CR273 Surrender – illustrative value grossly overstated by insurer

CR273

Surrender – illustrative value grossly overstated by insurer – policyholder relying thereon to his prejudice – held that it must have been obvious to the policyholder that the overstated illustrative value had been a mistake- insurer not liable.

BACKGROUND

The complainant, a practising attorney, was the policyholder in an investment policy. A schedule of his policies dated 9 January 2007, obtained from the insurer by the complainant’s financial advisor, reflected the policy’s surrender value at that stage as being R1 393 916.00, and its estimated maturity value R2 174 716.00. A couple of days later he withdrew R200 000.00 from its value.

On 10 April 2007, however, the broker obtained from the insurer a further policy schedule in which the then current surrender value was stated to be
R5 222 639.00. Despite the advisor’s recommendation that the complainant should first verify the correctness of the figure, the complainant instructed him to surrender the policy in full with immediate effect. This was duly done, whereupon the correct surrender value turned out to be based, not on
R5 222 639.00 as had been represented in the schedule furnished by the insurer, but on R997 861.17.

Despite the complainant’s demand the insurer refused to pay a further sum to bring the total proceeds of his surrender to R5 222 639.00.

The complainant lodged a complaint with the office, claiming payment to make the total R5 222 639.00. His contention was in effect that the insurer had misrepresented to him that the higher figure was the surrender value, that he had relied on the correctness thereof in deciding to surrender the policy, that he had thereby suffered a loss, and that the insurer should be ordered to pay him an amount to make up a total surrender value of
R5 222 639.00.

DISCUSSION

The view of the office was that, although the insurer had misrepresented the surrender value, it was nevertheless not liable for any loss the complainant might have suffered. He could not reasonably have relied on the correctness of the higher figure. On the contrary it must have been quite obvious to the complainant, and he ought in any event to have realised, that the value of the policy could simply not have increased from a little over R1M to over R5M in a mere 3 or 4 months. It had therefore not been reasonable for him to have relied on the mis-stated figure – indeed, his own advisor realised that there had probably been a mistake and had sought for that reason to persuade him not to rely on it, and the probability was that the complainant himself had realised that the figure was a mistake and had sought to exploit the error.

The office advised the complainant that the surrender of a policy constitutes a contract in itself, and if the reflection of the illustrative surrender value of the higher figure really had induced him to enter into such a contract, he would be entitled to no more than a rescission of the surrender. He was in any event informed that it cannot be said that it was as a result of the mis-statement that he had acted to his detriment. It was furthermore clear that a “forfeiture” of an amount to which he had claimed to be entitled cannot be categorised as a loss. The misrepresented value had never been guaranteed by the insurer, and in the circumstances the complainant could not claim to be placed in the hypothetical position he would have been had the misrepresentation been true.

CONCLUSION

The complainant persisted in his contentions, however, and the office thereafter made a final determination whereby his claim was dismissed. Because the misrepresented illustrative value had constituted a poor service by the insurer, however, the office informed the insurer that it ought to pay compensation to the complainant for the poor service which it offered to do in the sum of R10 000.00. The complainant rejected the offer and threatened that he was going to court. He was of course fully entitled to do so, Rule 3.6 expressly preserving that right for complainants. The office closed its file.

SM
January 2009

CR235 Surrender of policies –nature and requirements

CR235

Surrender of policies –nature and requirements

Background

The complainant and his wife each wrote a letter to their insurer cancelling their policies “with immediate effect.” The insurer thereupon stopped debiting the clients’ accounts and advised: “The policies has [sic] surrender value. Please provide us with the Surrender requirements.” (This is a reference to the ‘Payment Request Form.’) The insurer allegedly sent three follow-up letters to the insureds’ adviser as well as an e-mail: “Please note that the request has been closed due to non-receipt of requirements.” The complainant, however, contended that the notices were sent to the wrong address.

At the time when the letters of cancellation were received the cash value amounted in total to R13000. After cancellation of the debit orders the insurer continued to deduct the premiums from the cash value of each policy to fund the risk benefits. They explained that they had this right in terms of the policy provisions.

By the time that the complainants offered to submit the “Payment Request Form” the cash values had already been depleted and the policy had lapsed. The complainants offered no explanation for their undue delay in submitting the required form.

The insurer pointed out that the insured continued to enjoy cover under the policies while premiums were being deducted from the cash value. They took the view that because the requested documents were not received, they assumed that the clients elected to continue with the policies.

The complainants claimed the cash value of their policies at the time of the letter of cancellation but the insurer refused to comply.

Discussion

The issue here is what are the requirements for the surrender of a policy—when does a surrender become operative?

Where a policy makes provision for a surrender, the policyholder clearly has a right to surrender the policy. He does not need to ask for the insurer’s permission and the insurer cannot refuse the surrender. Surrendering a policy is therefore not a matter of offer and acceptance, i.e. agreement but of an election by the insured. Being a right given by the policy, surrendering a policy does not amount to a breach of contract by the insured.

There seems to be two different views on the requirements for a surrender. The first is that a surrender is only complete when all formalities laid down by the insurer have been complied with. Consequently before the “Payment Request Form” has been completed the contract continues unscathed; the insured will enjoy cover up to this moment with the result that he must continue paying premiums; by the same token the insurer will be authorised to collect premiums by debit order or otherwise and the insured will be entitled to the cash value as it was at the time when all the formalities have been complied with.

The second possible construction is that the surrender is complete once the insurer has received written notification of the surrender. Consequently the policy is terminated by such notification with immediate effect: the cover comes to an end; the duty to pay premiums ceases and the insured becomes entitled to payment of the cash or surrender value determined in accordance with the provisions of the policy and calculated at the time the insurer received the notice of surrender. However, the insured can only claim the cash value if he has complied with the prescribed formalities, i.e the request form and whatever FICA requirements there may be.

We took the view that second construction was the correct one. Accordingly the insurer correctly cancelled the debit orders but it was not entitled to recover further premiums from the cash value of each policy. The policy provisions relating to the application of the policy’s cash value to unpaid premiums were concerned with the lapsing of a policy because of non-payment of a premium. It did not have anything to do with the situation where the insured elected not to continue with the policy and informed the insurer to this effect.

There was some break in communication after the insurer received the initial notice from the complainants. The insurer took the position that when the complainants failed to communicate with it, it assumed that the policyholders had decided to take advantage of the policy provisions and therefore to continue with the policy. We had difficulty in supporting this approach. In our view the insurer was entitled to request the completion of the necessary documents and could have withheld payment until the documents were produced but they could not have unilaterally reinstated the policy. Mora, for the purposes of mora interest, would only start once the insurer had received the formal documentation. Meanwhile the insured would have enjoyed no cover with the result that the insurer’s position would have been secure.

We accordingly ruled that the cash value of each policy at the time the insurer received the written cancellation order had to be paid to each complainant.

MFBR
May 2007

CR215 Costs – Complainant unhappy with return on his policies; alleging values diminished by surrender penalties

CR215

Costs – Complainant unhappy with return on his policies; alleging values diminished by surrender penalties

Background

The complainant had taken out three endowment policies in the late 1970’s, and he surrendered them in 2003, receiving approximately R47 000 in total. He was unhappy with this return and felt that the money he had spent on the policies was money down the drain. He had recently become aware from the media of the controversy around surrender values, and although he did not know what penalties he might have incurred, he assumed that they must have been very large, “in order to cancel out decades of my premiums”. He asked us to investigate, as he felt he had been “done down”.

The insurer responded that when the policies were taken out expenses for commission, marketing, distribution and acquisition were incurred, and the expectation was that these would be recovered from the monthly policy fees over the expected terms of the policies, which were 33, 31 and 29 years respectively. When the policies were surrendered prematurely after, on average, 26 years, the insurer recovered the outstanding expenses that would no longer be recouped by deducting lump sums from the fund value of R1.14 for the one policy, R6.00 for the second, and R21.09 for the third. Thus the deductions had had virtually no “penalty” effect on the surrender values.

Discussion

In an effort to delve further into an explanation for the values paid, we
asked the insurer to provide us with a schedule setting out the total amount of premiums paid and the amounts paid as surrender values, as well as an indication of what proportion of premiums were allocated to risk costs, and what growth was obtained on the policies. From the insurer’s reply it emerged that, over the three policies, the complainant had paid a total of about R13 000 in premiums, of which about R6000 had been allocated to investment, with most of the balance being used for life cover, (the sum assured at commencement was about R33 000). The total of the surrender values of the three policies was R47 600, and this reflected an average per annum growth rate on the investment portion of 13.4% over the entire life of the policies.

Result

We advised the complainant that, contrary to his original impression, he had had guaranteed life cover and good investment returns on his policies. Recoupment of outstanding costs had had a negligible effect on his surrender values, as he had kept the policies for so long that all the costs had already been paid for. The complainant was satisfied with the explanation.

SM
May 2007

CR209 Surrender – life cover reduced by approximately R200 000 due to part-surrender of the policy

CR209

• Surrender – life cover reduced by approximately R200 000 due to part-surrender of the policy – policyholder alleges she was not made aware of the effect of the part-surrender on the policy

Background
The complainant’s husband was the insured under a whole life policy commencing on 1 February 1999 with life cover of R619 707,75. When her husband fell ill the policy was ceded to the complainant on 22 November 1999. On 16 January 2004 she effected a part-surrender and an amount of R26 854,17 was paid to her. Her husband passed away on 18 April 2004 and the insurer paid a benefit of R408 879,00. The complainant wrote to us in August 2005 expressing her dissatisfaction about the reduction of approximately R200 000 in the life cover as a result of the part-surrender of only R26 000.

According to the complainant the insurer never informed her of the negative consequences of a part-surrender on the policy, not orally when she contacted its call centre, nor subsequently in writing. She alleged that she would never have continued with the part surrender if its effect had been properly explained to her.

Discussion
In assessing the complaint, the office had regard to the relevant contractual documentation pertaining to the part-surrender, to the quotation, to the surrender application and to the endorsement.

As to the quotation, the insurer referred to a quotation e-mailed and addressed to the branch office of the insurer. The quotation clearly indicated the new basic sum assured of R408 879,00. The complainant alleged that she was never shown the quotation.

During the investigation it transpired that the complainant’s deceased husband was a financial adviser of the insurer and that the complainant was employed as his secretary at the particular branch office to which the quotation was e-mailed. The insurer contended that neither the deceased nor the complainant could be regarded as laypersons regarding insurance matters and that they should have been alive to the adverse consequences of a part-surrender of a policy. The insurer, moreover, was adamant that the application for the part-surrender could not have been effected without the submission of a quotation even if it was not signed by the complainant.

As to the surrender application form signed by the complainant on 16 January 2004, the insurer contended that in the normal course of events this document would have been completed after the policyholder had had sight of the quotation. In this document the part-surrender value was mentioned with the qualification “thereby reducing a portion of the sum insured and bonuses”. There was no cross-referencing to the quotation and no mention of the amount by which the sum assured would be reduced.

The third applicable document was the endorsement forming part of the policy contract. One would have been expected the endorsement to have clearly and comprehensively set out the provisions of the part-surrender. That was also the insurer’s final opportunity to advise the policyholder how the part-surrender would influence the policy. There was, however, no indication on the endorsement of how the part-surrender would affect the sum assured.

The office was thus faced with a dispute of fact on whether the complainant had sight of the quotation.

The manner in which the transaction was recorded by the insurer left much to be desired:
• the insurer did not require the complainant to sign the quotation;
• the surrender application, although signed by her, did not indicate the reduction in the sum assured and did not have a cross-reference to the quotation; and, last but not least,
• the endorsement did not reflect the new basic sum assured of R408 879,00.

At the same time the office pointed out that there was a glaring weakness in the complainant’s case. Having regard to her background, she must have been aware that the part-surrender would have an adverse effect on her policy. She should have insisted on a quotation before she signed the surrender application. Her conduct prior to lodging a claim also gave the impression that she had accepted the terms of the part-surrender.

Result
In the light of these inconsistencies on both sides we suggested to both parties that the insurer should make an offer of settlement. The insurer did so and offered the complainant an additional amount of R178 670, which she accepted in full and final settlement.
AR
November 2006

CR167 Surrender – right of complainant to surrender a policy – ownership of policy

CR167

Surrender – right of complainant to surrender a policy – ownership of policy.

Facts

The complainant had owned a hotel, the XYZ Lodge, and had purchased a policy to cover his overdraft with the bank.

After the complainant sold the hotel he paid off the overdraft and then attempted to surrender the policy. The insurer refused to accede to his request as it alleged that the policy now belonged to the new owner of the hotel and could only be surrendered with his consent or on cession of the policy to the complainant. The complainant declined to do so and referred the complaint to our office.

Discussion

On investigating the matter we found that the policy had been issued in the name of XYZ Lodge, the name under which the complainant ran his hotel. However, he, as sole proprietor, owned the hotel and there was no other legal entity involved. The policy was also in effect owned by him as it was issued in the name of the Lodge. The sale agreement in respect of the hotel made no mention of the policy as part of the sale.

We advised the insurer that it should act on the complainant’s request and pay the surrender value of the policy to the complainant’s account as the policy was in effect owned by him.

Result

The insurer was not prepared to accept our legal argument but eventually agreed to pay out the surrender value on receipt of an indemnity from the complainant, which covered them in the event of a claim on the policy from any other party.

JP
April 2006

CR166 Surrender – forged signature on surrender documents

CR166

Surrender – forged signature on surrender documents

Background

The complainant, at the suggestion of his personal banker, discussed his life insurance portfolio with the bank’s insurance broking arm. Following discussions with the broker the complainant signed a number of documents, seemingly without giving them much attention, but he alleges that he was under the impression he was granting the broker access to his portfolio details. In fact he was signing an application for a new contract which would replace his existing life portfolio. However, the complainant is adamant that he did not in fact sign a request for the surrender of his earlier contracts although a signed surrender request was submitted to the insurance company concerned. The surrender requests were submitted by the broker, without the complainant’s knowledge, and the complainant avers that the signature on the documents was not in fact his.

Assessment

A forensic investigation was undertaken which included an opinion regarding the signature on the surrender requests. The documents were submitted for handwriting analysis by a handwriting expert who expressed the view that all the signatures that appeared on these documents were not those of the complainant.

This complaint was referred both to the insurer and to the broker involved. Both the insurer and the broking house accepted that the documents relating to the surrender were not in fact either completed or signed by the complainant.

Result

Matters were resolved by the reinstatement of the surrendered contracts which necessitated the refund of a surrender value which the complainant had already received. In addition, as the complainant had in fact incurred expenses in his attempts to resolve this dispute, (he consulted attorneys and also an independent broker) the complainant was awarded compensation of R15 000. This compensatory award, which made under provision of the Ombudsman’s rule 3.2.5, was paid by the broking house involved.

D M
April 2006

CR125 Rights of cessionary to apply for the surrender

CR125

Cession in securitatem debiti – rights of cessionary to apply for the surrender of the policy.

Facts

The complainant, a trader, was the cessionary of an endowment policy issued to the policyholder. The complainant notified the insurer of the cession to him of an endowment policy as security for the payment of the price for goods sold and delivered. The obligationary agreement provided “It is hereby agreed that the above [policyholder] will purchase goods from [the complainant] for not more than R1750, depending on the value of the Policy. If the Policy value goes down the value of goods supplied will be reduced accordingly. Purchases will be done weekly, if no payments are received for a period of 30 days we [the complainant] reserve the right to call in the cession policy for payment of the account.”

When the policyholder did not meet his obligations the complainant applied for the surrender of the policy to the insurer. The insurer, however, responded:

“As this is not an out- and- out cession it is not possible for the cessionary to surrender this policy without the consent of the assured. The reason being that this policy was only ceded as security, but the cessionary does not have full ownership rights. Therefore there must be consensus between the cedent and the cessionary that the policy can be surrendered and that the cash value can be paid in full or partly to the cessionary.”

Discussion

We did not agree with this view pointing out that the legal position is:

“If the cedent fails to pay the secured debt on due date the cessionary is entitled, without prior judgment against or excussion of the cedent, to redeem the principal debt and to apply its proceeds to its satisfaction of the secured debt. Any surplus recovered is for the cedent’s account.”

The insurer responded that as the mere product supplier it “usually gets caught up in the middle whenever a dispute between the cedent and the cessionary relating to the security cession arises. Therefore, as [the insurer] is not a party to the security cession agreement in question, but merely performs an administrative function in this respect, the approach (with regard to security cessions) is followed to rather request a joint instruction from both the cedent and the cessionary in the absence of an appropriate power of attorney or an agreement of parate executie in favour of the cessionary. We also believe that this is an approach that is fair and reasonable and serves the interests of both parties under the circumstances. Should the cessionary be unable to obtain the consent of the cedent, then he can still follow the conventional route [i.e. obtain judgment, sell the policy in execution, and apply the proceeds in satisfaction or reduction of the secured debt] and secure payment of the debt in this manner.”

We replied: “From the documentation it would appear that this was an express term of the obligationary agreement that the policy could be surrendered on non-payment of the secured debt. Such non-payment is also alleged.

In the circumstances it would appear that the cessionary is entitled to payment. But I do understand the insurer’s predicament and consequently, as a precaution and as a practical solution to overcome it, I would suggest that you give notice to the policyholder, preferably by registered post at his last known address, of the fact that a claim has been made on the policy by the cessionary. In the notice you should state that you propose to effect payment unless good grounds are advanced by the policyholder by a given date why payment should not be made.

In the absence of any response from the policyholder, [insurer] will be safe in effecting the payment; and if good reasons are advanced why payment should not be effected, this office would take the matter up with the cessionary.”

The insurer responded that it requested its particular department to follow the course as suggested and to afford the cedent a period of 21 days for a reaction.

Result

The procedures were thereupon followed and since the amount of the debt exceeded the surrender value of the policy, the surrender value was paid to the cessionary.

PMN
April 2006

CR52 Values – surrender – wrong value quoted – estoppel

[vc_row][vc_column][vc_column_text]CR52

• Values – surrender – wrong value quoted – estoppel

The complainant had an investment with the insurer since 2000. Two years later, due to poor portfolio performance, she decided to request the surrender value. Her bank provided her with a quote indicating that the surrender value was R62 123,43 but only R40 327,54 was deposited into her banking account.

When she complained, the insurer advised her that the quoted surrender value was wrong as the insurer had omitted to include an earlier partial surrender of R30 000. The error was picked up on the date of payments and corresponding amendments were made. An actuarial certificate confirming the surrender value of R40 327,54 was provided.

The office’s prima facie ruling was that the complainant was entitled to only R40 327,54. The insurer could only be held to the false representation (that R62 123,43 was owing) if it could be estopped from raising the mistake as a defence. Such a case was not made out.

However, since the complainant alleged that she would not have surrendered the policy if it had not been for the false representation, we ruled that she should be given the option of restoring the status quo of the policy, namely reversing the surrender, repaying the sum of R42 357,54, and having the investment reinstated to what it was before, as if no payment had been made.

The insurer thereupon offered to reinstate the policy to current fund prices but the complainant disagreed. She contended that she was not in a financial position to refund the surrender value. She made a counter-proposal to the insurer, which it was not prepared to accept.

On reconsidering the matter the office decided to pursue the possibility of a settlement. We recommended a 50% settlement basis, namely a payment of half the difference of the surrender value quoted and the value actually paid i.e. R10 897,94.

The reasons advanced by the office were two-fold: the complainant had from the outset stated that she surrendered the policy on the strength of the false representation. She therefore acted to her detriment by the early termination of the policy; having made the initial mistake, the insurer should at least have informed the complainant that the amount quoted was incorrect prior to making the payment, thereby giving her the opportunity to reconsider terminating the policy.

The recommendation of settlement was accepted by both parties and the amount was duly paid.[/vc_column_text][/vc_column][/vc_row]