & Another
(
supra
) 1109H-J
Lappeman Diamond
Cutting Works (Pty) Ltd v MIB Group (Pty) Ltd
(
supra
) at
paragraph 36 in which the
dictum
in
Lenaerts
was
approved.)
95. In
Lappeman
the court held that an insurance broker’s duty, as a specialist
broker, is discharged when he has done everything reasonably
necessary to draw the attention of the insured to obligations imposed
by the policy. It is the insured’s responsibility to
ensure
compliance.
96. In
Mutual and
Federal Company Limited v Ingram NO & Others
2009 (6) SA 53
(E) the court held that the insurance broker has an obligation to
ensure that the insured is adequately covered.
97. Counsel for the
defendant reiterated that the defendant acted according to the
insured instructions and also acted according
to the information
given to him by the client. He even submitted that refusal to answer
question by Vandekan during cross examination
was as a result of
aggressive cross examination he was subjected to. He submitted that
he was not completely unable to say anything.
98. Having considered all
the evidence, the argument and the authorities referred to on behalf
of both parties, I am satisfied that
the plaintiff has discharged the
necessary onus of showing that the defendant did not act with
reasonable care and skill as it
was required to do. According to the
evidence and the principles enunciated in the cases referred to
above, it was incumbent upon
the defendant to explain to the
plaintiff:
(a) How a business
interruption loss is calculated;
(b) To obtain sufficient
information from the plaintiff to be able to advise it as to satisfy
itself that the plaintiff was adequately
insured;
(c) To warn the plaintiff
that average could be applied and that it could be under insured if
the business interruption cover was
not increased.
99. None of these were
explained by the defendant to the plaintiff. Accordingly, the
defendant’s failure to have done so,
means that the defendant
did not act with reasonable care and skill and that it is liable to
pay the plaintiff the amount claimed
from it. The amount claimed has
been amended accordingly and there is no dispute about the amount
claimed.
100. There is no reason
why the costs should not follow the result in this matter. The
defendant is therefore liable for the costs
incurred in this action.
101. In the result, I
make the following order:
Judgment is given for the
plaintiff against the defendant as follows:
Payment in the sum of
R357 780,00.
Interest thereon in the
rate of 15,5% per annum from 8 August 2008 to date of payment.
Cost of suit. These
costs are to include the qualifying fees of the plaintiff’s
experts.
________________
Sishi J
Judge of the KwaZulu
Natal High Court , Durban.
Appearances
Date of hearing : 23, 24
& 25 November 2011,
14 December 2011 & 1
March 2012
Date of Judgment : 10
September 2012
Counsel for the Plaintiff
: Gardner Van Nierkerk SC
Plaintiff’s
Attorneys : Hamilton Attorneys
Suite 115 Musgrave Park
18 Musgrave Road
DURBAN
Counsel for the Defendant
: S M Sheptone
Defandant’s
Attorneys : Neerajh Ghazi Attorneys
6
th
Floor,
Royal Towers
30 Gardiner Street
DURBAN
Ref : NG/DN/GLE13