Posts in category: Reinstatement of Policies or Benefits

CR382

Mistake, lapsing, reliance, reinstatement

Lapsed policy – insurer informing policyholder that if arrears paid the policy would be reinstated, and mistakenly advising that this would be without underwriting if reinstatement took place before a mentioned date – policyholder paying arrears before mentioned date – insurer invoking its mistake – policyholder entitled to enforce contract on basis of reasonable reliance.

Background:

1. The policyholder had a “key person” policy on the life of an employee.  Premiums for October and November 2017 were paid late, after the thirty day grace period. 

2. On 25 November 2017 the insurer sent the policyholder a letter advising that “Your policy has lapsed (been cancelled)”.  The letter also advised that “you may be able to reinstate the policy within 6 months”.  It stated further:

“You may be able to reinstate your policy

If you decide to pay the arrear premiums, the policy may be reinstated depending on [the insurer’s] underwriting requirements at that time.

Please speak to your financial adviser or call us to discuss your options.  You will need to apply for reinstatement within 6 months of the date of this letter”.

3. The policyholder requested that the policy be reinstated.  On 29 November 2017 a letter was sent to the policyholder’s broker (agent for the policyholder) stating as follows:

“The total outstanding amount (December 2017 premium included) is R1 479.76 to reinstate the policy without formalities.  Should the policy be reinstated after the 28^th February 2018, the reinstatement will be subject to underwriting assessment”.

4. A similar letter was sent on 8 December 2017.

5. The policyholder paid the outstanding amount of R1 479.76, which included the premium for December, on 20 December 2017. 

6. The insurer then stated that it made an error in offering to reinstate the policy without formalities.  It insisted that the life insured be underwritten again before it would reinstate the policy.  The policyholder complained to our office.

Discussion:

7. We noted that the policy is silent on the issue of reinstatement.  This means that there is no right to reinstatement flowing from the policy.  An agreement on reinstatement would thus have to be reached between the parties.  There would have to be an offer and an acceptance, to constitute a binding agreement (a contract).

8. The letter sent on 29 November 2017 (paragraph 3 above) appears to be a clear offer by the insurer to reinstate, without formalities, if the total outstanding amount is paid.  The time within which payment must be made for reinstatement without formalities is not made as clear, but the implication is that it should be before 28 February 2018.

9. The policyholder paid the total outstanding amount of R1 479.76, which included the premium for December, on 20 December 2017.  In doing so the policyholder indicated acceptance of the insurer’s offer.

10. The insurer then stated that it made a mistake in offering to reinstate the policy without formalities.

11. This mistake would be regarded as causal, since according to the insurer it intended to contract on different terms, ie on the basis that underwriting would be required.  The mistake is material (essential), since it led to dissensus between the parties on a material term of the contract.

12. An essential mistake in principle means that a contract is invalid (void ab initio), because of the lack of subjective agreement. 

13. Contractual invalidity in this situation may be seen as unfair to the other party, if he reasonably believed that there was a valid contract, and the reasonable reliance approach may then come into play.

14. In accordance with the reasonable reliance approach, it must be asked whether the policyholder (the non-mistaken party) reasonably believed that there was subjective consensus between the parties.  If so, he should be able to enforce the contract despite the insurer’s mistake.  In terms of the reasonable reliance theory, the contract will be valid if the mistaken party (the insurer) created the impression that it subjectively agreed to the contract; and there was reliance on this impression by the non-mistaken party; and the reliance was reasonable.

15. In this case the insurer created the impression that it would reinstate the policy without underwriting/formalities if the arrears were paid before 28 February 2018.  The policyholder relied on this impression, paid the arrears on 20 December 2017, and attempted to pay subsequent premiums.  In our view the policyholder’s reliance in this case was reasonable.  We stated our view that the insurer should be held to the contract.

Result:

16. The insurer reinstated the policy without underwriting.

CR295
Reinstatement of policy

[Cross reference from Lapsing; Pre-existing conditions]

Policy lapsing due to non-payment of premiums when complainant in hospital for diabetes-related amputation – insurer initially refusing to reinstate, but later exercising its discretion in his favour – parties agreeing that arrear premiums be deducted from the sum assured at time of any claim – insurer waiving reliance on diabetes as pre-existing.

Background

1. The complainant had regularly paid premiums on his life policy for ten years. Towards the end of 2006 he was hospitalised and had one of his legs amputated as a consequence of diabetes. He remained in hospital for a number of months recuperating, and was in that time unable to attend to the payment of his premiums. When he was discharged he found that his policy had lapsed because the premiums had not been paid.

2. The policy provided that “If the policy lapses it may be reinstated upon such terms and conditions as [the insurer] may reasonably choose to impose”. The complainant wanted to pay the arrears and have the policy reinstated but the insurer refused, citing unspecified “internal reinstatement rules”. The insurer also pointed out that even if his policy was reinstated, it would have to be a condition that his diabetes be regarded as pre-existing at the date of reinstatement. The insured felt that this would be unfair to him as he would then have no cover should he later die from any cause related to diabetes.

Discussion

3. We asked the insurer whether it would reconsider reinstating the policy if the complainant was made aware of the exclusion and still wished to retain cover. At the same time we wrote to the complainant to ask whether he would still be prepared to continue with the policy with the exclusion operating, in other words knowing that a claim would only be paid if he died because of an accident or some illness unrelated to diabetes.

4. The insurer replied that, contrary to its earlier communications, it had since decided to make an exception in this instance, on the grounds of the complainant’s excellent payment history prior to the lapsing and the long relationship it had had with him. In the light of the value of the sum assured (R8 500) and the complainant’s age the insurer was also prepared to waive the exclusion of diabetes-related claims.

5. We asked the insurer to clarify whether it would reinstate the policy on payment of arrear premiums, or whether it would redate the policy as if it had begun on the date of reinstatement. We asked, if it agreed, that the insurer provide an endorsement to the effect that diabetes, while pre-existing, was not excluded. In response the insurer offered two options: either the complainant could pay the arrears in the amount of R1 200 (which would leave the sum assured intact); or the arrear premiums could be deducted from the sum assured at the time of any claim. There would be no change to the initial effective date of the policy. The insurer was also prepared to issue an endorsement confirming that after reinstatement it would still be on risk for any claim arising directly or indirectly from diabetes.

Result

6. The complainant advised that he preferred the option where the arrear premiums would be deducted at the time of any claim. The insurer sent the complainant a letter confirming this, and stating that it remained on risk for diabetes. We advised him to keep the letter with his policy, and thanked the insurer for its willingness to assist the complainant.

SM
October 2009

CR206

Reinstatement of policy – poor service – policy wrongly terminated – provisions not allowing insurer’s action –.

Background

The complainant wrote to us in June 2005 and advised us that when she was nursing she took out a policy with an insurer via the SA Nursing Association.
The premiums had been paid up to 3 January 2005 when she received a letter from the insurer who advised her that the policy had now expired.
As this policy was a funeral (family) policy and she was in need of the cover she was most surprised to receive this notification from the insurer.
She further pointed out that she had been paying for the policy for 13 years and that she had no idea that the policy would come to an end as there was no expiry date on the certificate which had been issued to her.
The master policy was in fact held by the SA Nursing Association. The insurer, after some delay, responded that the policy, which had cover of R5 000, was pure risk cover and the only benefit which became due was on the death of the life assured prior to the expiry date.
According to the insurer the policy expired at the age of 65 which was the age the complainant had reached on 1 April 2000. They stated that they were prepared to refund all the premiums which had been deducted after the age of 65.

Discussion

We advised the insurer that we needed to see the copy of the conditions on which they relied in order to terminate the policy.
The insurer then wrote back and said that they had scrutinised the policy schedule and it appeared that their previous letter stating that the benefit had expired at the age of 65, was incorrect.

Result

The insurer thereupon advised that they had reinstated the policy at their expense and that they would start deducting the premiums for the complainant’s policy with effect from the next due date.
The insurer also confirmed that the policy would in fact continue until the client died, unless she terminated the policy.
JP
November 2006

CR117

Advances made to third parties against an insurance policy without the knowledge or consent of insured – insured’s demand to insurer to reinstate value of policy as if advances not made

Background

In 1988 an endowment policy contract was entered into on the life of the complainant. The complainant was also the owner of the policy. At that time he was 14 years old. The policy had been contracted to cover a debt between the complainant’s father and a friend and in terms of the agreement the friend was to pay all premiums. During 1996 and 1997 two advances were made to the father of the insured and during 1998 a further advance was made to a trust in which the friend who was paying the premiums was involved. In total the advances were R69 000. On the date of the first advance being made the insured was already a major and had full contractual capacity.

During 2000 he made enquiries to the insurer concerning the policy and was advised of the advances that had been made against the policy. On requesting copies of the applications for the advances he was advised by the insurer that the documentation had disappeared. He requested the insurer to recalculate the value of the policy as if the advances had not been made as the advances, in the opinion of the complainant, had been made without his consent and knowledge. The insurer refused.

The complainant approached our office for relief and following further investigation the insurer averred that if the policy was to be reinstated as if the advances had not been made, the insurer would have to sue whoever had benefited from the advances on the basis of unjustified enrichment. In this particular case they considered the complainant to have been the ultimate beneficiary of the unjustifiable enrichment and so advised him and our office.

Discussion

On the facts as presented we were of the opinion that since the insurer could not provide any evidence as to who had applied for the advances, the insurer was unable to prove that the complainant as the policyowner had consented to the payment of the advances to third parties. We therefore concluded that the insurer had made advances on a policy belonging to the complainant, who at that time had full contractual capacity, to third parties, which had been to the detriment of the complainant. In the circumstances we suggested that the insurer should reinstate the policy as if the three advances had not taken place. Since we had no jurisdiction concerning the question of whether anyone was liable on the basis of unjustifiable enrichment, we made no recommendation.

Result

The insurer accepted our recommendation and the endowment policy of the complainant was reinstated as if the three advances had not taken place.

AS
October 2005