CR36 Jurisdiction – lapsed policy – premium part of bond repayment

by Case ReportsJurisdictionTopics & Cases
[vc_row][vc_column][vc_column_text]CR36

Facts

The policyholder had taken out a bond from a bank.  The bank required a policy on the life of the house owner to be ceded to it as security.

The premiums for the policy were included in the total bond payment made every month.  As interest rates vary this payment amount changes from time to time and the complainant was, therefore, used to fluctuating amounts being deducted.  The premium for the policy was deducted on an annual basis from the bond bank account and paid over to the insurer.  When there was a take-over of the bank the bondholder decided to move her bond.  At the time of the transfer the arrangement with the premium fell by the wayside.  The premium was not paid over to the insurer and eventually the policy lapsed.

When the bondholder (and life assured) died the insurer did not pay out the claim as there was no policy in force.  The wife of the deceased complained to our office.

Decision

We could not assist the complainant as the insurer had been justified in declining the claim.  It appeared to us that the bank may have been at fault at the time of the transfer of the bond to a new bank.  We contacted the Ombudsman for Banking Services who confirmed that he had jurisdiction in the matter and we, therefore, requested the complainant to complete the necessary forms in order to submit the claim to his office.

Comment

It is a concern that when a premium forms part of a bond instalment on a policy ceded to the bank the original policyholder loses control over the policy premium payments.  When premium payments are not made for whatever reason the policyholder is “out of the loop” and will be unaware of the premium arrears and the possible lapsing of the policy.

As far as this issue is concerned we wrote to the Banking Council in 2003:

“We are writing to you in the hope that you can assist with the following problem.

As you are doubtless there is a widespread practice of life insurance policies being ceded to banks as security for loans, mortgage loans in particular.  When such a cession is no longer operative, because the loan has been repaid, there is a need for the bank to advise the policyholder of that fact and return the policy document to the policyholder.  It has come to our notice that policyholders are not, unfortunately, always advised of the cancellation of the cession.

This is particularly important where the insurance premium has been remitted by the bank to the insurer.  This occurs where the bond repayment amount includes the cost of the insurance premium.  In the absence of such advice the policyholder may in all innocence omit to pay the premium directly to the insurer and the policy could lapse or become paid-up.  The policyholder could thus lose valuable policy benefits.

We would request you to please bring this problem to the attention of your members and in particular that it is essential that their clients be duly notified and that the policy document be returned to the policyholder as soon as the secured loan has been repaid.”

We have had no response to this letter and as far as we are aware no standard practice, however desirable, has yet developed in this regard.  Equally desirable would be a practice that insurers, as debtors, should inform their policyholders, the cedents, whenever a claim is made on a policy by an outsider, such as a bank as cessionary.  This would enable the policyholder to contest the payment, if there are good grounds for doing so.  (See, too, “Cession”).

JP[/vc_column_text][/vc_column][/vc_row]

CR37 Misrepresentation by independent broker prior to conclusion of contract

by Case ReportsMisrepresentationTopics & Cases
[vc_row][vc_column][vc_column_text]CR37

Misrepresentation by independent broker prior to conclusion of contract – complaint that quotations provided and representations made induced the complainant to enter into a contract which in a material respect did not comply with his requirement.

Background

It was common cause that the complainant approached the broker for advice on appropriate investment of a lump sum for a period of five years and that his requirement included a reasonable monthly income and a guarantee of “return of capital”.

He was provided with five quotations. Four of these provided a guaranteed monthly income as well as a guaranteed maturity value at the end of the term equal to the full amount of the total proposed investment. The fifth quotation also guaranteed a monthly income over the period. Unlike the other quotations, this specific quotation did not as such contain a guarantee of payment equal to the full amount invested at the end of the term. It reflected projected values on the basis of assumed rates of return. The broker, however, provided the applicant in addition to the quotation also with marketing material and emphasized by marking it with a coloured highlighter statements in the marketing material that a return of 100% of the initial amount invested at the end of the five year term was guaranteed. This marketing material only related to the “investment” portion of the quotation.

The guaranteed monthly income, quoted in respect of the last mentioned product, was significantly higher than those in the other quotes. On the strength of the quotations and representations of the broker, the complainant applied for the last mentioned product.

On receipt of the contractual documents, the complainant noted that only a return of just over 50% of the total consideration paid was guaranteed at the end of the term. He complained to the broker. The broker’s initial responses to the complaints were rather evasive and may be interpreted as supporting the complainant’s stance that the total amount invested should have been guaranteed. The complainant submitted an affidavit in which he states that he was given assurances by the broker that the required guarantee will be attended to. He was, however, eventually informed that the contract was issued in accordance with his application and the quotation which was also signed by him. In response to enquiries by our office, the broker contended that the complainant was fully informed when he elected to enter into the particular contract.

Assessment.

The issue which under the circumstances seems to clamour for an explanation is why the complainant entered into a contract in accordance with the one quotation which did not meet his requirements of a guaranteed income and a guarantee of investment at the end of the term.

The complainant contends that the quotations were presented to him in such a manner that he was under the impression that they were in fact similar with regard to the guarantees of income and return. The broker, on the other hand, contends that the complainant was “fully informed”. Although given all opportunities to do so, the broker did not contend that the significant difference between the quotations were explained to the complainant. It is our perception that a reasonable prudent intermediary under the particular circumstances would have at least indicated this significant difference.

A more significant aspect is that a guarantee of a return of the amount invested was specifically emphasized by the broker. According to the complainant this was done in response to his enquiry as to whether the total investment amount was guaranteed. The contentions by the complainant in this respect was not denied by the specific intermediary. During our investigation of the matter we were provided with a memorandum by the intermediary which supported the impression that the intermediary was even at that stage, under the impression that the guarantee applied to the total amount invested in respect of both the annuity/income as well as the “investment” portion of the total amount paid by the complainant.

Our opinion was that the available information confirmed on a balance of probabilities that the broker represented to the complainant that the contract entered into contained the guarantee of return of the total investment consideration similar to the other quotations.

It was furthermore our opinion that in the light of the stated requirement of the complainant any advice to invest in a product which does not provide for a guarantee requested for, would fall short of the standard which may reasonably be expected from a broker in similar circumstances.

Recommendation

We recommended that the broker accept liability for any losses caused by the representations made and advice provided.

Result

The matter was resolved in that the broker provided the complainant with a certificate signed by its executive director in which it undertook to compensate the complainant for any loss in respect of the total amount invested at the end of the term.

EdB[/vc_column_text][/vc_column][/vc_row]

CR38 Misselling – advice to 64 year old to move investments off-shore

by Case ReportsMissellingTopics & Cases
[vc_row][vc_column][vc_column_text]CR38

Misselling – advice to 64 year old to move investments off-shore

Facts

In May 1999 the complainant retired and received a 1/3 lump sum. She invested this together with an inheritance at a bank in a money market account from which she drew an income. In August 2000 the complainant went to the insurer to seek advice on increasing the monthly contribution she made to a unit trust in her grandson’s name. The insurer’s agent, assisting her, advised her to reinvest her R400 000 investments in an off-shore investment housed in a policy. The complainant was 64 years old at the time of investment and she required an income. She was advised that she could draw £500 each quarter as income.

No formal needs analysis was done. When the investment dropped in value, the complainant contacted the adviser and he met with her on several occasions. At one of these occasions the adviser gave a personal guarantee that if the amount of the investment reduced beyond the original lump sum he would make up any shortfall. He also advised her to stop drawing an income so as not to erode her capital any further.

The insurer advised us that they did not regard the advice as inappropriate.

Discussion

On the facts we were convinced that the adviser had persuaded the complainant to invest off-shore rather than her wanting an off-shore investment from the outset.

Our view was that it was inappropriate advice for a 64 year old retired pensioner, who has no other significant investment, to transfer her pension fund money from a South African money market account to an off-shore equity portfolio.

We were also not convinced on the documentation on file that the complainant had made an informed decision when she chose the investment on the advice of the insurer’s adviser. We interviewed the complainant and her husband and it became clear that she had relied on the agent who had convinced her that an off-shore investment was the route to go and had painted a very bleak picture of South African investment market. At no stage did there appear to have been any warnings about the risks attached to her new investment.

We advised the insurer accordingly.

JP[/vc_column_text][/vc_column][/vc_row]

CR39 Misselling—instructions misunderstood?

by Case ReportsMissellingTopics & Cases
[vc_row][vc_column][vc_column_text]CR39

Misselling—instructions misunderstood?

Background

The complainant, a divorcee aged 65, had all her pension money invested in the money market. The investment yielded a sufficient amount per month for her upkeep but she became concerned about the lack of capital growth. Because she was totally unskilled in financial matters, she turned to a firm of brokers for advice on how to invest her money. She insisted on a minimum monthly income equal to that which she got from her investment in the money market. The broker recommended an investment overseas. The plan was based on the assumption that the investment would produce a satisfactory yearly return and furthermore that the Rand would continue its downward trend. The complainant alleged that she instructed the broker that her capital should not be exposed to any risk. She, however, signed a mandate in which it was made clear that no guarantees were provided. She admitted to her signature but explained that she signed the document without reading it. The investment performed satisfactorily in dollar terms but as a result of the strengthening of the Rand, the capital deteriorated sharply. The complainant claimed compensation for the loss of her capital on the ground that her broker did not adhere to her instruction that her capital may not be exposed to any risk.

Assessment

We could not determine on the papers whether in fact there was a mutual understanding that the complainant’s money should not be exposed to any risk. It was furthermore not possible to decide whether the complainant took an informed decision. A hearing was arranged during the course of which the parties came to a practical settlement. The firm of brokers undertook to pay a sum towards compensation on the basis that there might have been some misunderstanding about the actual terms of the mandate.

MFBR[/vc_column_text][/vc_column][/vc_row]

CR24 Funeral Insurance – status of “life assured”

by Case ReportsFuneral InsuranceTopics & Cases

CR24
• Funeral Insurance – status of “life assured”

In another case the complainant claimed payment on the policy by virtue of the death of his grandmother. The insurer responded by pointing out that although the complainant was an additional life assured and the premium payer, he was neither the policyholder nor a nominated beneficiary. No payment was accordingly due to him by virtue of her death. Although he was the premium payer the policy devolved, in the absence of his nomination as a beneficiary for ownership, on the estate of his grandmother. Accordingly he was also not permitted to demand the cancellation or surrender of the policy. The insurer advised him that it was up to him to negotiate with the estate for a cession of the policy to him in which event, on his death, the policy would devolve on his estate. We agreed with the insurer’s approach and declined to uphold the complaint.

PMN

CR40 Non-disclosure – insurer’s right to investigate

by Case ReportsNon-DisclosureTopics & Cases
[vc_row][vc_column][vc_column_text]CR40

• Non-disclosure – insurer’s right to investigate

The insured was covered in terms of a policy which provided for various benefits. A claim in respect of temporary total inability to attend to his usual professional duties was admitted and paid. In the course of subsequent enquiries to the insurer, he was informed that a possible “non-disclosure” by him at the time of application was being investigated. He also discovered that his medical practitioner received requests for specific further information.

The insured took the strongest exception to what he termed “continued harassment after the fact”. He contended that the insurer was fully entitled to conduct investigations prior to the decision to admit the claim but that, having once admitted it, the insurer was not entitled to re-open and prolong them further.

The insurer confirmed to us that non-disclosure was initially investigated but that it was decided, based on a statement by the insured at the time to honour his claim. The insurer contended that statements made by the insured during subsequent interviews created not only a suspicion but indeed the probability that the previous statement was not true. Hence the insurer requested further information from the insured’s medical practitioner.
We accepted it as trite law that the admission of a claim would not as such limit an insurer’s right to investigate an earlier failure to comply with the duty of disclosure. But it was also accepted that specific issues of non-disclosure may be condoned and disposed of during the process of the consideration of a claim. In those circumstances an insurer’s right to re-investigate or rely on earlier non-disclosure may be compromised. On the facts of this particular case it could not, however, be concluded that the aspects of non-disclosure that were later investigated were identical to the ones referred to our office earlier.

We informed the parties that the insurer was entitled to pursue its investigations and to take such steps as may be appropriate, whereupon the insured terminated the contract and the insurer, without prejudice to its rights, decided not to pursue the matter any further.

EdB[/vc_column_text][/vc_column][/vc_row]

CR9 Conclusion of contract of insurance

by Case ReportsConclusion of ContractTopics & Cases

CR9
• Conclusion of contract of insurance – intermediary not authorised to act on behalf of insurer- estoppel

Background

The complainant took out life insurance from X Life Insurance covering his own as well as his wife’s life. A dispute arose about the amount of the premium and the negotiations had to be reopened. The complainant wanted to deal with a senior person at managerial level. He asked for such a person but what he did not realise was that he was dealing with senior officials employed by X Advisory Services and not X Life. X Advisory Services was a separate company appointed by X Life to market their products and also to assist clients with financial advice. They had no actual authority to conclude or amend contracts.

The parties agreed on a discounted premium based on the complainant’s membership of a scheme affiliated to X Life. However, according to the house rules of X Life, the complainant did not qualify for such discount because his wife was not a member of this scheme. The complainant recorded the terms of the varied agreement by sending a fax to the representatives with whom he had dealt. He asked X Life to implement the agreement. To this X Life answered that they were not aware of the dealings between the complainant and X Advisory Services and that the latter had no authority to bind X Life.

The complainant was all along under the impression that he was dealing with senior officials representing X Life and he regarded X Advisory Services as a department of X Life. Various factors related to X Life, contributed to the complainant’s wrong impression. First, in its correspondence with him, X Life provided the contact details of X Advisory Service and was informed that if he needed any more information, he must contact his financial adviser. Second, the word “X” formed part of the name of both companies but the precise relationship between the two entities was never explained to the complainant. Third, a quotation received from X Life contained the following sentence: “In terms of the Long Term Insurance Act commission paid to financial advisors is regulated. However, since the application has been submitted to a salaried employee of X Life, no commission is payable.” Fourth, the email addresses of both companies were identical.

Assessment

In the circumstances we found that as a result of the conduct of X Life the complainant reasonably came to the conclusion that the officials from X Advisory Service were entitled to contract on behalf of X Life. The complainant acted to his detriment and consequently X Life was estopped from raising absence of authority as a defence.

MFBR

CR10 Conclusion of contract – mistake

by Case ReportsMistakeTopics & Cases

CR10

Conclusion of contract – mistake – insurance company’s error at underwriting stage – whether the insurance company should abide by their mistake and maintain the contract as originally issued.

Facts

In December 2003 Mr and Mrs A applied to X Company for a health insurance policy. Mr A’s application was accepted but with a loading. Mrs A’s policy was accepted at tabular rates without any exclusion or restrictive clause, this notwithstanding the fact that in the application form the history of Mrs A’s hip replacement, which she underwent some time in 1998, was recorded. Once the acceptance had been received, Mr and Mrs A cancelled their health insurance contract with Y Company.

X Company stated that it erred in not capturing the history of the hip replacement when Mrs A’s details were loaded into their underwriting system. When the policy was issued the medical history which featured in the application form was repeated in the contract document. X Company implied that as this did not record the history of Mrs A’s hip replacement she should have realised that something was amiss and, thus, she had been given an opportunity to correct matters. Mr and Mrs A stated that they never received the policy document which was not in fact forwarded directly to them but was allegedly forwarded to their broker.

The fact that a policy was issued in a form not intended by X Company, came to light two years later when Mrs A underwent a further hip replacement. X Company took the view that it was clearly its intention to include a hip replacement exclusion but nevertheless it agreed to admit the claim but insisted that an exclusion would apply to any further treatment relating to the conditions of the hips. Mr and Mrs A’s attitude is that X Company should abide by the original terms of acceptance and adhere to the contract as originally issued.

Result

The complaint was upheld and the contract remained as issued without any exclusion or restrictive clause.

DM

CR2 Cession – security cession – surrender by cessionary.

by Case ReportsCessionTopics & Cases

CR2

  • Cession – security cession – surrender by cessionary.

Policies often serve as instruments of security for loans.  Microlenders insist on the cession of a policy, be it an existing one or a policy newly created for that very purpose, be it as security for the policyholder’s own debt or for the debt of another i.e. when the policyholder has been induced to stand surety for the debt of a family member.

Once that happens the policyholder is locked into a situation from which an escape is not always easy to engineer

Thos most we can do in such a situation is to explain the legal position to the complaining policyholder.  In one such case we said to the policyholder who had stood surety for the debt of his aunt, and ceded his policy to secure that debt:

“(i)       On such a security cession you retain your interest in the policy;

  • Once the debt in respect of which the cession has been given is extinguished the policy reverts to you;
  • Until that debt has however been repaid you cannot enforce your rights under the policy;
  • Since the cession was given as security for payment of the debt it follows that the cessionary is entitled to apply the proceeds of the policy to the payment of your debt;
  • Since your debt (as surety) is dependent on the non-payment by your aunt of her debt to the cessionary it follows that is he is in default the cessionary was entitled to a surrender of the policy which the insurer was obliged to implement.”

Where the policyholder challenges the validity of the cession or insists that the secured debt has in fact been repaid our ability to help is limited:  we can badger the insurer, as debtor, but we cannot engage the cessionary, as creditor.  We lack the jurisdiction to do so.  On that issue policyholders are on their own.

PMN

 

 

 

CR11 Disability claim repudiated on basis of failure to meet criteria of screening tests

by Case ReportsDisabilityTopics & Cases

CR11

• Disability claim – claim repudiated on basis of failure to meet criteria of screening tests – insured’s medical practitioners’ view that insured not capable of engaging in his occupation.

The complainant, a self-employed mechanic, was diagnosed as having a prothombotic tendency after suffering a deep vein thrombosis with severe pulmonary embolism, and a sagittal sinus thrombosis with cerebral venous infarcts and generalised seizures.

The view of the neurologist who treated him was that he no longer capable of engaging in his former occupation as a mechanic. Formal neuropsychological testing revealed deficits in executive functioning – he was unable to engage in abstract thought, and displayed perseveration and deficits in attention and working memory. In addition, the neurologist noted that he would have to take Warfarin, a blood-thinning drug, for life, and stated his view that “the combination of using Warfarin in a patient with seizures is fraught with difficulty, and then to additionally expose such a patient to a workshop environment with dangerous moving machinery and expect him to continue to work is an irresponsible and dangerous practice. “ It appears that the complainant would run the risk of severe bleeding if injured while on Warfarin, as a relatively minor laceration could result in hospitalisation.

The complainant had purchased a “new generation” disability product. A selling point for this product was that a lump sum disability benefit was payable not if an impairment affected one’s ability to perform a specific occupation, as in the classic disability benefit, but according to a system of strict medical criteria, described as “objective and fair”. Thus, when the complainant submitted his claim, it was assessed against the “nervous system” criteria. To qualify for a 50% benefit these criteria were: “inability to comprehend or communicate language symbols or 85% speech impairment or able to perform ≤ 4 basic activities of daily living or destruction of an optic nerve or monoplegia or < 20/125 Snellen rating bilaterally or > 75% binaural hearing impairment”. It seems the complainant did not meet any of these requirements – but the insurer repudiated the claim specifically on the basis that the neurologist had recorded a score of 5/6 on the Activities of Daily Living score sheet. In the last category, “Advanced activities”, he scored the complainant as “poor/cannot” in almost every sub-category, specifically memory, problem solving and stress adaptation.

The Ombudsman’s office commented that if one read the policy as a whole, it could not be interpreted as restrictively as the insurer had done. The wording in the policy was reminiscent of a classic disability policy.

The insurer recognises that some illnesses could be assessed only through strict screening tests. The policy stated that in cases where objective criteria were insufficient a more subjective test, the Activities of Daily Living score sheet, had to be used “to assess incapacity to work, for example, the inability to communicate, loss of memory, impaired locomotion, etc.” The score sheet tests activities in six basic activity categories: self care; communication; physical activity; sensory function; hand functions; and advanced functions.

We pointed out to the insurer that, in interpreting the contract to determine the common or constructive intention of the parties, and having regard to the contract as a whole, one needs to reconcile the policy provision that “this benefit pays a capital amount in the event of you being medically impaired and hence unable to work”, with an exclusion simply on the basis of medical screening tests that do not specifically measure an ability to work. The quoted statement indicated the nature and purpose of the contract: to provide cover if you were medically impaired and unable to work. The link between the criteria and the purpose was in fact explicitly acknowledged in the policy document: “these criteria are designed to establish whether your disability prevents you from working at all”. We suggested that the criteria should be seen, in the context of the contract as a whole, as guidelines to gauge whether an insured is able to work. They should not therefore be applied mechanistically but to help the insurer form an opinion as to the claimant’s ability to work, the insurer retaining a discretion to override the strict application of the criteria to give effect to the policy provision that the benefit is payable if you are “medically impaired and hence unable to work”, if indeed it is clear that the person cannot work.

The complainant’s case provided a good example of someone who was fully functional in most respects allowed for on the score sheet (5 out of the 6 categories), but who utterly failed the 6th category (Advanced Activities), which happened to contain most of the abilities one would immediately recognise as being necessary to enable one to work as a mechanic: social interaction, understanding concepts, memory, problem solving.

The insurer responded to our input by conceding that reliance solely on the Activities of Daily Living tool had led to an unfair result. It agreed to pay the 50% benefit immediately and indicated that it would consider payment of the remaining 50% after the complainant had had a further neuropsychological assessment to determine whether his cognitive impairment was moderate or severe. We accepted the reasonableness of this stance.

SM