CR287 Loans Loan –against policy as security


Loan –against policy as security – interest limit in terms of the
in duplum rule – alternative remedies.


The complainant held a policy with a death value of R1 500 000. He required cash for his business, and in September 2002 he borrowed R41 000 on the policy. In terms of the loan agreement:
o the policy would serve as security for the loan;

o interest would be payable on the loan at the rate of insurer’s policy loan interest rate, which was 14% p.a. – 17% p.a.; and

o if the loan was not repaid, and the loan amount plus interest became more than the cash value of the policy, the policy would be cancelled.

In the period after it was taken out the complainant was unable to make repayments on the loan, and by 2008 the cash surrender value of his policy amounted to
R106 825.00. The compound interest on the loan amounted to R52 292.57, which brought the total loan debt to R93 360.57. On several occasions the complainant contacted the insurer to enquire how long he could postpone repayment of the loan without losing his policy benefits. In doing so he suggested alternatives, such as reducing the death value by the amount of the loan and interest, but the insurer was not agreeable.


The Roman Dutch in duplum rule stipulates that interest stops running when unpaid interest equals the outstanding capital of a loan. The Insurance Act 27 of 1943 had exempted policy loans from the operation of the in duplum rule, but a provision in the new Long Term Insurance Act, which became effective on 1 January 1999, brought an end to the exemption. The insurer had not reprogrammed its systems, however, to take account of the in duplum rule that had thereby become applicable, and had therefore failed to apply the rule to loans advanced after that date.

Because the complainant’s loan had been taken out in 2002, the insurer accepted that it had been legally obliged to apply the in duplum rule to it. It also accepted that an application of the rule would bring down the total debt amount to R82 136.00. This resulted in the writing off by the insurer of interest in an amount of R13 745.26, no further interest being chargeable.

The insurer would have retained the right, however, to part surrender the policy to recover the outstanding debt, but because this would have an impact on the cover amount, and because the insurer conceded that the interest rates had been high, it offered the complainant two options:

1. To reduce the fund account by the interest and capital loan amount and to have the new cover recalculated based on increased risk (because the fund value buffer would reduce). The cover would thereby be reduced from R1 500 000 to
R1 156 000 and the debt would be settled; or

2. To change the loan and interest debt to an interest free loan instead of an interest bearing loan, which would then not affect the cover amount. The debt would still be owed against the policy but with no interest portion.


The matter was settled when the complainant accepted the second option.

October 2009

CR246 Loans Interest limit in terms of in duplum rule


Interest limit in terms of in duplum rule – loan on policy repaid in part – meaning in rule of “amount of unpaid loan”.


A policyholder borrowed R9 000 from the insurer against his policy. The debt was subject to the in duplum rule (as the loan was made after 1 January 1999 when the rule became applicable to loans against insurance policies.)

The policyholder subsequently repaid a lump sum of R5 000 in respect of the loan. The policyholder complained to our office when interest on the outstanding balance exceeded R9 000.

The insurer advised that the R5 000 had been credited to accrued interest in the sum of R1 804,53 and that the remaining R3 195,47 was used to reduce the loan amount to R6 744. The insurer contended that R15 744,38 was the limit to which the debt could grow, in other words the interest could run to R9 000.

We agreed with the insurer that in the absence of an agreement to the contrary, it was entitled to apply the R5 000 to interest before applying it to capital. The in duplum rule states, however, that interest stops running when it reaches the amount of the unpaid loan which means that arrear interest cannot run to an amount greater than the capital amount of the outstanding loan.


In our opinion the balance of the unpaid loan, R6 744,38, would therefore be the new limit for interest accumulation, not the R9 000 of the original loan.

This interpretation was supported by case law. In Commercial Bank of Zimbabwe v MM Builders & Suppliers (PVT) Ltd 1997 (2) SA 285 (ZHC) at 298 Gillespie J stated that:

“… the question is whether the interest accrues until it reaches the amount of the capital originally advanced or whether, in the event of reduction of the capital by partial payments, it accrues only to the amount of the capital outstanding. The all-embracing manner of formulation of the rule from Roman times, usurae non currunt ultra duplum and ultra sortis summam usurae non exiguntur, is not such as to suggest that where payment of part of the capital has been made nevertheless there remains a notional principal sum to which interest may accrue no matter what the true capital outstanding. Where both Nathan and Niekerk’s case have formulated the rule on the basis that the limit beyond which interest ceases to accrue is the unpaid capital, or the amount of capital upon which judgment is obtained, that formulation seems correct.”

We requested the insurer to reconsider its stance. It agreed to do so, and reduced the interest to accord with the balance of the amount of the loan debt, R6 744,38 .

CR227 Loans – Loan on security of policy – complainant alleges interest rate not disclosed


Loans – Loan on security of policy – complainant alleges interest rate not disclosed


1. On 6 April 2001 the complainant made an off-shore investment in a policy in the amount of R400 000. The sale was done through a broker.

2. In the policy it is stated that interest bearing loans were available, not from the insurer but from an associated company of the insurer, against cession of the policy. The policy also further on stated that no nil interest bearing loans were allowed during the term of the policy.

3. R160 000 was advanced by the insurer to the policyholder and the policy was ceded to the company making the loan. On maturity the loan amount, which at that stage had reached R291 562,20, was paid to the lender and the balance was paid to the complainant.

4. The complainant was most unhappy about the reduced amount that he received. He claimed that he had never been told that interest was payable on the loan and he was unhappy because he received only R108 743 on maturity.

5. At first the insurer raised the fact that the issue of the loan should be taken up with the lender, not with them, but they then went on to actually deal with the complaint.

6. The insurer could, unfortunately, not locate a copy of a signed loan agreement but the loan application was found and that stated that the borrower agreed to be bound by the terms and conditions of the loan agreement, that the loan application has accepted, which it was in the circumstances.

7. The complainant made the further point that he had never been advised of the interest rate which applied during the term of the loan. In his view he was taking an advance on his own money. He alleged that had he known about the interest rate he would have obtained money from other sources.

8. We believed the complainant when he said that he did not think that the agreement in respect of the withdrawal of the R160 000 was subject to the payment of the interest.

9. He saw it, rightly or wrongly, as it was put in the summary statement of the policy, that he had elected to make a 100% penalty free withdrawal from the fund. That was the reason why in correspondence he kept harking back to the point that he was simply withdrawing part of his own funds.

10. His view was fortified by the fact that there was no document in the file signed by him in which the rate of interest was disclosed. In fact, the interest rate was prime plus 1,5 or 2% and that rate would endure for the whole of the loan.

11. Although we realised that the insurer was a separate entity from the lender it was also significant that the lender was a wholly owned subsidiary of the insurer. By interposing this separate entity as the lender, the lender did not have to comply with the Policyholder Protection Rules (PPR) which requires disclosure of the interest rate and the amount of the loan on an annual basis to the policyholder borrowing against his own policy.

12. We wrote to the insurer advancing these reasons as well as our unease about the fact that none of the documentation was on file and suggested that it would be an appropriate case to explore the possibility of a settlement that would be fair to both sides. It had become clear during the complaint that the adviser had not advised the complainant about the implications of the loan.

13. The insurer very graciously, albeit after some argument, agreed to not charge interest on the loan for the duration of the loan and offered to pay the complainant a further R131 258,20, which the complainant accepted and the matter was then regarded as resolved.

May 2007

CR144 Loans – loan against a policy –rate of interest left blank in application form


Loans – loan against a policy –rate of interest left blank in application form – no subsequent agreement on rate of interest – validity of contract


The complainant applied for a loan of R2500 by signing a document entitled “Acknowledgement of Interest Bearing Loan on Policy.” One of its terms read: “I will pay interest on the capital at the rate of —% per annum or such other rate as may be determined by [insurer] from time to time.” The space where the initial rate of interest was to be inserted, was left open. The document also did not make any provision for the term of the loan and neither did it provide for any instalments to be paid. The insurer over the years charged interest on the loan (at a rate varying from 6% to 22%) with the result that upon maturity of the policy the complainant owed some R14 000 in interest.

The complainant alleged that before she applied for the loan she had been informed by her broker that the insurer granted interest free loans, at least in certain cases. Since the space for the rate of interest was left open, her contention was that she neither intended nor undertook to pay any interest. She acknowledged that the amount of the loan was paid to her after she submitted the document referred to above, but, according to her, “I was never notified that it would be an interest bearing loan.” She added that she for the first time became aware that the insurer regarded the loan as interest bearing when she received statements to this effect. At that stage she protested and made ongoing enquiries but “no-one could explain” what the position was.

According to the insurer it was not the practice of its predecessor in title (which granted the loan) to grant interest free loans. It accordingly intended the loan to be interest bearing. It maintained that when the loan was granted a letter of confirmation was sent to the insured disclosing all costs and also the interest. However, the example of a confirming letter did not contain particulars of the rate of interest, the term of the loan or any instalments. The insured in any event denied that she ever received such a letter.

The insurer furthermore alleged that its predecessor would have sent out a letter pointing out the consequences of the loan. This letter contained a section which the insured was requested to complete and return. In this section the insured was asked to confirm whether he intended to repay the loan in a lump sum, whether he proposed to repay the loan in instalments, and if so, what the amount of the instalments would be, the starting date of the instalments and what method of payment he preferred, The complainant denied that she received such a letter and the insurer could not produce a copy of a returned form completed by her.


It appeared to us that that the offer for the loan was inchoate in that the place where the initial rate of interest had to be filled in was left blank. There consequently was no agreement on a vital aspect of the proposed contract. Moreover, it could not be said that the term quoted above left the initial rate of interest to be determined by the insurer. It could only change an existing rate of interest. We pointed out that it is a well-known requirement for a contract that the parties must have agreed on all the material terms of the proposed contract and that this requirement had not been fulfilled in the present circumstances. There was furthermore nothing to prove that the original flaw had been cured by subsequent agreement.

Against this background we suggested that the contract of loan was abortive in that full agreement had not been achieved. Indeed, there was neither an actual contract nor a reliance on contract. The insurer could not prove a valid contract for an interest bearing loan and, on the other hand, the complainant could not maintain that she reasonably thought that the insurer granted her an interest free loan. Hence we suggested that the only remedy available to the insurer was a claim based on unjust enrichment.


We made a provisional ruling that interest could not be claimed. The insurer then offered to put the insured in the position in which she would have been had an interest free loan been granted. This meant that the amount of the loan was deducted from the capital invested under the policy with effect from the date of the loan. In the result the amount so deducted could not contribute to the growth of the investment and this detrimentally affected the maturity value of the policy. The complainant accepted the insurer’s offer.

April 06