Posts in category: Refund of Premiums

CR165

Refund of premiums – non-disclosure of material facts – contract rescinded – premiums forfeited in terms of a penalty clause – reduction of penalty –interest on premiums?

Background

The insured applied for several policies including two key man policies. He warranted the truth and accuracy of all information furnished by him and also that he would disclose all material facts prior to the acceptance of the risk. Each contract contained a provision that it may be cancelled should any material fact not be disclosed and that premiums would be forfeited in such a case.

The deceased, in completing the application forms for the insurance policies, omitted to mention that he went for an angiogram because of a nagging pain in his left leg (which he attributed to arthritic changes in his joints). The angiogram revealed atheromatous plaques in his major blood vesels. This was not disclosed in the application forms. The insured died as a result of myocardial infarction.

The insurer requested a medical report from the insured’s nominated doctor. The report included a radiologist’s report in respect of the angiogram. The doctor confirmed that he had been perturbed about the insured’s circulation and therefore had suggested that an angiogram be done. The report further indicated that there were areas of calcification in the blood vessels and that smoking would worsen the condition. At the time of completing the application forms the insured stated that he smoked approximately 20 cigarettes per day.

The insurer rescinded the contracts and declared all premiums forfeited. The insured’s broker referred the matter to our office for assistance.

Assessment

The complainant raised the issue as to whether a non-disclosure by the life assured could be held against the policyholder. In the case of the key man policies the policyholder was the employer of the insured. We did not believe that there was merit in this argument. Where the policyholder allows the life assured to complete the initial health questionnaire, the latter acts, for that particular purpose, as his agent. Any non-disclosure by the life assured, therefore, is tantamount to non-disclosure by the proposed policyholder.

We could not escape a conclusion that the alleged misrepresentation related to material facts. This left us with the question whether the insurer could enforce the clause providing for the forfeiture of the premiums.

We noted that rescission terminates a contractual relationship as from its inception with the result that each party must return what he or she has received under the contract. Thus the insurer had to refund the premiums it received if it were not for the forfeiture clause. We regarded the forfeiture clause as a penalty clause which is governed by the provisions of the Conventional Penalties Act no. 15 of 1962. According to the Act a forfeiture clause is prima facie enforceable but subject to adjustment if the penalty is out of proportion to the prejudice suffered.

The insurer furnished details of the total premiums on all 5 policies, together with the expenses brought about by the conclusion of the contracts, viz the costs relating to commission, distribution, marketing, acquisition and renewal. The total premiums amounted to R470 448.90 and the total costs were R161 111.13. The insurer consequently insisted on enforcing the forfeiture clause only to this limited extent and offered to refund the amount of R309 337.33 to the complainant. We advised the complainant of this offer. His response was that although he agreed with the legal principles, he considered it unreasonable of the insurer not to make provision for interes on the premiums. It after all had the benefit of the premiums for several years without being on risk. Hence the complainant insisted that the insurer should pay interest in an amount of R91 994. We conveyed this information to the insurer who responded that it was not prepared to pay any interest on the premiums. The insurer did however offer to pay an additional amount of R18 109.16 as interest on account of late payment as distinguished from the interest claimed by the complainant.

Result

We reviewed the complainant’s insistence on interest at a meeting of Adjudicators and decided that it was practically impossible to determine to what extent, if at all, the insurer had gained any benefit from its possession of the premiums. Furthermore, we could not find any direct authority for such an order to be made and ruled accordingly.

MFBR
April 2006

Refund of premiums – cancellation of contract by insurer on the grounds of non-disclosure.

Background

The insured took out a life policy but failed to disclose certain material information. The insurer cancelled the contract and invoked a clause providing that the insured forfeited all premiums if the contract is cancelled on the grounds of non-disclosure. The insured paid R4950 towards premiums.

Assessment

We pointed out to the insurer that where a contract is cancelled on the grounds of misrepresentation, each party must restore what he or she has received under the contract because the cancellation has retro-active effect. This implies that an insurer cancelling a policy must in principle restore the premiums received by it. However, the misled insurer may recover compensation for any loss it has suffered as a result of the misrepresentation provided the misrepresentation was either fraudulent or negligent.
In the present case there was a clause in the contract that the premiums would be forfeited in the event of cancellation. This type of provision is frequently found in policies of all kinds and seriously affects the rights of insured especially where premiums have been paid for a considerable number of years in terms of a contract of life insurance. We regard and treat forfeiture clauses of this nature as penal clauses. In terms of the Penalties Act 15 of 1962 a penalty is enforceable but it may be revised if the amount of the penalty is out of proportion to the prejudice suffered. In accordance with the Act the term prejudice bears a wide meaning.
We enquired from the insurer what loss it had suffered in the present circumstances. This does not mean that we saddle the insurer with a full onus of proof requiring it to substantiate a claim for damages—we accept that a penal clause is prima facie enforceable. The insurer explained that a certain part of the premium was allocated to life cover. We did not regard this as part of the insurer’s prejudice since the insured in actual fact enjoyed no life cover. The insurer furthermore mentioned an amount expended on administrative matters (R348) as well as commission paid out (R711). This amounted to R1059. Compared to the amount of premiums paid out, we advised that the amount to be forfeited appeared to be out of proportion to the actual prejudice. The insurer agreed to repay R3890.
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