CR6 Cession – sale of second-hand policies

by Case ReportsCessionTopics & Cases

CR6

• Cession – sale of second-hand policies

Policies are sometimes traded at a discount, often through the intervention of intermediaries.

The practice as such is not reprehensible but it can lead to irregularities.

Where a policyholder signs documents in blank, allowing for a cession, there is not much the office can do for a complainant if his verbal instructions were ostensibly disregarded, and there is an irresolvable dispute of fact as to what was said between the policyholder and the intermediary.

In a recent case the policyholder ceded his policy to a bank as security for an overdraft and afterwards, through the intervention of an intermediary, sold the policy to a third party who paid a sum in excess of the amount owing by the policyholder to the bank and applied for its repayment. Thereafter the policy was receded by the policyholder to the new purchaser as an out-and-out cession. The policyholder alleged that this was not in accordance with his agreement with the intermediary, who was an agent of the insurer, but on that point there was a dispute of fact, which could not be resolved in favour of the policyholder.

When confronted with the insurer’s version of events the policyholder failed to respond and the file was closed.

PMN

CR7 Annuity – non-disclosure by insurer at point of sale of the extent of charges

by AnnuitiesCase ReportsTopics & Cases

CR7

• Annuity – non-disclosure by insurer at point of sale of the extent of charges

Facts

On reaching the age of 65 the complainant invested her pension savings in a linked life annuity policy. This was in February 2000 prior to the Policyholder Protection Rules. The insurer had made an error and had not deducted a 0,16% management fee during the first year. This fee was collected by selling units. According to the complainant she had also not received her policy contract, which provided for the management fee. Almost four years after inception, on noticing a reduction in her units, the complainant began enquiries as regards the composition and costs of her annuity. When she was finally furnished with details about the deductions it showed that more than one-third of her annuity was being deducted in the form of charges.

The insurer suggested that because of the small amount of the annuity, i.e. R166 per month, that the complainant should consider moving her money into a fixed interest annuity and that she could do so without paying “switching” costs. Before doing so, however, the complainant wanted the issue of what she regards as an unauthorised deduction of charges to be resolved. The broker does not fall within our jurisdiction, he did, however, advise the insurer that he had not disclosed the extent of his commission and other charges to the complainant since it was not a legal requirement to do so at the time. He indicated his willingness to have his commission reversed and transferred into the policy.

Discussion

This is another case where the failure to disclose the nature and extent of charges at point of sale results in a very dissatisfied policyholder. This kind of complaint will reduce as a result of the disclosure requirements previously in PPR and now in FAIS. However, this does not assist in the case of policyholders whose policies were issued prior to the introduction of such disclosure requirements. To our surprise the insurer advised us that the charges were not out of the ordinary but fell within the norm in the industry. This does highlight the fact that in the case of a small annuity the use of a linked contract is usually inappropriate, not only because of the risk which is attached to it but also because of the extent of the charges which are deducted from the annuity amount. We requested the insurer t+o consider reversing some of the expenses against the annuity on the basis that, as the intermediary conceded that the complainant had not been aware of the effect of the high costs on her annuity income when she consented to the agreement, she had not made an informed decision. The insurer agreed to reverse 50% of the costs. This amount would be added to the lump sum which would be transferred to purchase a fixed interest annuity.

JP

CR8 Conclusion of contract – telemarketing – terms of the contract

by Case ReportsConclusion of ContractTopics & Cases

CR8

• Conclusion of contract – telemarketing – terms of the contract

The insurer’s agent approached the complainant by telephone. The complainant alleged that the parties came to an agreement in terms of which he took out whole life insurance on the life of his mother. The life insured died slightly more than a year afterwards. The insurer disputed liability on the grounds that the policy made it clear that death due to natural causes would only be covered 12 months after the insurer received an acceptable application form completed by the proposer. According to them, the policy and schedule were mailed to the complainant in the ordinary course of business. They explained that this class of policy required underwriting and that it was therefore necessary for the policyholder to complete and sign the application form which incorporated a health declaration. The complainant failed to return a signed application form despite having allegedly been reminded to do so. Consequently the insurer contended that there was no contract.

The telephonic conversation that took place was recorded. We listened to the tape. We found that the agent assured the client that there would be immediate cover for accidental death and cover for death by natural causes after a year. She informed the client that no medical examination was needed but that the life insured had to do a declaration of health indicating the status of her current health and all her pre-existing medical conditions. She made it clear that the plan did not cover pre-existing conditions. Thereupon the agent asked the client whether she might complete an application form and they proceeded to do so by noting certain particulars. They discussed and agreed on the amount of the premium and the sum insured. The agent then proceeded to provide some particulars of herself and in the course of this discussion she said that the phone call was being recorded “as we do a legal contract via the phone.” She assured the client that the cover would continue even though the insurer has not received the documents. She added that if the client did not receive these forms within 2 or 3 weeks, he should please give her a call so that they could be re-posted. She did emhasise that the documents must be signed and returned. Finally, she typified the policy in question as a whole life policy.

Assessment

The policyholder was of the opinion that he had a whole life policy on his mother’s life and that full cover would be enjoyed after one year. He had been assured that the telephone contract was a legal contract. The agent filled in an application form on his instruction. It is true that he was told that the form had to be signed but he was also assured that there would be cover even though the documents had not been received by the insurer.

We came to the conclusion that a valid contract of insurance had indeed been entered into on the terms as discussed between the agent and the policyholder. There is after all no general requirement that a contract of insurance must be in writing and signed. The form in question had admittedly to be signed to confirm and record the details about the life insured, i.e. for proof rather than validity. It was not brought home that the returning of a duly signed application form was a prerequisite for the validity of the contract or for the purpose of extending the contractual benefits. It is true that the insurer needed these documents but in the light of the discussion that took place, the position simply was that the insured had a contractual duty to complete, sign and forward these documents to the insurer. It was therefore no more than an ordinary contractual obligation which the insurer could enforce as a breach of contract but it did not rob the insurance of its validity.

In the circumstances the policyholder’s contention was upheld.

MFBR

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

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

CR1 – Cession – security cession

by Case ReportsCessionTopics & Cases

CR1

  • 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