Centriq Insurance Company Ltd v Oosthuizen and Another

• Jurisdiction: South Africa
• Judge: Cachalia JA, Mbha JA, Mathopo JA, Dlodlo AJA and Rogers AJA
• Judgment Date: 14 March 2019
• Citation: 2019 (3) SA 387 (SCA)
• Docket Number: 237/2018 [2019] ZASCA 11
• Hearing Date: 14 March 2019
• Counsel: CE Watt-Pringle SC (with CC Bester) for the appellant. JF Mullins SC (with PJJ Zietsman) for the second respondent.
• Court: Supreme Court of Appeal

Cachalia JA (Mbha JA, Mathopo JA, Dlodlo AJA and Rogers AJA concurring): A

[1] This appeal concerns the interpretation of a professional indemnity insurance policy underwritten by Centriq Insurance Company Ltd (Centriq). The policy indemnified a financial advisor from liability for 'breach of duty in connection with [his] business by reason of any B negligent act, error or omission'. The advisor had advised his client to invest in a dubious property development scheme in circumstances described more fully below. The investment failed, and she sought to recover her loss from him, who in turn claimed the indemnity from Centriq. It denied liability, relying on an exclusion clause that set out C certain situations in which the indemnity did not apply. The defence failed in the Free State Division of the High Court. [1] Centriq now appeals that order with leave of this court. The issues in this appeal are important for insurers who underwrite financial advice on the one hand, and for financial advisors who seek to indemnify themselves against the adverse consequences of their advice on the other. D

Genesis of the dispute

[2] The first respondent, Mrs Marisa Vogel Oosthuizen, became widowed following her husband's death in a shooting accident, leaving her E with their two and half-year-old son. The deceased was a farmer and his life policy secured for her an amount of R3,4 million. Of this amount she set aside R300 000 as a reserve, purchased calves to the value of R1,1 million and decided to invest the balance of R2 million. To this end she sought the advice of Mr José Francisco Castro, who had previously advised her husband and whom she trusted. He was registered as a F financial services provider and a broker in terms of the Financial Advisory and Intermediary Services Act 37 of 2002. He advised her to invest the R2 million in Sharemax Investments (Pty) Ltd (Sharemax). The investment was in a property development scheme known as 'The Villa Retails Park Holdings 2'. The Villa was a yet to be completed shopping complex, a fact that he did not draw to Mrs Oosthuizen's attention. G

[3] The development failed following a Reserve Bank investigation, which found that Sharemax was contravening the Banks Act 94 of 1990 by taking deposits illegally. With no prospect of recovery from H Sharemax, Mrs Oosthuizen sued Mr Castro for the loss of her capital sum of R2 million, plus mora interest on this amount, less an amount of R1400 she had received from Sharemax a few days after making the investment. Her claim was that Mr Castro had failed to act honestly and fairly in her interests in recommending the investment; that he had not given her objective financial advice appropriate to her needs; and that he I had not exercised the degree of skill, care and diligence expected of an authorised financial services provider.

Cachalia JA (Mbha JA, Mathopo JA, Dlodlo AJA and Rogers AJA concurring)

[4] A After the pleadings had closed, Mr Castro joined Centriq as a third party claiming that he was entitled to be indemnified under the policy concluded with Centriq. The policy is styled 'Professional Indemnity Insurance for Members of the Financial Intermediaries Association' and, as is apparent from its name, is offered to all members of the body. B Mr Castro was one such member. Centriq denied any obligation to indemnify Mr Castro on the ground that Mrs Oosthuizen's loss fell within the ambit of the specific exclusion contained in clause 3(ii) of the policy. The clause excluded Centriq from having to indemnify the insured member —

'in respect of any third party claim arising from or contributed to by C depreciation (or failure to appreciate) in value of any investments, including securities, commodities, currencies, options and futures transactions, or as a result of any actual or alleged representation, guarantee or warranty provided by or on behalf of the Insured as to the performance of any such investments. It is agreed however that this Exclusion shall not apply to D any loss due solely to negligence on the part of the Insured . . . in failing to effect a specific investment transaction in accordance with the specific prior instructions of a client of the Insured.' [Emphasis added.]

[5] Following Mrs Oosthuizen's evidence regarding the circumstances in which she came to make the investment and that of Mr Magnus Heystek, who gave expert testimony on whether Mr Castro's advice was what a E reasonable investment advisor ought to have given her, she closed her case. Neither Mr Castro nor Centriq disputed their evidence. I shall narrate their evidence when I set out the background in more detail later. Mr Castro also takes no issue with the finding of the court a quo that he is liable to Mrs Oosthuizen for her loss. Neither does Centriq. F But Centriq maintains that its liability as the third party is excluded.

[6] Centriq contends that the exclusion is triggered by two distinct provisions in the exclusion clause. The first is that the claim by the third-party claimant against the insured — ie Mrs Oosthuizen's claim against Mr Castro — is one that arises from or is contributed to by G depreciation or failure of the investment to appreciate in value. The second is that the investment was undertaken by the insured on the third-party claimant's behalf pursuant to a representation, guarantee or warranty by the insured as to the performance of the investment.

[7] The court a quo found neither trigger present. Regarding the first the H learned judge rejected Centriq's contention that the loss in value of the investment was 'contributed to by depreciation' pursuant to Mr Castro's advice. He concluded, on the basis of Mr Heystek's evidence, that the investment was 'hopeless' from the onset, and that the loss arising therefrom was not 'contributed to by depreciation' as envisaged in the I clause. In regard to whether Mr Castro's advice constituted a representation, guarantee or warranty as to the performance of the investment, the court a quo held that this was not Mrs Oosthuizen's case. She sued Mr Castro because he had failed to give her adequate investment advice, suitable to her needs for a safe investment, and not because the investment had not performed in accordance with the advice she had J obtained. Mrs Oosthuizen maintained that the learned judge's reasoning

Cachalia JA (Mbha JA, Mathopo JA, Dlodlo AJA and Rogers AJA concurring)

in respect of both issues was correct. It will be helpful to place these A contentions in their proper perspective by setting out the background and Mrs Oosthuizen's evidence in a bit more detail.

Background

[8] The judgment of the court a quo sets out the circumstances under B which Mrs Oosthuizen decided to make the investment and the reasons for holding Mr Castro liable for breach of their financial services contract succinctly. This is common ground, which I shall recount briefly.

[9] Mrs Oosthuizen was left vulnerable and insecure in the immediate aftermath of her husband's sudden death. She was also placed in a C financial predicament before she was able to gain access to the proceeds of her husband's insurance policy, having to borrow money from her brother...