CR223 Interest – complainant cancelled during the cooling-off

by with No Comment Case ReportsInsurable InterestInterest on Late PaymentsPolicyholder Protection RulesTopics & Cases

CR223

Interest – complainant cancelled during the cooling-off

Background

1. The complainant had signed an application form on 6 April 2005 for a “Sinking Fund” policy. It later transpired that someone other than the complainant or his adviser had completed the investment portfolio detail as “Money Market Fund”.

2. What in effect had happened was that the complainant had transferred money from a Money Market Unit Trust into a Sinking Fund policy on 26 May 2005 but only to be invested in the same unit trust again and that he paid a hefty price for the privilege to do so. In fact a commission of R30 000 on an investment of R900 000.

3. A meeting was held between the complainant and the insurer on 6 June 2005 at which the complainant declared that he withdrew from the investment. At that meeting, according to the complainant, the insurer agreed to refund the capital without costs plus interest until the capital was reinvested in his Money Market Unit Trust account. Unfortunately the rate of interest was not at the same time settled.

4. The complainant claimed interest from 6 June (the date of the meeting when he decided to withdraw from the investment) until 28 June 2005 when the capital sum of R900 000 was paid back into his unit trust account.

5. The complainant wanted interest at the ruling rate applicable at the time. After our intervention the insurer paid interest from the period 27 May 2005 to 27 June 2005. They paid interest at the rate that actually applied to the policy. This amounted to R4 265 and after the four fund taxation rate of 30% was applied to it, it amounted to R2 986,19.

6. The complainant argued that the insurer was not allowed to take tax into account, they should have allocated the gross amount of growth to his account. The insurer countered that the interest was calculated as the actual growth of the units as earned under the policy, which had been the factual situation until the complainant cancelled the policy. They had to pay income tax under the four fund taxation basis and therefore felt that the complainant should bear this item of cost.

7. The Policyholder Protection Rules (PPR) do not provide for interest to be paid where a policy is cancelled because of the cooling-off provision, unless the time requirement of the PPR are breached. In this case the insurer agreed to pay interest but the basis of the interest for payment was not actually negotiated.

8. The insurer’s basis seemed reasonable to this office in the absence of an agreed rate, as this was the interest that the insurer would actually have earned on the money. It was, therefore, the amount of growth or “enrichment” in the insurer’s hands and seemed fair in the circumstances.

9. We, therefore, were of the opinion that we could not uphold the complainant’s complaint for additional interest.

JP
May 2007

CR187 Insurable interest – “spouse”

by with No Comment Case ReportsInsurable InterestTopics & Cases

Insurable interest – “spouse” – divorce – whether cover in respect of a “spouse” terminates, on the basis of absence of insurable interest, when that person no longer meets the requirements of a spouse as defined in the contract.

Background
The complainant was a participant/member of a group life scheme in terms of which he applied for and was granted cover on his own life, that of his spouse and his children.

The definition of “spouse” in terms of the contract read:

”spouse means the legal husband/wife of the member, or such other person residing with the member who would normally be regarded by the community as the husband/wife of the member, provided the spouse is the person indicated in the prescribed application form.”

The complainant and his spouse were divorced after the commencement of the contract. The custody of their children was awarded to the member’s spouse and he duly paid maintenance for them. When she died, he felt obliged to cover the cost of her funeral.

The insurer declined a death claim in respect of her death on the grounds that cover, in respect of the spouse, ceased on divorce. According to the insurer the divorce terminated any insurable interest that had existed between the member and his former spouse. In the absence of an insurable interest, so it was contended, the insurer was no longer obligated to pay the promised benefits.

Discussion

Insurable interest is a wide subject. It is dealt with in more detail on our website under “Papers and Presentations”. There is a difference, as far as insurable interest is concerned, between indemnity and non-indemnity insurance and the times when such an interest needs to exist.

The purpose of indemnity insurance is to compensate the insured for loss or damage. It follows that if at the time the claim is instituted the insured has not suffered any loss or damage, the justification for compensation is lacking. This would be the case when the owner of a motor vehicle insures that vehicle but subsequently sells it and no longer has an interest in the vehicle at the time it is damaged in an accident.

Life insurance is non-indemnity insurance.

The requirement of an insurable interest in respect of life insurance has its origin in the English law where it became a legal requirement in order to avoid wagering on lives. It is generally accepted that while this interest is a requirement for the validity of the contract at its conclusion, it does not have to exist at the time when the event insured against occurs, unless of course the contract so provides, which in this instance it did not do.

On the strength of these considerations the argument of the insurer could not be supported. The member had assumed liability for the funeral costs of his deceased ex-spouse which in any event confirmed the existence of an insurable interest at the time of her death.

Result

The insurer accepted our decision and paid the claim.

EdB
November 2006

CR136 Insured life wrongly described as spouse of principal insured

by with No Comment Case ReportsInsurable InterestTopics & Cases

CR136
Funeral insurance – insured life wrongly described as spouse of principal insured – agency – vicarious liability of insurer for agent’s misrepresentation

Background

The complainant was the nominated beneficiary and premium payer in terms of a funeral policy. His wife was the policyholder and principal insured but he was actually the driving force during the pre-contractual negotiations. The policy also covered the life of another woman as a second life insured. This woman had been incorrectly described in the application form as the “spouse” of the principal insured whereas she actually was the cousin of the beneficiary. The type of policy under discussion covered spouses for a certain sum at no additional premium. In the circumstances no premium was charged in respect of the second life insured.

The complainant alleged that the incorrect description of the second life insured was done on the advice of an official at the bank who marketed the insurance. The complainant and his wife simply followed the advice of the bank official as they had relied on her experience and knowledge of insurance matters. The good faith of the complainant and his wife was not challenged.

On the death of the second life insured, the insurer rejected the complainant’s claim on the grounds of the mis-description. The insurer admitted that there was an arrangement between itself and the bank for the marketing of its policies but it denied any responsibility for the bad advice given by the bank official.

Discussion

The mis-description of the proposer’s relationship to the second life insured amounted to misrepresentation. It affected the terms of the policy and was clearly material. In principle, the ordinary remedies for misrepresentation would accordingly have been available to the insurer.

We suggested to the insurer that the contract regulating the relationship between the insurer and the bank could be interpreted as a joint venture of some sort. It could probably not be described as a partnership since a partnership would run contrary to insurance legislation but it was not necessary to find a precise niche for it. The insurer’s role was to underwrite the scheme whereas the bank’s task was to inform and advise clients. It had to explain the funeral cover plan to customers and it also had to assist customers with the completion of the application form. An important aspect of the bank’s duties was that it had to negotiate and conclude individual transactions with customers on behalf of the insurer. Furthermore, it had to adhere to the sales and servicing procedures prescribed by the insurer.

Against this background there was little doubt that the bank had been mandated and authorised by the insurer to inform and guide customers who applied for insurance with the insurer. The bank was not in the position of an independent broker. We further suggested to the insurer that at the time that the bad advice was given by the bank official he was acting within the scope of the bank’s mandate.

It is trite law that a principal is liable for misrepresentation by his mandatory or agent acting within the scope of his or her authority (see Ravenne Plantations v Estate Abrey 1928 AD 143). Hence, we advised the insurer that it must take responsibility for the incorrect information that was given by the bank’s official.

The complainant took part in the negotiations as premium payer and beneficiary. As a result of the official’s incorrect information, the contract was structured in such a way that it cost the complainant the loss of the benefit he would have had had his cousin been properly covered as an extended family member. For this loss the complainant had to be compensated.

Result

Taking into consideration that the premium rate for an extended family member required a premium of R3.85 and since the minimum amount of cover that an insured life may carry in the circumstances was R1 000 the insurer undertook to pay that amount less 12 premiums of R3.85 each. A total amount of R953.80 was paid by the insurer to the beneficiary.

MFBR
April 2006