The legal framework regulating the duties of insurance intermediaries

Abstract

In South Africa, before the Financial Advisory and Intermediaries Services Act (FAIS Act) and other insurance laws came into existence, intermediary services regarding the rendering of insurance products have always been regulated by the law of agency and mandate. This means that the Roman-Dutch principles provided for the standards to which the conduct of intermediaries was to comply with when rendering insurance services. The mandate of intermediaries in terms of the Roman-Dutch Principles also included the fact that they had to act with care, skill and in good faith. When the FAIS Act came into operation, it introduced several detailed rules and minimum standards for insurance intermediaries to comply with, and these minimum standards are not limited to qualifications, experiences and characteristics of honesty and integrity that an intermediary must comply with, but they also stipulated in detail what an intermediary must do when discharging insurance intermediary duties. The FAIS Act is the leading legislation when it comes to the regulation of intermediary services. The FAIS Act, under section 16, provides for a General Code of Conduct for Authorised Financial Services Providers and their Representative (GCC), which contains a set of rules that are applicable to all intermediaries. These rules under the GCC are aimed at ensuring that insurance customers are provided with material facts that will enable them to make a prior informed decision and that their reasonable financial needs concerning insurance products will be carefully considered so that they can be provided with a product that will be suitable to satisfy their needs. Furthermore, in terms of South African laws and practices, intermediaries play an essential role in the creation of legally binding insurance contracts. Insurance businesses are concluded through intermediaries. Considering that many insurance companies are juristic persons, and they can only conduct business by means of human agents, insurance laws make it compulsory for intermediaries to have skills, knowledge, and experience regarding insurance products that they are rendering to insurance customers. It is commonly believed that intermediaries with skills, knowledge and experience, they always act in the best interest of the client, and they ask relevant questions to assist the clients to disclose all material facts, and they always make sure that material facts are clearly communicated/disclosed to the insurer and insured to avoid future conflicts. The legal framework placed a duty on the intermediary to assist the insured to disclose all material facts and to explain all clauses contained in the insurance contract which may lead to the insurer repudiate its liability. Furthermore, an intermediary is at all material times expected to first consider the financial situation of the potential insured before determines a cover that will be best suitable for the insured’s needs. However, despite the best guidelines outlined by applicable insurance laws and regulations, mistakes are still being made by intermediaries, which lead to insurance customers to suffer the consequences of impractical intermediary services, and that has resulted in numerous complaints, legal disputes, debarments, and other regulatory actions. As a result of intermediaries’ continuous misconduct, insurers have been repudiating claims, and it has created a presumption that insurers conduct businesses to enrich themselves instead of protecting the interests of their customers as required by regulating legal framework. Therefore, so many people have lost confidence in the insurance industry due to unlimited court cases and complaints arising from misconduct or omissions of intermediaries, such as their failure to disclose material facts to the parties. Once it is found that material facts were not fully disclosed between the insurer and insured, both parties would have been deprived of their right to make an informed decision before consenting or signing a legally binding contract. Therefore, a need is created for intermediaries to be educated of their legal duties when rendering insurance services and that will help strengthen or restore the confidence of the public towards insurance industry.