Commercial Union Insurance Company of SA Ltd v Wallace NO; Santam Insurance Ltd v Afric Addressing (Pty) Ltd (249/2002) [2003] ZASCA 84 (19 September 2003)

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Commercial Union Insurance Company of SA Ltd v Wallace NO; Santam Insurance Ltd v Afric Addressing (Pty) Ltd (249/2002) [2003] ZASCA 84; 2004 (1) SA 326 (SCA) (19 September 2003)

THE
SUPREME COURT OF APPEAL
OF
SOUTH AFRICA
CASE NO: 249/2002
In the matters between :
CASE NO: CPD 14500/95
COMMERCIAL UNION INSURANCE
COMPANY OF SA LTD
Appellant
and
EUGENE BRYAN WALLACE NO
Respondent
CASE NO: CPD 9497/95
SANTAM INSURANCE LTD
Appellant
and
AFRIC ADDRESSING (PTY) LTD
Respondent
_________________________________________________________________
Before: STREICHER & NUGENT JJA & MLAMBO
AJA
Heard: 25 and 26 AUGUST 2003
Delivered: 19 SEPTEMBER 2003
Summary: Claims under policy of fire insurance –
fraudulent claim – non-disclosure of material facts.
_________________________________________________________________
J U D G M E N T
_________________________________________________________________
NUGENT JA
NUGENT JA:
[1] On the evening of
Sunday 13 November 1994 a fire engulfed a warehouse at Blackheath on
the Cape Peninsula and destroyed the contents.
Some of the goods that
were destroyed belonged to a company known as Press Supplies Limited
(‘Press Supplies’) and some belonged
to an associated company
known as Afric Addressing (Pty) Ltd, which traded under the name
Afric Mail Advertising (‘AMA’).
[2] Both companies were
insured against the risk of fire under separate policies of insurance
issued by Commercial Union Insurance
Company of South Africa Limited
(‘Commercial Union’) and Santam Insurance Limited (‘Santam’)
respectively. (Press Supplies
was insured by Commercial Union and AMA
was insured by Santam). Both insurers declined to meet the claims of
their respective insured
and they were sued in separate actions.
(Press Supplies was by then in liquidation and was represented by the
liquidator). The actions
were tried together in the Cape High Court
by Thring J, who upheld the claims of both insured but granted the
insurers leave to appeal
to this Court. He also granted AMA leave to
cross-appeal against part of his order relating to interest.
[3] In the court
a
quo
many issues were raised and pursued with undiscriminating
vigour but it is necessary to deal with only two of them for they are
decisive
of this appeal. Before turning to those issues, however, it
is convenient first to set out in some detail the background against
which the claims arose.
[4] AMA and Press
Supplies were subsidiaries of DZ Investment Holdings Limited
(formerly known as Press Supplies Holdings Limited)
which was in turn
controlled by Mr D. Zandberg. A further subsidiary in the group was a
company known as Funny Paper (Pty) Ltd (‘Funny
Paper’).
[5] AMA’s business, initially, was the assembling of bulk mail, but
its business later expanded to include litho-printing and specialized
packaging. Its main business premises were situated at Airport
Industria near Cape Town airport. It also leased two
‘mini-factories’
in an adjacent complex known as Ruco Park.
Zandberg’s daughter and her husband, Mrs L. Mentz and Mr H. Mentz,
were executive directors
of AMA. Mr B. Potgieter was its financial
manager.
[6] Press Supplies was a supplier of machinery and equipment to the
printing industry. It shared the premises of AMA at Airport Industria
but its main trading branch was at Selby, Johannesburg. Mrs Mentz was
a director of Press Supplies. Its Johannesburg branch manager
was Mr
S. Rogers and its financial manager (also located in Johannesburg)
was Mr M. Thompson. (Thompson had died by the time this
matter came
to trial).
[7] Funny Paper’s business, initially, was the importing in bulk of
wrapping paper and related materials, which it would convert
into
saleable form by cutting and packaging, and the products would then
be distributed for sale through retail outlets. (That category
of its
merchandise will be referred to in this judgment as the converted
products or the converted stock, as the case may be). Later
it
expanded its product range to include a variety of manufactured
products like paper serviettes, paper plates, paper cups, stationery,
bows and ribbons, which it similarly imported. (That category of
merchandise will be referred to in this judgment as the imported
products, or the imported stock). The main branch of Funny Paper was
at Selby, Johannesburg, where it shared the premises of Press
Supplies. It had smaller branches in Durban and Cape Town. In Cape
Town it leased a unit in the Ruco Park complex for the storage
of its
merchandise. Thompson, the financial manager of Press Supplies, was
also the financial manager of Funny Paper.
[8] Press Supplies formerly sold both heavy and light machinery but
in 1990 it sold its heavy machinery division, leaving it with
only
its three light machinery divisions. In March 1993 it sold those
remaining divisions to High Tech Graphics (Pty) Ltd, a company
within
the Hoechst group of companies (I will refer to the company as
‘Hoechst’).
[9] The transaction was dependant upon the fulfilment of various
conditions precedent, including the conclusion by Hoechst of
contracts
of employment with certain key personnel of Press Supplies,
and the acquisition by Hoechst of various key agencies that were then
held by Press Supplies. Subject to the fulfilment of those conditions
Hoechst purchased from Press Supplies the business of its three
divisions as a going concern, together with certain assets relating
to each division, including specific stock.
[10] The stock that was then being held by Press Supplies (mainly
machinery but also associated spares and accessories) was separated
into three categories for purposes of the transaction. Machinery and
other stock in category A was acquired outright by Hoechst at
its
cost price as reflected in the accounts of Press Supplies. Machinery
and other stock in category B (which was referred to in
the agreement
as ‘the unsold marketable stock’) was retained by Press Supplies.
Press Supplies was entitled to sell those goods
for its own account,
subject to certain restrictions, but Hoechst undertook not to acquire
identical goods from alternative sources
if they were still available
from Press Supplies. Machinery and stock in category C (which was
referred to in the agreement as the
‘redundant machinery and
stock’) was altogether excluded from the transaction and remained
the property of Press Supplies.
[11] The agreement contemplated that Hoechst would lease from Press
Supplies a portion of the Selby premises, and, for reasons that
were
not explored in the evidence, Press Supplies undertook to transfer to
the Selby premises those items of machinery and stock
in categories B
and C that were then in Cape Town.
[12] Needless to say, the effect of the transaction was to bring the
trading activities of Press Supplies to an end – the whole
of its
trading business had been disposed of as a going concern, its key
personnel had been employed by Hoechst, and it had disposed
of its
key agencies – but it was left with a substantial amount of stock
that Hoechst was unwilling to purchase.
[13] The financial position of Press Supplies was already
deteriorating at the time the business was sold and this was
attributed
in the evidence, at least partly, to rumours of the
impending sale. Not surprisingly, its financial statements for the
following
year (upon which its auditors did not express an opinion)
reflect that at 30 June 1994 it was insolvent. After writing off
moneys
that had been advanced to an associated company its
accumulated loss was over R5.5 and its current liabilities exceeded
its current
assets by more than R1.5 million. Bearing in mind
that the company was no longer actively trading there was clearly no
prospect
of a recovery and ultimately it was placed in liquidation.
[14] I turn now to the affairs of AMA and Funny Paper. In about the
middle of 1993 (shortly after Press Supplies sold its business
to
Hoechst) Funny Paper appointed a certain Mr G. Starkowitz, an
experienced marketer of paper products, as its sales and marketing
director. At that time Funny Paper’s business was confined to
importing bulk materials (mainly gift-wrap paper) and converting
it
for resale. Soon after the appointment of Starkowitz it expanded its
product range to include the imported products that I have
described.
Funny Paper was at that time under financial strain. Its audited
financial statements at 30 June 1993 reflect an accumulated
loss of
over R3 million and its net current assets amounted to little
more than R650 000.
[15] The appointment of Starkowitz and the extension of its product
range failed to reverse the fortunes of the compnay. On the contrary,
although its turnover increased substantially during the following
year so did its accumulated loss, which was almost R5 million
by 30
June 1994. Its current liabilities at that date exceeded its current
assets by more than R2,5 million and it was dependant
upon its
associated companies, and its bank, to meet its operating expenses.
At 30 June 1994 Funny Paper owed its bank about R1 million
(a
debt for which AMA had bound itself as surety) and it owed AMA
R712 402.
[16] In about June 1994 Starkowitz left the employ of Funny Paper. By
then a company known as Constantia Greetings (Pty) Ltd (‘Constantia’)
had shown an interest in purchasing Funny Paper in order to acquire
its machinery. At about that time AMA decided to take over some
of
Funny Paper’s stock in settlement of the debt that was owing to it.
Although the transaction was finalized only in about September
1994
it was treated for accounting purposes as having occurred on 30 June
1994.
[17] Funny Paper’s stock at 30 June 1994 had been counted for
purposes of the financial statements and was valued at about R1.2
million. Most of the stock was held in Johannesburg (about R1.04
million) with the remainder in Durban (about R141 000) and Cape
Town
(about R78 000). The stock was reflected in a compendious stock-sheet
that was summarized to reflect the stock in various categories
at the
various branches.
[18] The person who was responsible for implementing the transaction
on AMA’s behalf was Mrs Mentz. Mr Leisching, the auditor
of Funny
Paper, said in evidence that the proposed transaction was discussed
at a meeting in Johannesburg with Zandberg and that
Zandberg then
telephoned Mrs Mentz and asked her to visit Johannesburg in order to
examine the stock. He said that she did so the
following day. The
evidence of Mrs Mentz was rather different. She said that she did not
see the stock before the transaction was
approved and that she only
examined samples of the stock that were sent to her in Cape Town. In
my view the evidence of Leisching
is to be preferred on this issue.
He had a clear and detailed recollection of the visit and the
circumstances in which it occurred,
he had no reason to misrepresent
the facts (he was called to give evidence on behalf of the
respondents), and it is unlikely that
a transaction of that magnitude
would have been decided upon without an examination of the stock.
[19] It was left to Mrs Mentz to select the stock that was to be
acquired by AMA. She said that she made the selection from the
summary
of the Funny Paper stock-sheets. The summary reflected Funny
Paper’s stock as at 30 June 1994 in various categories, including
a
category referred to as ‘raw materials’ (the bulk materials that
were awaiting conversion, together with related packaging
materials,
valued at R316 661) and two minor categories referred to as ‘party
packs’ and ‘Woolworths’ (the value of these
two items together
was no more than R7 100).
[20] AMA had no use for the raw materials, nor did it have an
interest in the two minor categories. The remainder of the stock
comprised
converted products (they were described in the summary as
‘book covers’, ‘brown Kraft rolls’, ‘counter rolls’
‘gift-wrap
rolls’, ‘gift-wrap sheets’ ‘Xmas gift-wrap’,
‘polythene’ and ‘tinsel’) and the imported products that
Funny Paper
had introduced the previous year. Mrs Mentz said that she
decided that AMA should take over all the stock in both categories:
in
other words, all the Funny Paper stock other than the raw
materials and the two minor items. (The total value of that stock was
reflected
in the summary as almost R931 000.)
[21] It seems unlikely, on the face of it, that Mrs Mentz would
indeed have chosen to acquire the converted stock, because at that
stage, according to Rogers, Funny Paper was building up its stock of
those products to enable it to supply its customers in time
for
Christmas sales. There is no apparent reason why Mrs Mentz should
have acquired that stock for sale in Cape Town, where a market
had
not yet been established by AMA, when Funny Paper already had an
established market itself. It is a matter to which I will return
later in this judgment.
[22] Rogers, who had
remained with the group after the sale to Hoechst, and who was then
running the affairs of Funny Paper, certainly
did not understand AMA
to have acquired both categories of stock, as alleged by Mrs Mentz.
He had the task of arranging for the transfer
of the stock to AMA in
Cape Town and all that he sent was the imported stock: the converted
stock remained in Johannesburg. Thompson
(Funny Paper’s financial
manager), on the other hand, appears to have understood the position
differently, for he sent a delivery
note to AMA which recorded the
following: ‘Stocks transferred as per this attached list and
display stands.’ The list that
was attached to the delivery note
was a copy of the Johannesburg and Durban stock summaries, but
excluding only the raw materials
and the two minor categories. In
other words, it recorded that what had been delivered was all the
converted stock, and all the imported
stock, from Johannesburg and
Durban, as well as certain display stands that were used for
displaying merchandise in retail outlets.
He also caused invoices to
be sent to AMA reflecting the sale to AMA of both categories of
stock.
[23] One or other of
them was mistaken. Either Rogers mistakenly retained the converted
stock in Johannesburg, or Thompson mistakenly
recorded that the
converted stock had been acquired by AMA. Whether it was Rogers or
Thompson who made the error, and its significance,
is a matter that I
will return to later in this judgment. For the moment it is
sufficient to say that according to Mrs Mentz it was
Rogers who
erred, for she said that she selected both categories of stock for
acquisition by AMA and that she was initially under
the impression
that both categories of stock arrived in Cape Town.
[24] Rogers arranged for the imported stock from Johannesburg to be
loaded into four containers and they were dispatched to Cape
Town
during September 1994. Rogers said that he instructed Thompson to
prepare an inventory of that stock but that he discovered
only after
the containers had been despatched that Thompson had neglected to do
so. Rogers also arranged for the Durban stock to
be forwarded to
Johannesburg, and it was later sent to Cape Town in circumstances
that I will come to.
[25] When the four containers arrived in Cape Town they were
directed to AMA’s premises at Ruco Park where they were unloaded
under the supervision of Mrs Mentz. No inventory was taken as the
stock was unloaded, Mrs Mentz said that she did not notice that
none
of the converted stock had arrived.
[26] One of the outlets through which Mrs Mentz intended to dispose
of the stock in Cape Town was a shop that was opened specifically
for
that purpose, under the name Impressions, in premises in Roeland
Street that were owned by the group. Soon after the stock had
been
unloaded at Ruco Park a selection of stock (which might have included
some of the Cape Town branch stock) was transferred to
the shop in
Roeland Street, together with the display stands that had been
received from Johannesburg.
[27] On 6 October 1994 AMA, represented by its broker, applied to
Santam to increase the sum insured under its policy in respect
of
stock from R700 000 to R1,7 million, to increase the sum
insured in respect of machinery by R200 000 to R7.1 million,
and
to extend the policy so as to apply to the premises of Impressions in
Roeland Street.
[28] Meanwhile Press Supplies had decided that its remaining
machinery and other stock, then being stored in Johannesburg, should
be transferred to Cape Town. According to the evidence that decision
was taken because it was thought that it would offer a better
prospect of the machines being sold, using the AMA sales staff.
Rogers was given the task of arranging for the machinery to be sent.
One machine was sent to Cape Town by truck, and the remaining
machinery and other stock, together with the Funny Paper stock from
Durban that had by then been received in Johannesburg, was sent to
Cape Town in five containers during October 1994.
[29] By the time the five containers arrived in Cape Town AMA had
temporarily leased a warehouse at Ricsa Park. The containers were
directed to the warehouse where they were unloaded under the
supervision of Mr Mentz. Some time later most of the Funny Paper
stock
that had been in the AMA units at Ruco Park was transferred to
the warehouse, allegedly to provide AMA with sufficient space at Ruco
Park to execute a large contract.
[30] On 18 October 1994 AMA applied to Santam to further extend its
policy so as to cover the warehouse at which the acquired stock
was
being stored. On 19 October 1994 Press Supplies, acting through its
broker, applied to Commerical Union to increase the sum insured
in
respect of stock under its policy from R1 million to R2 million and
to add the warehouse as an insured location.
[31] Thus at the time of the fire on 13 November 1994 the warehouse
at Ricsa Park which had been leased the month before contained,
essentially, the Press Supplies machinery and other stock that
remained after the sale of its business to Hoechst, and the imported
stock that AMA had acquired from Funny Paper. (Some items had been
removed and others added but for present purposes it is not necessary
to go into those details).
[32] After the fire occurred the insurers appointed a firm of loss
adjusters to investigate the claims on their behalf. The loss
adjusters in turn appointed Dr Froneman, an expert in that field, to
investigate the cause of the fire. On 21 November 1994 Froneman
reported that in his opinion the fire had been deliberately set and
had been accelerated by paraffin. Not surprisingly, the claims
of the
insured were thereafter subjected to considerable scrutiny. It is
important to bear in mind, however, that if the insurers
suspected
that either of the insured, or anyone acting on their behalf, had
played any part in causing the fire, that suspicion has
not been
voiced at any stage of these proceedings. The insurers have declined
to meet the claims on other grounds entirely. It is
not necessary to
traverse all the defences that were raised by the insurers for in
each case there is one that is decisive.
THE AMA CLAIM
[33] Amongst the General Conditions in the Santam policy was a
condition that protected the insurer against fraud in the following
terms:
‘
If any claim under this
policy is in any respect fraudulent or if any fraudulent means or
devices are used by the insured or anyone
acting on their behalf or
with their knowledge or consent to obtain any benefit under this
policy … the benefit afforded under
this policy in respect of any
such claim shall be forfeited.’
[34] During December 1994 AMA’s financial manager, Potgieter,
assisted by Mrs Mentz, prepared a summary of the loss that was
alleged
to have been sustained by AMA, and it was submitted to Santam
under cover of a completed claim form on 16 January 1994. To
appreciate
what occurred thereafter, and the nature of Santam’s
defence, it is necessary to understand how the claim was calculated.
[35] In the absence of an inventory of the stock that was in the
warehouse at the time of the fire Potgieter resorted to deductive
reasoning in order to determine what stock had been present. Mrs
Mentz said that the starting point for the enquiry was the invoice
that AMA had received from Thompson (which, it will be recalled,
included both the converted stock and the imported stock). Potgieter
said that the starting point was the stock summary from which Mrs
Mentz had made her selection, but that this was correlated against
the invoice. (The difference between the two witnesses on that issue
is not significant – it is likely that both documents were
referred
to when the claim was prepared.)
[36] Potgieter said that he assumed that the stock summary accurately
reflected the stock that Funny Paper had on hand at its three
locations when the acquisition by AMA took place. He said that he
then excluded the three categories of stock that Mrs Mentz said
she
had not selected (the raw materials and the two minor items). The
remainder, he reasoned, was the stock that was acquired by
AMA (which
accorded with the invoice that AMA received from Thompson).
Accepting, as he did, that all that stock had been received
in Cape
Town, Potgieter then deducted the stock that had been sent to the
shop at Roeland Street (which was reflected in the accounts
of
Impressions as its opening stock) and the stock that was in storage
at Ruco Park after the fire. Reasoning that the stock that
remained
after all those deductions had been made must all have been in the
Ricsa House warehouse at the time of the fire, he then
established
what it would cost to replace that stock. With the assistance of
Rogers he established that the cost of replacing the
stock, including
VAT, would be R1 220 063 and that amount, together with the
book value of the display stands (which were
also reflected in the
invoice) brought AMA’s claim to R1 263 218. (It also
claimed R347 700 in respect of two machines
that were alleged to
have been destroyed by the fire but that is not material for present
purposes).
[37] Leaving aside the manner in which Potgieter valued the stock,
his reasoning as to what stock was in the warehouse at the time
of
the fire was faulty in three respects. First, the display stands were
not in the warehouse when the fire occurred – they had
been taken
to the shop in Roeland Street. Secondly, it seems not to have
occurred to Potgieter that Funny Paper had continued trading
after
the date that the Funny Paper stock-sheets were compiled (30 June
1994) with the result that they did not accurately reflect
the stock
on hand at the time it was sent to Cape Town. Thirdly, and more
important for present purposes, a large part of the Johannesburg
stock of Funny Paper (i.e. the converted stock) was never sent to
Cape Town, as I have indicated, notwithstanding that it was reflected
on the invoice and on the list that was attached to the delivery
note.
[38] The converted stock that had remained in Johannesburg
constituted a substantial part of the claim. In value it constituted
about
a third of Funny Paper’s marketable stock (it was valued in
the stock-sheets at almost R252 000). The cost of sales that had
taken place after 30 June 1994 was R128 087 and the value of the
display stands was R43 155. The cumulative effect of the
errors
was that AMA’s true loss in respect of its stock was approximately
half of what it was claimed to be.
[39] But the fact that the claim was overstated has a more material
significance for Santam alleges that AMA, and in particular Mrs
Mentz
(who was at all times aware of how the claim had been calculated)
caused the claim to be submitted well knowing that it was
false. If
that is so then clearly it was done with intent to defraud, and
constituted a breach of the condition to which I referred,
thus
relieving Santam of all liability for the claim.
[40] As pointed out by the learned judge in the court
a quo
the
case in that regard turned largely upon the credibility of AMA’s
witnesses and in particular that of Mrs Mentz. Mrs Mentz was
well
aware that the claim included the converted stock. She said, however,
that she was unaware when the claim was submitted that
the converted
stock had never been received in Cape Town. The learned judge
commented favourably on the impression that Mrs Mentz
(and the
remaining AMA witnesses) made on him. He said, amongst other things,
that Mrs Mentz had left him with an excellent impression,
that her
answers were without exception given forthrightly and without
hesitation, that she was open and candid, and that he had
no reason
to suspect that she was attempting to hide anything. He attributed
what he described as minor discrepancies in her evidence
to the fact
that she was testifying about events that had taken place six or
seven years earlier and he said that he accepted her
evidence without
reserve.
[41] While it has been said that a trial court is at an advantage
when evaluating the credibility of witnesses (a proposition that
is
not uncontentious – see for example Tom Bingham
The Business of
Judging : Selected Essays and Speeches,
p 10 ff)
any such
advantage ought not to be overemphasized, for ‘the truthfulness or
untruthfulness of a witness can rarely be determined
by demeanour
alone without regard to other factors including, especially, the
probabilities.’ (
President of the Republic of South Africa and
Others v South African Rugby Football Union and Others
2000 (1)
SA 1
(CC) para 79). In
Body Corporate of Dumbarton Oaks v Faiga
[1998] ZASCA 101
;
1999 (1) SA 975
(SCA) Harms JA pointed out at 979 I-J, that to
decide a case without regard to the wider probabilities is a
misdirection that will
entitle a court of appeal to reassess the
evidence.
[42] In the present case the learned judge in the court
a quo
,
perhaps overwhelmed by the quantity of evidence and the number of
issues that he was called upon to decide, gave no indication in
his
judgment that he had analysed the evidence in the detail that was
required for the probabilities to be weighed against the impression
that he formed of Mrs Mentz. Had he done so I have little doubt that
his confidence in her truthfulness would have been displaced
because
in my view they all point to the contrary conclusion.
[43] There is one aspect of the evidence that it is convenient to
deal with out of its chronological sequence for it is material
to the
remaining evidence.
[44] The absence from the warehouse of the converted stock first
started coming to light on 26 January 1995 when Mr Mentz attended
a
meeting at the warehouse with the loss adjusters. He was asked to
search through the debris and to identify, if possible, remains
of
the various categories of stock that made up the claim. Mr Mentz was
unable to find evidence of fourteen categories of stock (including,
not surprisingly, the various categories of converted stock that had
been retained in Johannesburg).
[45] Mrs Mentz said that when this was reported to her she thought at
first that the explanation lay in Mr Mentz’s unfamiliarity
with the
stock but she was driven to concede that she soon became concerned.
According to Potgieter there were numerous discussions
between him
and Mr and Mrs Mentz and it ‘dawned on us that it appeared there
was a problem’. One would expect, in those circumstances,
that
enquiries would have been made in an attempt to establish why there
was no evidence of the converted stock and, indeed, Mrs
Mentz said
that she did just that: she said that she telephoned Johannesburg and
spoke to both Rogers and Thompson and learnt for
the first time that
the converted stock had never been sent to Cape Town. Her evidence in
that regard (most of which emerged during
cross-examination) was
somewhat vague: she could not say when the telephone call was made,
nor precisely what was discussed, nor
is it even clear who she first
spoke to. In my view much of that evidence was untrue and I will
leave it out of account for the moment.
[46] What is clear, however, (independent of her own evidence) is
that by 21 February 1994, at the latest, Mrs Mentz must have been
fully aware that the converted stock had never been sent to Cape
Town, and that the claim was also overstated by the cost of Funny
Paper’s sales after 30 June 1994. For on that day Mrs Mentz was in
Johannesburg to attend to the opening of a new branch of AMA
and she
met with Thompson to discuss the ‘problem’ that had arisen in
respect of the claim. She telephoned Potgieter and asked
him to
telefax to Thompson a copy of the claim as he had formulated it,
which Potgieter did. Potgieter said that upon her return
from
Johannesburg she told him, firstly, that ‘it would appear that we
had not received all the stock from Funny Paper and, secondly,
that
‘there was the possibility that Funny Paper had in fact sold some
of the stock that we thought we had received.’
[47] It is difficult to see why Mrs Mentz would have expressed
herself in the cautious terms attributed to her by Potgieter, for
there could not have been any doubt in her mind, after her visit to
Johannesburg, that the converted stock had not been received.
Nor
could there have been any doubt in her mind as to the identity and
value of that stock for it was clearly reflected in the summary
that
she said she had used to make her selection. It is possible that in
the course of her discussions with Thompson she discovered
for the
first time that the claim also inadvertently included stock that had
been sold by Funny Paper after 30 June 1994, and it
would have
required further investigation to identify that stock, but that is
another matter. As far as the converted stock was concerned
she could
have been in no doubt at all.
[48] On 23 February 1995 the loss adjusters wrote to Mr Mentz
requesting that they be furnished with packaging in respect of all
the items forming the subject of the claim, and samples of the stock
that had not yet been identified amongst the debris. Mrs Mentz
must
have been aware that the samples were requested for purposes of a
further search through the debris that was due to take place
on 3
March 1995 for she asked the loss adjuster whether the samples
‘should be taken to the site meeting, or whether we should
deliver
same to yourselves.’ On 27 February 1995 Mrs Mentz wrote to the
loss adjusters enclosing the various samples that had been
requested,
which included samples of brown Kraft rolls, tinsel, gift-wrap
sheets, gift-wrap rolls and counter rolls. With regard
to the two
gift-wrap samples she added the following note: ‘We have a concern
regarding this Giftwrap Category and we are currently
awaiting
detailed information from Johannesburg.’
[49] On 28 February Mrs Mentz received from Thompson an analysis of
the cost of Funny Paper’s sales from 1 July 1994 to 31 November
1994, which she handed to Potgieter. Potgieter was not satisfied with
the adequacy of the analysis and after discussing it with Thompson,
he asked Thompson to undertake a further analysis. (That further
analysis was received from Thompson only in April 1995.)
[50] The site meeting on 3 March 1995 was attended by Mrs Mentz and
Zandberg. At that time Mrs Mentz knew not only that stock that
had
been sold by Funny Paper after 30 June 1994 had been wrongly included
in the claim (and that Thompson was analyzing the records
of Funny
Paper to identify those sales) but she also knew (she conceded as
much) that the converted stock had never been received
in Cape Town.
She must also have known precisely what that stock was for she had
examined it in Johannesburg and it was easily identifiable
from the
stock summary. Notwithstanding that knowledge she furnished the loss
adjusters with samples of that stock, without disclosing
that it
could not be amongst the debris, and what is more, she participated
in what she knew was a fruitless search for evidence
of that stock.
Once the search was over (it revealed evidence of three further
categories of stock none of which is relevant for
present purposes)
the debris was loaded into waste containers and weighed to enable
estimates to be made of the volume of stock that
had been in the
warehouse. Still Mrs Mentz failed to disclose that it was pointless
to go about making these estimates because a
large portion of the
stock that formed the basis of the claim had never reached the
warehouse.
[51] Mrs Mentz made some suggestion in her evidence that she might
have alerted the loss adjusters to what she then knew about the
missing stock but her evidence on that issue was vague and
non-committal. In her evidence in chief she said that she told Mr Van
Dyk (one of the loss adjusters) that ‘we believe that a possible
discrepancy can arise because of what was invoiced to us by Funny
Paper’ and in cross-examination she said that ‘we pointed out to
Mr Van Dyk that there was in fact a problem with the claim’.
She
sought to take her evidence a step further by saying that when she
pointed out that there was a problem with the invoice she
was
‘pointing out the fact that the invoice was not in fact correct,
that in fact we didn’t agree with what we had received.’
Whether
or not she made these guarded utterances is neither here nor there,
for what Mrs Mentz did not do was disclose the facts
as they were
then known to her – that evidence of the converted stock would not
be found amongst the debris because it had never
arrived in Cape
Town, and that the claim had also wrongly included other stock, the
amount of which had not yet been established
– nor did she furnish
any explanation for her failure to do so. Zandberg also stood by
without making these disclosures. Why he
did so remains unexplained
for he was not called to give evidence.
[52] That the loss adjusters continued to be unaware of the true
facts for a considerable time is evident from the events that
followed.
On 14 March 1995 they wrote to AMA in the following terms:
‘
Both Mr and Mrs Mentz are aware of the apparent
discrepancies in the items/quantities included in your claim and the
debris. Dr Froneman
is at present analysing the position and we
expect to receive his report within the next two weeks and we then
require you, in terms
of the policy conditions, to explain the
discrepancies.
However, both Mr and Mrs Mentz have indicated that the
discrepancies probably arise out of what was invoiced to you by Funny
Papers
(Pty) Limited.
Because of your allegation that the discrepancy lies in
the accounting for these items, our clients have appointed KPMG Aiken
&
Peat to establish from the accounting records what the true
position is …’
[53] On 24 March 1995 Froneman reported to the loss adjusters in the
following terms, after weighing the paper debris that had been
removed from the warehouse, and calculating the volume of the stock
reflected on the stock summary:
‘
From the above results
I can only conclude that the Warehouse was not large enough to store
all the items listed in the stock list,
and not all the items were in
the warehouse at the time of the fire. This is supported by the fact
that Mrs Mentz and myself could
not find any Giftwrap Rolls, Sheets
or Xmas in the warehouse on 3 March 1995.’
[54] Clearly the
deception could no longer be sustained. On 24 March 1995 Potgieter
and Mrs Mentz met with representatives of KPMG
at AMA’s offices at
Airport Industria where the background to the problem was discussed.
Mrs Mentz said that she told the KPMG
representatives that the claim
was inaccurate in two respects – it included the converted stock
that had not been received, and
it included stock that had been sold
by Funny Paper after 30 June 1994 – and that Thompson was working
on a revision of the claim.
Thompson’s revision, which became
available on about 13 April 1994, was later verified by KPMG.
[55] It was submitted in
argument that the reason that Mrs Mentz failed to disclose the true
facts at the outset was that she was
awaiting the outcome of
Thompson’s investigation and did not want to deal with the matter
piecemeal. Mrs Mentz did not proffer
that explanation and in any
event it is most unlikely that Mrs Mentz would have stood by and said
nothing while a search took place
amongst the debris and the debris
was weighed for the purpose of analysis merely because she preferred
not to deal with the matter
piecemeal. In my view the inference is
inescapable that she deliberately withheld the true facts relating to
the converted stock
because she hoped that those facts might remain
undiscovered and the conclusion is inevitable that she intended by
doing so to defraud
the insurer.
[56] Her withholding of
the true facts was itself a breach of the condition in the policy but
the matter goes further than that. For
if Mrs Mentz was deliberately
concealing the truth on 3 March 1995 (and in my view she was) one
asks when she first formed that intention
to conceal. Her evidence
would have it that she could only have formed that intention after 26
January 1995, because until then,
she said, she was unaware of the
true facts. It is most unlikely, however, that Mrs Mentz would have
decided for the first time after
26 January 1995 to set about
concealing the truth, for by then it was already apparent that the
loss adjusters required proper proof
of what was in the warehouse. To
have attempted at that stage to introduce a fraudulent claim would
have been foolhardy indeed. For
that reason alone, it is probable
that Mrs Mentz was aware long before 26 January 1995, and probably
from the outset, that the converted
stock was not received in Cape
Town and indeed, when the remaining facts are examined, the
probabilities all point to Mrs Mentz
never having selected the
converted stock for acquisition in the first place.
[57] I have already said
that it is improbable that Mrs Mentz would have acquired the
converted stock for AMA while Funny Paper still
had an active market
for that stock. It is also improbable that Mrs Mentz would not have
noticed that the converted stock did not
arrive in Cape Town. Its
volume was substantial (the evidence suggests that an additional four
containers might have been required
to transport it) and it could not
easily have been overlooked. Mrs Mentz suggested that she had
overlooked the non-arrival of the
converted stock because she was not
familiar with the stock. Bearing in mind that she had viewed the
stock in Johannesburg before
it was acquired, and the distinctive
nature and volume of the stock, that explanation is improbable.
[58] After AMA acquired
the Funny Paper stock Rogers wrote letters to various customers
advising them that Funny Paper would henceforth
concentrate on its
core business, which he described as the conversion and marketing of
quality gift-wrap paper, and informing them
that the other stock in
which Funny Paper had formerly traded (serviettes and stationery were
mentioned in particular) had been taken
over by AMA. Those letters
correctly reflected Rogers’ understanding of the transaction, which
is that only the imported stock
was acquired by AMA, but were
inconsistent with Mrs Mentz’s version of the transaction. Copies of
the letters were sent to Mrs
Mentz but evoked no reaction from her.
Moreover, on 31 October 1994 Rogers sent a telefax to Mrs Mentz
recording that on 27
th
October ‘the Christmas gift-wrap
orders for the Cape Hyperamas’ had been despatched from
Johannesburg by road and requesting
her assistance to ensure that the
products were effectively displayed on the shop floor. If her
evidence is true Mrs Mentz must surely
have asked why AMA should
assist Funny Paper to sell gift-wrap in Cape Town when AMA was
intending to establish a market for the
identical goods. Her failure
to react to any of that correspondence, and in particular to the
later telefax, is inconsistent with
her version of the transaction,
and consistent with knowledge on her part that AMA had not acquired
Funny Paper’s converted stocks
and would not be competing with it
for sales of those products.
[59] Only the invoices
and the delivery note that was prepared by Thompson are consistent
with Mrs Mentz’s evidence concerning the
nature of the transaction:
the probabilities all point to AMA not having acquired the converted
stock. In my view it was not Rogers
who erred when he withheld the
converted stock, but it was Thompson who did so when he included that
stock in the invoice and the
delivery note. Mrs Mentz, who had
selected the stock to be acquired, must have been aware when the
claim was compiled that the converted
stock had not been acquired,
but sought to capitalize upon the erroneous invoice when submitting
the claim. By submitting the claim
in that knowledge AMA clearly
breached the condition to which I have referred and Santam is
entitled to avoid the claim entirely.
[60] Santam’s counsel
submitted that a special costs order is warranted in the
circumstances and I agree.
THE PRESS SUPPLIES
CLAIM
[61] It is well established that an insured has a duty to disclose to
the insurer, prior to the conclusion of the contract of insurance,
every fact of which the insured has actual or constructive knowledge
that is relative and material to the risk or the assessment
of the
premium, and that a breach of that duty entitles the insurer to avoid
the contract of insurance (
Mutual and Federal Insurance Co. Ltd v
Oudtshoorn Municipality
1985 (1) SA 419
(A) at 432E-F).
[62] The financial circumstances of Press Supplies at the time it
applied for the extension of its policy of insurance on 19 October
1994, the characteristics of the stock that was insured, and the
circumstances in which the stock came to be stored in the warehouse,
have been outlined earlier in this judgment. In its plea Commercial
Union relied upon those and other facts in support of an allegation
that Press Supplies failed to make proper disclosure when it applied
to extend the insurance cover. In argument before us two matters
in
particular came to the fore: the financial position of Press Supplies
at the time the policy was extended, and the saleability
of the stock
that was insured.
[63] The learned judge in the court
a quo
dealt with each of
those issues (and other facts that were alleged to have been
material) separately and found in each case that the
relevant facts
did not fall to be disclosed. He expressed the view that the
deteriorating financial position of the company was material
only if
the deterioration was of such a nature and extent that it took on the
proportions of what the learned judge said had been
called a ‘moral
risk or hazard’. He said that there was no clear evidence that in
October 1994 the company faced liquidity problems,
or was unable to
meet its daily commitments, nor that the directors were even aware
that its current liabilities exceeded its current
assets. (The
financial statements reflecting that fact were signed only on 22
February 1995). Thus his finding, implicitly, was
that the financial
circumstances of the company were not such as to constitute a moral
risk. As to the saleability of the stock,
he pointed out that there
was uncontroverted evidence that it was in good condition and that
there was a market for such machinery.
In consequence there was
nothing untoward that fell to be disclosed.
[64] I am not sure that the reference to ‘moral risk’ was
apposite in the circumstances of this case. The term generally
describes
circumstances personal to the insured that raise questions
as to his integrity (cf. E.R. Hardy Ivamy:
General Principles of
Insurance Law
6
th
ed 151-153;
MacGillivray on
Insurance Law
10
th
ed para 17-55). The question that
the learned judge seems instead to have had in mind was whether the
financial circumstances of
Press Supplies were such that even an
otherwise honest person might have been tempted to commit fraud. But
leaving aside the nomenclature
in my view the learned judge’s
approach to the matter was rather too narrow.
[65] In
Oudtshoorn Municipality,
supra, at 435F-I, it was held
by this Court that the test of materiality is an objective one, to be
determined by asking, upon a consideration
of the relevant facts of
the particular case, ‘whether or not the undisclosed information or
facts are reasonably relative to the
risk or the assessment of the
premiums’. What is meant by that was expanded upon by Van Heerden
JA in
President Versekeringsmaatskappy Bpk v Trust Bank van Afrika
Bpk
1989 (1) SA 208
(A) when he said the following at 216E-G:
‘
[D]ie vraag (is) dus nie of na die oordeel van ‘n
redelike man die betrokke inligting wel die risiko beïnvloed
nie, maar of
dit redelikerwyse 'n effek mag hê op 'n
voornemende versekeraar se besluit om al of nie die risiko te aanvaar
of 'n hoër
premie as die normale te verg. Anders gestel, is die
toets of die redelike man sou geoordeel het dat die inligting
oorgedra moes
word sodat die voornemende versekeraar self tot 'n
besluit kan kom. En so 'n oordeel sou hy bereik het indien die
inligting na sy
mening die voornemende versekeraar redelikerwyse kon
beïnvloed het.’
[66] I do not think it is appropriate to view the financial
circumstances of Press Supplies and the characteristics of its stock
as if the bearing that each had upon the risk was divorced from that
of the other. What the insurer was called upon to insure was
stock
that was in the custody of the insured: clearly the characteristics
of the goods themselves, and the characteristics of their
custodian,
would be inexorably interwoven in assessing the nature and extent of
the risk. Moreover, I do not think that the financial
circumstances
of the insured necessarily fall to be disclosed only where they are
such as to suggest the potential for fraud for
those are not the only
circumstances in which there is an increased risk of loss.
[67] In the present case the stock that was sought to be insured
constituted the remnants after the sale of the business to Hoechst.
There was indeed uncontroverted evidence that the machinery was in
good condition, and that buyers existed for machinery of that
kind,
but in my view that presents only part of the picture. The stock in
question was in the possession of a business that had ceased
active
trading: it had no dedicated sales force to sell the machinery; it
had no established market; it had no infrastructure to
provide
service to the purchasers; it was not the agent of the various
manufacturers; and it was not even certain that it would not
soon be
in liquidation. The question is not merely whether there was a market
for the machinery itself (and I accept for present
purposes that
there was)
but also, and
more important, whether the machinery was saleable while it was in
the hands of Press Supplies. Bearing in mind the
circumstances that I
have outlined in my view it is unlikely that the machinery was
capable of being sold by Press Supplies in the
ordinary course and
without considerable difficulty if it was capable of being sold at
all. Indeed, the fact that the machinery was
still unsold some
eighteen months after the business had been sold to Hoechst is
testimony to that fact.
[68] As for the financial position of Press Supplies I am not sure
that the insolvency of an insured, by itself, is necessarily a
fact
that calls for disclosure: it seems to me that much will depend upon
the particular circumstances (cf
Grusd v Norwich Union Fire
Insurance Society Ltd
1922 WLD 146
at 152). But what was
significant in the present case was not merely that Press Supplies
was insolvent – it was also virtually
dormant and there was no real
prospect that its fortunes would recover: it was bound to end up in
liquidation.
[69] What was insured by Commercial Union when it issued the policy
of insurance on 1 February 1994 was, amongst other things, the
stock
in trade of a business that was described in the schedule to the
policy as follows:
‘
Suppliers to the printing and packing industries,
manufacturers of stationery, installation, maintenance, repairing and
reconditioning
of machinery & equipment, importers &
exporters & property owners’
[70] Whether that was a true reflection of the circumstances of Press
Supplies at the time the policy was issued is not necessary
to
consider because it certainly was not a true picture at the time the
extension was sought in October of that year. What Commercial
Union
was asked to insure was the stock in trade of an active trading
concern (for that is how the business was described in the
schedule).
In truth it was insuring the remnants of the stock of a business that
had ceased to exist, and which for that reason were
saleable only
with difficulty, if they were saleable at all.
[71] In my view there is a clear and material distinction between the
risk in each case. In the former case it can generally be expected
that the insured will have a positive interest in avoiding the
occurrence of the event that has been insured against, not only
because
its occurrence will deprive the insurer of the opportunity to
turn the stock to account
(unless the loss of that opportunity has been insured against
as well) but also because of the disruption that will be caused to
the
ordinary conduct of the business. The insurance, in other words,
is taken as a precaution against the occurrence of an unwelcome
event. In the case before us, however, Press Supplies had no such
vested interest in avoiding the occurrence of the insured event.
On
the contrary, its occurrence was likely to be welcomed, for it would
have the effect of relieving Press Supplies of stock that
was in any
event unwanted, without any trouble at all (provided, of course, that
Press Supplies recovered under its policy). In such
a case the
insurance is not merely a precaution against the occurrence of an
unwelcome event and the insured will generally have
little incentive
to avoid the event occurring. While there might well be circumstances
in which the insured will not lack that incentive,
no such
circumstances exist in this case. In my view the risk that presented
itself in this case was materially different to the
risk that would
have attached to the stock in trade of a going concern.
[72] In my view Press Supplies was obliged to disclose to Commercial
Union that its trading activities had ceased (contrary to what
was
reflected in the schedule to the policy) and that the stock that it
wished to insure constituted the remnants of its former business,
which were of doubtful saleability in its hands. That would have
presented a true picture of the risk that Commercial Union was asked
to insure. There is no dispute that those facts were not disclosed to
Commercial Union. In the circumstances it was entitled to avoid
the
claim and its defence ought to have succeeded.
COSTS
[73] There is one further issue that has a bearing on the costs.
Commercial Union and Santam gave notice before the trial that they
intended to lead the expert evidence of Mr Glasby and Mr Lindstrom
respectively. It appears from the summaries that accompanied those
notices that the witnesses would have expressed the opinion that the
facts relied upon by the respective insurers were material to
the
respective risks that they were asked to underwrite. Their summaries
contained no reasons for their respective conclusions. When
Commercial Union sought to call Mr Glasby an objection was taken on
the grounds that his evidence was inadmissible and the objection
was
upheld
.
The ruling that the evidence was inadmissible was
extended to the evidence of Mr Lindstrom. In ruling on the issue the
learned judge
said the following:
‘
[T]he test for
materiality is objective and is that of the reasonable man’s
reaction to a given set of factual circumstances. There
is no room in
applying that test for evidence regarding how a reasonable insurer or
a reasonable insured might or might not act or
react. And how a
reasonable man would or would not act or react is a question which
the Court must decide without the benefit of
evidence, of how certain
persons might or might not behave in the circumstances postulated’.
[74] I do not think the learned judge
can be faulted for having excluded the particular evidence that was
sought to be introduced
by the appellants for it constituted no more
than an expression of opinion on the very issue that the court was
called upon to decide.
In those circumstances the appellants are not
entitled to the qualifying fees of their respective witnesses. I
hasten to add, however,
that it does not follow that evidence that
might assist a court to arrive at an independent conclusion on the
particular issue will
similarly be inadmissible (cf
Hardy Ivamy
,
op cit
, 166-169;
MacGillivray on Insurance Law
,
op
cit,
paras 17-40 – 17-44;
Gordon and Getz
,
op cit,
130-1).
[75] In their heads of argument the appellants asked for the
qualifying fees of Dr Froneman. Both appellants gave notice of their
intention to call Dr Froneman and his evidence was equally relevant
to both claims. Liability for those costs should thus be shared
between the two appellants and I intend providing for their recovery
accordingly.
[76] I indicated earlier that in my view Santam is entitled to a
punitive costs order against AMA. Because it is not possible to
separate the issues that were dealt with on appeal I intend confining
that order to the costs of the action.
CONCLUSION
1. In both cases the appeals are upheld with costs, including the
costs occasioned by the employment of two counsel, and the orders
made by the court
a quo
are set aside.
2. In the case of
Commercial Union Insurance Co of SA Ltd v Eugene
Bryan Wallace NO
the following order is substituted for that of
the court a quo:
‘The plaintiff’s claims are dismissed with costs, which are to
include the costs occasioned by the employment of two counsel,
and
half of the qualifying fees of Dr Froneman.’
3. In the case of
Santam Insurance Limited v Africa Addressing
(Pty) Ltd
the following order is substituted for that of the
court
a quo
:
‘The plaintiff’s claims are dismissed with costs. The costs of
the defendant are to include the costs occasioned by the employment
of two counsel, and half of the qualifying fees of Dr Froneman, and
are to be taxed on the attorney and client scale.’
____________________
NUGENT JA
STREICHER JA)
MLAMBO AJA) CONCUR