CR358 Universal Life policy

Universal Life policy

Universal policy providing whole life cover with an investment component – guarantee date – review by insurer after guarantee date – whether insurer entitled to put policyholder to options for future: higher premiums for same cover, or same premiums for reduced cover


1. The complainant took out a so-called universal life policy, providing whole life cover with an investment component, in October 1993. The cover and premiums were guaranteed for 18 years, after which the insurer was entitled to review the policy.

2. The complainant was unhappy with the fact that the insurer reviewed his policy after the guarantee date and advised him that he had the option either to pay a higher premium for the same cover in future, or to keep his premium the same but decrease his cover. He maintained that his policy did not authorise the insurer to do this unilaterally. He also maintained that the policy did not provide “in clear and unambiguous terms, or even by implication, that [the insurer’s] obligation to pay the death benefit would be reduced after the date of guarantee”. In fact he argued that the terms of the policy were void for vagueness and therefore unenforceable. Furthermore he alleged that the insurer misrepresented the meaning and effect of the policy to him in order to induce him to sign the option form electing one of the two options.


3. In our view the first enquiry was whether the policy documentation explained how the policy works – including the fact that reviews would take place, and what the consequences might be – in a manner which was reasonably prominent, clear and could be easily understood. Thereafter the meaning to be attributed to the specific clause in the policy dealing with reviews must be examined to ascertain whether the insurer’s action was authorised by the policy.

4. To answer the first question one must look at the schema as a whole, and all the documentation provided at the commencement of the policy.

5. The signed application (proposal for insurance) would constitute part of the contract, but this did not contain any information relevant to this dispute. There was also a welcome letter, a policy schedule, and a Description and Provisions document, which the welcome letter confirmed was also part of the contract. A Statement of Benefits document was also provided; whether this could be considered part of the contract was moot, but in our view this document was relevant either way as it was information provided to the complainant at the commencement, and it could not be ignored.

6. The schedule indicated that the date of commencement was 1 October 1993, and the “Date of guarantee: 1 October 2011”. The cover amount (R468 000) and monthly premium (R300) were set out. Under “Benefits” the general statement was made that “the benefits set out hereunder must be read in conjunction with and are subject to DESCRIPTION AND PROVISIONS and other annexures (if any)”. The Death Benefit was then described as follows:

“At the death of the assured, the larger of the
– Balance of the Investment Account, and the
– Cover Amount
shall be payable.
The functioning of the Investment Account is described in paragraph 1 of DESCRIPTION AND PROVISIONS
The cover amount shall be R468 000”.

7. The Statement of Benefits provided illustrative death and early termination benefits at assumed bonus rates of 12% and 15%. The provisos and assumptions on which these illustrative benefits were based, were given. It was stated that actual benefits would be determined by actual bonus rates, and that inflation would influence the purchasing power of the benefits and premiums in future. It was then stated:

“Provided that premiums are paid regularly, [the insurer] guarantees that the cover amount will be maintained up to and including the date of guarantee.

In some circumstances (eg if high cover is maintained over a period of continuing insufficient investment yields) the cash value of the policy may decrease in such a way that an increase in premium may be necessary to maintain the benefits after the date of guarantee”.

8. The Description and Provisions provided under “Investment Account” that premiums (less policy fee and administrations costs) were invested in an Investment Account. Investment bonuses were added to this. The provision then stated:

“[The insurer] shall recover the annual cost of life cover … from the Investment Account”.

9. The “Cash Value” provision provided that the policy might on certain conditions be surrendered for a cash value as determined by the insurer, and that the cash value might be less than the balance of the investment account at that stage. (The cash value was thus synonymous with a so-called “surrender value”; on surrender a policyholder was effectively paid out the investment value less outstanding expenses as determined by the insurer.)

10. The “Lapse” provision, read with the “Automatic Non-Forfeiture” provision, provided for three scenarios in which the policy would lapse. The first was that if premiums were not paid and there was no cash value the policy lapses. The second was that if premiums were not paid and there was a cash value, the insurer may convert the policy into a paid up policy with altered benefits, or place the unpaid premiums and interest as a debt against the cash value – the policy would then continue (automatic non-forfeiture) as long as the cash value exceeded the debt, but would lapse when the debt exceeded the cash value. The third scenario which would cause the policy to lapse was as follows:

“if the cash value is exhausted as a result of the recovery of the cost of cover from the Investment Account (Please note: The policy shall not lapse before the date of guarantee as a result of this subclause if all premiums are paid regularly)”.

11. The “Date of Guarantee” provision explained the scope of the guarantee:

“If premiums are paid as indicated, the benefits provided for in the SCHEDULE … shall be payable at least until the date of guarantee”.

12. The “Reviews” provision stated as follows:

“The special nature of this contract could, in changing economic conditions, cause future premium payments to be insufficient to maintain the benefits in full after the date of guarantee.

[The insurer] therefore undertakes to review the level of benefits and premiums on the policy anniversary after the age of 45 and every subsequent 5 years, but not within 5 years of the date of commencement, and to inform the policyholder should any adjustments be necessary. Between these dates, reviews may also be carried out if [the insurer] deems it in the policyholder’s interest”.

13. In our view the information provided in the policy and other documents, taken together, was reasonably sufficient, and of sufficient clarity, to inform the policyholder that:

● his premiums were invested in an investment account, to which investment growth (bonuses) was added;

● the insurer recovers the cost of life cover from the investment account;

● there were thus two components to the policy, life cover and investment;

● the cash value was related to the investment account value but might be less than the Investment Account value at any stage;

● the insurer guaranteed the benefits (the cover amount) and the premiums for 18 years, from the commencement date of 1 October 1993 until the date of guarantee being 1 October 2011;

● after the guarantee date, the insurer would review the level of benefits and premiums every 5 years, and if changing economic conditions/ insufficient investment yields caused premiums to be insufficient to maintain the benefits in full, the insurer would inform him of any necessary adjustments; an increase in premium may be necessary to maintain the benefits;

● his policy would lapse if premiums were not paid and there was not sufficient cash value to keep the policy in force (unpaid premiums are offset as a debt against the cash value until the debt exceeds the cash value);

● the policy could also lapse if the cash value was exhausted as a result of the recovery of the cost of cover from the investment account, but not before the date of guarantee. The policyholder was thus put on notice that after the guarantee date there was the possibility of the policy lapsing if any adjustments deemed necessary were not implemented.

14. The complainant had made the point that “cost of cover” was not defined, nor was it explained anywhere in the policy documents that the cost of cover increases with the age of the assured, or how it was calculated. He maintained that on the face of it the cost of cover was fixed for the duration of the contract.

15. We agreed that “cost of cover” was not fully explained, but in our view it could be reasonably understood from the explication of the policy as a whole that it was the cost for the insurer of providing the cover amount (R468 000).

16. This must be determined actuarially by the insurer, and is based on an actuarial assessment of the risk, and the cost which the insurer must recover to be able to offer a particular cover amount (sum assured). If this had been a pure risk (no investment component) policy, it would be the risk premium.

17. It is a fact that the cost of cover increases as an insured grows older (with the increased risk of death). An insurer will not provide life cover to a 75-year old for the same premium as a 30-year old. The premium will be higher for the 75-year old.

18. The basic idea of the type of policy we were dealing with in this case, with a life cover and an investment component (sometimes called a universal policy), is that the overall premium remains level, for a guaranteed period. The premiums are invested, and the insurer takes the cost of life cover (less when the insured person is younger, more when he is older) out of the investment account. The cost of cover is calculated annually, and in doing this calculation the actuary also takes account of the value of the investment account. If the value has grown well, this may offset the increase in the cost of cover to some extent, as it reduces the amount at risk (ie the cover amount minus the investment account value). The expectation is that the growth in the investment account should “subsidise” the cost of life cover, to the benefit of the policyholder, but of course the extent to which this happens is governed by the actual investment returns achieved, and this cannot be accurately predicted over a long term.

19. It would be difficult to explain the above in detail in the policy documents, but the financial adviser/broker who assists with purchasing the policy should provide an explanation, or the prospective policyholder can direct questions to the insurer.

20. Nevertheless, as stated, in our view the policy documentation had set out sufficient explanation of its working, and sufficient clarity of the terms and conditions on which the insurer accepted the policyholder’s application for insurance.

21. In terms of the “Reviews” provision the insurer had sent the complainant an option letter in January 2013.

22. The option letter exhorted him to give careful consideration to the information in the letter and to respond by 1 June 2013. The information was set out as follows:

“The premiums that you pay are invested in an ‘Investment Account’ and the cost of cover is deducted from this account. This cost of cover increases as you get older and will reduce the value of your investment account over time.

Your policy contract specifies that the policy shall lapse if the cash value in the Investment Account is depleted as a result of the recovery of the cost of cover.

We expect your policy’s investment account to be depleted in the future. Once this occurs and the guarantee period has expired, the policy should lapse.

[The insurer] will not lapse your policy
It is our pleasure to inform you that [the insurer] will not lapse your policy. We wish to provide you with a once-off opportunity to amend your policy in order to maintain your cover for the foreseeable future.

You can exercise one of the following options according to your specific needs:

Option 1 Increase your premium by 5% per year, starting on 1 October 2013. This increase will ensure that you maintain your current cover for the foreseeable future…
Option 2 Decrease your cover by 5% per year, starting on 1 October 2013. In this case your current premium will remain unchanged.

[A table set out the effect of these adjustments over 15 years]

What will happen if you do not exercise any of the two options?

Once your Investment Account is depleted and the guarantee has expired your cover will be adjusted once-off as if you had selected the 5% cover decrease starting on 1 October 2013, similar to Option 2.

From that date onward we will also initiate an annual cover decrease which can be up to 15% per annum, depending on the number of years since our offer expiry date.

It is important to note that in this scenario you can lose a significant portion of your risk cover.”

23. The key to evaluating the complaint lay in an interpretation of the “Reviews” provision (see par 12 above), and an assessment as to whether the action the insurer took in terms of that provision (offering the complainant the options in the option letter) was authorised by it.

24. The policy made it clear that the benefits provided for in the Schedule would be payable at least until the date of guarantee. The “Reviews” provision dealt with what happens after the date of guarantee, in the event that premiums are insufficient to maintain the benefits in full thereafter. The clause expressly provided that the insurer would review the level of benefits and premiums (at the intervals stated), and would “inform the policyholder should any adjustments be necessary”. It was the meaning of these words in particular which was in issue.

25. The complainant contended that the words merely indicated one of the three jurisdictional preconditions which must be satisfied (the first two being the conducting of reviews, and the finding that changed economic conditions have caused premium payments to be insufficient to maintain the benefits in full after the guarantee date). In his view the “Reviews” provision did not apply if all three facts/preconditions were not established. He argued further that the clause was in fact silent as to what would happen once the insurer had informed the policyholder that adjustments were necessary. He assumed that the policyholder and insurer must therefore negotiate, but he then raised the further difficulty that the policy was silent as to what would happen if the parties could not reach agreement: “there is no mechanism for resolving a deadlock and determining a new benefit or a new premium”. He concluded that the “Reviews” provision therefore did not entitle the insurer to put to him the options set out in the letters.

26. In our view this analysis was flawed.

27. It could clearly be inferred from the 2013 option letter (even if it did not say so explicitly) that the insurer had conducted a review in terms of the “Reviews” provision, the guarantee date of 1 October 2011 having passed. It is evident that (because of changing economic conditions resulting in lower than possibly anticipated investment growth) the review indicated an expectation that the investment account would be depleted and that the policy would lapse unless adjustments were made to maintain the cover.

28. Understood in the context of the policy as a whole and the surrounding circumstances, the words “inform the policyholder should any adjustments be necessary”, must be taken to mean that the insurer may unilaterally decide what, if any, adjustments to premiums and benefits are necessary, and that the insurer will inform the policyholder of the implementation thereof. The policyholder is warned in the “Reviews” provision that changing economic conditions could cause future premium payments to be insufficient to maintain the benefits in full after the guarantee date. It is made clear that the insurer guarantees that the premium will not increase, neither will the benefits reduce, before the guarantee date; the understood corollary of this must be that after that date the insurer may increase the premiums or reduce the benefits, as it deems necessary. It was thus in our view a tacit term that the insurer had the authority to make the adjustments.

29. The fact that the insurer chose to give its policyholders the option as to whether it should increase their premiums for the same cover benefit, or hold the premiums constant for reduced cover, did not detract from the fact that the insurer had deemed one or other adjustment necessary, as it was entitled to do. Thus if neither option was chosen by the policyholder the insurer was entitled to and would, as it informed the policyholder in advance, effectively implement a variation of the second option (reduce the cover). This must be so, as the investment account value was in the insurer’s estimation not sufficient to pay for the increased cost of the same level of cover if the premium remained the same – and an adjustment was necessary.

30. In our view the option letter was in some parts not clearly expressed and might be confusing. It appeared that the course the insurer would follow if no option was selected was not that similar to option 2 as there would be a faster decline in cover (there was mention of a once-off 5% cover decrease, and thereafter an annual cover decrease “which can be up to 15%”), and the chance that in this scenario “you can lose a significant portion of your risk cover”. This was not entirely clear (but see paragraph 37 below).

31. However, the overall message of the letter was clear, and it was in line with the scheme of the policy. On a common sense reading, the insurer was informing its policyholder that the increasing cost of cover was leading to the ongoing reduction of the investment account, and of the adjustments that would therefore be necessary to avoid lapsing. The reference to the policy lapsing if the investment value was depleted (ie exhausted) in the future was a reference to the policy clause which provided that the policy would lapse “if the cash value is exhausted as a result of the recovery of the cost of cover from the Investment Account”. After 18 years of paying the same premium every month, the investment account value was simply not sufficient to support the increasing cost of the same level of cover (the full benefit cover amount).

32. To prevent the cash value being exhausted and the policy lapsing, the insurer provided two options for the necessary adjustments. The options were clearly set out. If no option was selected there was a third default action which the insurer would take. This also avoided lapsing by reducing the cover, but would not be as favourable as one of the two options presented for selection. The policyholder was invited to contact his financial adviser or the insurer if he needed help to exercise his option.

33. In our view there was no reason to suppose that the insurer’s statements in the option letter could not be relied on, ie that lapse would ensue if the policy continued without adjustment, but as the complainant had queried this we made certain enquiries from the insurer to test this.

34. We asked the insurer to provide:

• Information on the value of the investment account and the cash value, as at the date of the review and as at the current date.

• Information on the actual cost of cover recovered from the investment account for each year of the policy.

• Figures and an explanation as to why the scenario which would occur if neither option was accepted would be different to the scenario in option 2.

• Projections on which the expectation of lapse in the future was based, and the date on which this was expected to happen, if neither of the two options were offered (and no adjustment made).

35. In response to the first question, the insurer indicated that the review date was 31 July 2012. The surrender (cash) value at that date was R5 940.84, and the fund (investment) value was R9 431.06. By the current date (values for 1 April 2014 were given), the cash value was R11.33, and the investment value was R732.37. It was evident that the policy would be in imminent danger of lapsing if there was no adjustment at all (see paragraph 38 below).

36. In response to the second question, the insurer provided a fund build-up spreadsheet, indicating for each year of the policy’s life the investment (fund) value at the start of the year, the investment amount added during the year, the actual cost of life cover recovered from the investment account for each year, the investment growth added during the year, and the investment (fund) value at the end of the year. This clearly showed the actual cost of cover steadily increasing over the years, from R1 403.87 in 1993 when the policy commenced to R8 364.59 in 2012. The build-up spreadsheet also showed the fund value gradually increasing from 1993 to 2006, and thereafter decreasing each year as the increased cost of cover exceeded the growth in the investment account (fund value). (It was apparent that if economic circumstances had been more favourable than they in fact were, the favourable position of an increasing investment account could have continued for longer, but this was not the case here.)

37. In response to the third question, the insurer stated that if neither option was accepted, the cover would be decreased from the actual date the investment (fund) value became negative. This was projected (in January 2013 when the first option letter was sent) to be a year after the effective option date of 1 October 2013. Since in this scenario the decrease in cover would not have commenced at the effective option
date but only a year later, the first decrease would be at 5% but thereafter greater decreases of 7% or possibly more would be made (presumably to make up for the “lost” year).

38. In response to the fourth question, the insurer indicated that in fact the “expected crash date” if no option was accepted and no adjustment made was 1 June 2014. This was based on the actual fund value on 1 April 2014 being R732.37 (see paragraph 35 above), and the projected fund value for 1 May 2014 being R363.44, with the projected fund value by 1 June 2014 being negative at –R23.31.

39. In our opinion the insurer’s answers confirmed the import of the option letter, ie that increasing costs of cover were depleting the investment account and that adjustments would therefore be necessary, otherwise the policy would lapse. The complainant was afforded notice of the necessary adjustments more than a year before the “expected crash date”, and given options to select from according to his circumstances.

40. Since the insurer was in our view entitled in terms of the policy (see paragraph 28 and 29, above) to put to the complainant the options for the necessary adjustments, and to make adjustments unilaterally if he did not elect one of the options, there could be no question of the insurer having misrepresented the meaning and effect of the policy in order to induce him to sign the option form in which he agreed to pay the increased premiums from 1 October 2013. As the figures provided in answer to our questions demonstrated, no misrepresentations were made.


41. After setting out the above reasoning, we made a provisional ruling to the effect that the insurer’s position was justified.

42. The complainant accepted our provisional ruling. Subsequently he advised the insurer that he accepted that he was bound by the terms of the option he had signed, and that the insurer could continue to recover the increased premiums.

September 2014

CR292 Onus of proof Beneficiary having killed the life assured

Onus of proof

Beneficiary having killed the life assured – insurer raising defence that no-one can benefit from his or her own unlawful act – onus on insurer to prove that the killing was unlawful– State not proceeding with a prosecution – insurer not allowed to wait indefinitely.


The life assured was covered under a funeral plan underwritten by a life assurer but administered by a bank. He died of what was described in the death certificate as unnatural causes, and his wife, the complainant, was the beneficiary in his estate.

According to a police report the deceased had died of a stabwound to his chest, apparently inflicted by the complainant during the course of an argument between them. The bank, as administrators of the scheme, denied liability, relying on the well-established legal principle that no one may derive a benefit from his or her own unlawful act.


To succeed with such a defence the insurer would bear the onus. It would have to prove that the complainant had been unlawfully responsible for the deceased’s death, in other words that the killing was carried out either intentionally, which would amount to murder, or negligently, which would amount to culpable homicide, and in any event that she was not acting in self defence.

It was established that following the stabbing incident certain charges, presumably murder or culpable homicide, had been brought against the complainant. These were subsequently withdrawn but the police had indicated that she may well be charged again.

The problem was that it was more than a year after the deceased’s death that the complainant lodged her claim, and that further time passed thereafter because nothing further seemed to be happening about recharging the complainant.

While a conviction would have put an end to the issue, the proof of an unlawful killing did not of course require a conviction in a criminal court. For this reason there was nothing that precluded the office from proceeding to deal with the claim, although it felt that if the insurer wished to rely on the outcome of a prosecution it should be allowed a reasonable time to await developments.

Because the question whether the complainant would be charged again remained unanswered, however, and because so much time had already gone by, the office informed the insurer that matters could not be left unresolved indefinitely. If the insurer wanted the office to wait for a criminal charge to be prosecuted, it was for them to show that the complainant would still be charged, what the charge would be, and when the trial was expected to commence. If they could not supply this information they should at least ask the prosecuting authority to do so, and if a delay was expected the prosecuting authority should also be requested to explain the reason for it.

It was stressed that the onus was on the insurer to provide this information and if it was not submitted within a reasonable time, which in the absence of the abovesaid information had already elapsed, the office would have to deal with the claim on the material before it.

Although the bank did not agree, the insurer did. The insurer accepted that the claim on the policy could not be delayed indefinitely, and that they would have to consider on the evidence in their possession whether or not their defence was sustainable.


After further discussion the insurer decided to admit liability notwithstanding the views of the bank concerned.

October 2009

CR274 Beneficiary nominations Joint life policy – spouses being joint policyholders

Beneficiary nominations

Joint life policy – spouses being joint policyholders – legal position when no beneficiary nominated and one of the policyholders dies.


1. In 1996 the complainant, Mr B, and his wife, Mrs B, took out a joint life policy to cover their bond, the sum assured being R110 000 in 1996. They were both proposers and both were lives assured under the policy. There was no beneficiary nomination, the policy simply stating that “The initial sum of R110 000 or the balance of the savings element, if greater, will be payable on the death of the first dying of the lives assured”. In 2005 the couple were divorced, in July 2006 the bond was settled, and in October 2006 Mrs B died.

2. Mrs B’s estate submitted a claim and the insurer paid the full proceeds to the estate. The complainant contended, however, that as premium payer and joint policyholder the proceeds of the policy should have been paid to him. He complained to the insurer and subsequently to our office.


3. The insurer then obtained an opinion from a re-insurer, which expressed the view that the proceeds were indeed payable to the complainant. The re-insurer reasoned that it was normal business practice for joint life policies not to have any beneficiary nominated, as the intention/purpose behind such policies is to pay out to a surviving spouse/partner.

4. Attorneys for the estate on the other hand argued that the policy fell into the wife’s estate in its entirety, on the grounds of a deeming provision in the Estate Duty Act for purposes of calculating estate duty payable. The attorneys also argued that as the parties were divorced by the date of the wife’s death, there was no longer any spouse/partner.

5. The insurer obtained an outside legal opinion. The view expressed therein was that the deeming provision in the Estate Duty Act does not deal with the question as to who is entitled to the proceeds of a joint life policy. The full proceeds of the policy would be subject to estate duty (as deemed property of the estate) but this would be payable by the survivor/beneficiary. The opinion was to the effect that the right to the proceeds of the policy vests in both of the policyholders. On the death of the first-dying, and in the absence of a named beneficiary, the proceeds become payable to the owners in equal shares.

6. Faced with all these legal opinions the insurer asked our office to rule on the question.

7. Our view was that the correct position was that as the complainant and his wife were joint owners of the policy, and in the absence of a named beneficiary or any other clause to the contrary, the proceeds on the death of the first-dying were payable to the owners in equal shares. We asked the insurer to check whether there might be something in the application, being part of the contract, expressing a different intention, in which case we would have to reconsider the position. The application could, however, not be traced.


8. Our office then made a provisional ruling that half of the proceeds must be paid to the complainant and the other half to the estate. The complainant objected, questioning on what basis our office sought to overrule the practice referred to by the insurer for joint life policies to pay the entire amount to the surviving spouse. It was explained that it did not depend on an insurer’s practice, but on the law, and that it was trite law that each joint owner is entitled to 50% of the proceeds. The ruling was therefore made final. The insurer recovered 50% of the proceeds from the estate, which it paid to the complainant.

October 2009

CR61 Offer to replace existing Life assurance policies by new policies


Offer to replace existing Life assurance policies by new policies – intention to terminate two original policies but premiums still collected – allegation that the two original policies were still in existence


The complainant represented both a close corporation which took out a life policy on the life of their key man, the deceased, as well as the executor in the estate of the deceased which had an interest in a further life policy on the life of the deceased. In November 1997 the deceased was insured in terms of the aforesaid two policies with insurer A. Insurer A was subsequently taken over by insurer B which offered policy owners of insurer A an opportunity to exchange their existing policies for new policies with insurer B at lower premiums. Both policyholders availed themselves of this opportunity and on 28 September 2000 they completed life application forms with insurer B. In this application form the question was asked whether the application is to replace existing insurance and an affirmative answer was reflected in the appropriate space. On 2 October 2000 both policyholders completed a “Replacement Policy Advice Record” (RPAR) form with insurer B. This form ostensibly informed an insured of the disadvantages of replacing or changing a life policy. Its purpose presumably was to protect the financial adviser who recommended the replacement and was signed by both the policyholder and the adviser. Subsequently the application forms as well as the RPAR forms were forwarded to insurer B which issued new life policies as requested.

The original policies with insurer A were not formally cancelled and no surrender values were paid out to the insured. Furthermore insurer B continued collecting premiums and also issued annual benefit statements in regard to the original policies.

In 2002 insurer C took over insurer B. Insurer C continued to collect premiums and it also issued annual benefit statements as if the original policies were still in existence.

The policyholders were initially not aware of the fact that premiums were still being collected but became aware of that fact during or about April 2003. The complainant alleged that it appeared to the policyholders that both insurer B and insurer C were treating the original policies as not having being terminated. Since the insured at that time felt a need for further insurance on his life he decided to continue paying the premiums under the close corporation’s policy on insuring their key man. No formal notice of this decision had been given to the insurer. The complainant expressed his view that the deceased would have considered further insurance at this stage if insurer B or insurer C had indicated that the original policies could not be continued. In August 2003 insurer C on request confirmed that the original policies were still in force but when the insured died in 2004 insurer C took the position that they were not liable under the original policies. They maintained that the policies had in fact been terminated in 2000 and that the subsequent collection of premiums was to the knowledge of the policyholders a mistake. They tendered the surrender value of the policies as at 1 October 2000 as well as all premiums subsequently paid. They also offered to pay interest. The claims under the new policies were fully met.


It was common cause that all parties intended to terminate the original policies and to replace them with policies issued by insurer B. In order to resolve the dispute it is important to obtain clarity about the nature of the transactions involved. Two possibilities presented themselves:
1. the parties could have intended a novation i.e. an agreement whereby one obligation is extinguished and replaced by a new obligation. In the present context this would have entailed a new policy by insurer B which by its express or tacit terms would have terminated and replaced the policy of insurer A.
2. the parties could have intended to enter into two separate transactions namely one to surrender the existing policies of insurer A and the other to issue the new policies of insurer B. On surrendering the existing policy with insurer A the surrender value would have had to be paid to the policyholder concerned.

On the basis of the documentation submitted and the probabilities, our office considered that the parties in fact intended a novation of the original policies issued by insurer A and their substitution by the new policies issued by insurer B. This conclusion was based on the fact that both parties concerned intended to replace the original policies of insurer A. Our view was that the original policies were accordingly terminated by mutual agreement, if not expressly then by conduct.

The complainant had also argued that the insurer’s subsequent conduct of continuing to accept premiums and to issue annual benefit statements had created the impression that the original contracts issued by insurer A were reinstated and revived and as such continued to exist alongside the new policies issued by insurer B. Our office concluded that the policyholders’ erroneous impression was not reasonable for the following reasons: –

1. the onus to establish their position rested on the policyholders and in our view the onus had not been discharged on the probabilities;
2. since the starting point was that the original policies of insurer A had been replaced by the new policies of insurer B that left no room for the impression that the old policies would continue to exist in addition to the new ones. The policyholders knew that the old policies had been terminated and replaced and the conduct of the insurer was probably due to serious errors in their systems, a fact which had been conceded by the insurer. In our view the policyholders should have explored with the insurer in greater detail whether the original policies with insurer A had in fact been cancelled and whether the subsequent conduct of the insurer was not in fact due to a mistake. That question was never asked.


There can be little doubt that the policyholders were significantly inconvenienced by the admitted error made by insurers B and C and we consequently decided, in terms of rule 3.2.5, to make a compensatory award of the maximum amount of R15 000. In respect of each disputed policy this office made a provisional ruling that the insurer was to pay to the complainant the following: –

1. Payment of the surrender value as at 1 October 2000;
2. Interest on the said amount at the rate of 15.5% per annum;
3. Repayment of all premiums received after the termination of the policy;
4. Interest in respect of each such premium at the rate of 15.5% per annum;
5. R7 500 by way of a compensatory award.

The insurer accepted the provisional ruling. The complainant, however rejected the finding and stated that it proposed to institute legal proceedings.

Oktober 2005