Posts in category: Paid-Up Values

CR201
• Paid-up value – informed decision

Background
The complainant’s endowment policy, offering life and disability cover, had been in force for some 20 years when, in June 2003, he experienced financial difficulties. He telephoned the insurer’s call centre regarding his options. He was anxious to interrupt the payment of his premiums until his financial position had improved whereupon he intended to resume full payment. What he wanted, so he explained, was to make the policy “paid-up”.

According to him the call centre assured him that he would not have to repay the missed premiums but when, in October 2003, he applied to have the policy re-instated, he was advised that the premiums would have to be brought up to date. He reluctantly agreed that double premiums could be recovered for three months but having made that promise the insurer failed to deduct double premiums and only collected normal premiums as from November 2003. Furthermore, he received medical forms which he was requested to complete and when he queried it the insurer promised to get back to him, which never happened.

No premium was deducted in March 2004 and when he once again enquired about it he was informed that the money was in a “suspense account” and that the policy had not been re-instated. He clearly did not appreciate the full import of that information. The insurer then informed him that they were waiting for an HIV test. According to the complainant he had not previously been informed that one was needed. He nevertheless underwent the test on 1 April 2004. On 7 April 2004 he received further medical forms for completion. Once again he phoned the insurer to find out why this was needed. Once again nobody returned his call.

According to the insurer the complainant was advised in October 2003 that a full medical examination was required before the policy could be re-instated. Since all the requirements were not received they advised the complainant by fax on 14 November 2003 of the outstanding HIV test. On 29 March 2004 the complainant was again telephonically advised of the outstanding HIV test. This was provided by him on 5 April 2004. Meanwhile the declaration of health and medical information had become outdated. The insurer faxed the complainant another declaration of health on 7 April 2004, which they duly received on 16 April 2004.

The insurer was prepared to reinstate the life cover but not, because of the complainant’s deteriorating health, the capital sum disability cover.

According to the complainant the insurer, when he called the call centre in June 2003, never informed him that he would have to reimburse the missing premiums or that he would have to undergo further medical tests to reinstate the policy. Had he known that this was required, so he said, he would have found other means to keep the premiums up to date.

Discussion

We requested and received a transcription of the telephonic discussion the complainant had with the call centre. The complainant clearly had not made a fully informed decision. The call centre brought him under the wrong impression that he could stop paying premiums for a few months and then resume payment without any adverse consequences. This is what he understood “paid-up” to mean and on that basis his belief was not unreasonable.

We held, first, that the policy had to be fully reinstated with both life and disability cover against payment of all arrear premiums and, secondly, that the insurer was not entitled to updated medical reports.

Result

The complainant paid the arrear premiums and the policy was duly and fully re-instated. Because of the satisfactory result and notwithstanding the unsatisfactory service no compensatory award was made.

AS
November 2006

CR202

Payment – paid-up policies – insurer failing to implement premium escalation by increasing annual debit order amount as specified in the contracts – policies falling into arrears and becoming paid-up – complainant unhappy with resultant maturity values.

Background

The complainant’s husband died in 1994. At the instigation of his employers and their broker, the death benefit from his pension fund (in the amount of R227 400) was used to purchase five policies from the insurer in the name of the couple’s youngest son, who was at that stage 14 years old. All the policies incepted on 1 February 1995. The plan was that the first policy would be the “bronpolis” (“source policy”), a voluntary annuity with a ten year term, which would generate enough income to pay the premiums on the other four endowment policies. These four policies would mature on 1 February 2000, 2002, 2004 and 2005 respectively. According to the complainant the broker indicated that her son could expect payment of R1,2 million by the end of the ten years. She did not tell her son about the policies until he was 21.

The insurer paid a monthly amount in respect of the annuity policy into the complainant’s bank account (commencing at R2 630 with a 10% p.a. escalation). The amounts necessary to pay the premiums on the four policies were simultaneously drawn from the account by debit order. The complainant knew that she could make use of the favourable difference between the amounts paid in and the amounts paid out. She stated that she did not know what the amounts of the premiums were but noticed that both the amounts paid in and the amounts paid out in respect of premium payments increased annually.

In 2000 the first endowment policy paid out only the amount of R12 625 plus R565 as late payment interest. The complainant accepted the maturity value, although she stated that it seemed suspiciously low to her. When the second endowment policy matured in 2002 she felt that the maturity value was so pathetic that she refused to accept it. The same happened on the maturity of the third endowment policy in 2004, and these two amounts were simply left with the insurer. In 2005 the last endowment policy matured and her son, who was by then a major, accepted payment of the value in the amount of R342 984.

It was thus the second and third policies that were at issue. The broker had had a protracted correspondence with the insurer over the years regarding various irregularities before he apparently gave up.

The two policies were identical apart from the maturity dates. A 10% p.a. escalation in premiums had been selected. The problem was that the insurer’s systems failed to ensure the deduction of the escalated premiums, as a result of which a constant premium of R200 per month was paid on each policy throughout the respective terms. This resulted in both policies going into arrears and being made paid-up on 1 February 2001. (Premium escalations had also been selected on the other two policies. The difference was that the escalations on the fourth policy were properly executed, and when the insurer itself noticed that escalations had not been executed on the first policy, it caused the premium escalation to be cancelled from inception so that that policy did not fall into arrears.)

In 2001 the insurer offered the following reinstatement options to the broker:

• restore the premium escalations retrospectively with the client paying 50% of the difference in the increased premiums and the insurer the other 50%; or

• cancel the premium escalations and reinstate the policies with a constant premium of R200, as the credit on each policy was sufficient to cover the arrear premiums.

The broker rejected the first option on his client’s behalf on the grounds that the policyholder was not at fault and did not have the money to pay the arrears. He insisted on a complete reinstatement including the annual escalations, with arrears to be paid in full by the insurer. The second option was not pursued. The dispute lingered on, with the now grown-up son also getting involved and the complainant eventually lodging a complaint with us.

A letter from the insurer in 2003 admitted that the fault lay with it. The writer failed to explain why the insurer had unilaterally cancelled the escalation on the first policy (so that it would not fall into arrears), but had done nothing about the other two, which then became paid-up.

In our view the insurer was liable on grounds of breach of contract. It had failed to implement the contractually provided for premium escalations. As a result the annuity policy paid over too little money each month to the two policies and they fell into arrears; they were then made paid-up and the resultant maturity values were much lower than they should have been.

We asked the insurer to reconstruct the values as if the premium escalations had been cancelled from inception, the policies had not been made paid-up (and thus no paid-up costs deductions were made), the credit was used to bring the policies up to date and the policies thereafter continued after the maturity dates with the addition of growth.

Result

The calculations indicated that the policy which matured on 1 February 2002 with a value of R14 868 would on the reconstructed basis have had a maturity value of R23 673, and by March 2006 this would have grown to R38 707. The policy which matured on 1 February 2004 with a maturity value of R15 823 would on the reconstructed basis have had a maturity value of R28 444, and by March 2006 this would have grown to R46 887.

We made a provisional ruling ordering payment of these amounts. No further submissions were received from the insurer, and the ruling became final.

SM
November 2006