CR123
• Cession of policy to third party – policy to revert to policyholder after five years – insurer ignores the term of which it was aware

Facts

On 1 March 1988 the complainant took out life cover with the insurer. On 22 July 1988 he ceded the policy to his employer and informed the insurer of the terms of the cession. The cession agreement specifically stated that “in terme van diensvoorwaardes word die polis my eiendom na 5 jaar diens”. He remained in service for the five years but in April 1997 the employer’s business was sold and the complainant left it.

On 23 September 1997 the insurer received an application to surrender the policy. In the application the policyholder/cessionary is indicated as the erstwhile employer and the reason given for the surrender was “life assured not in employment”. The insurer complied with this request and issued a cheque to the employer, oddly enough not in the name of the employer but in the name of the complainant. The cheque was deposited into the account of the employer.

In December 1997 the complainant applied to have the policy re-ceded to him. The insurer informed him that the policy had already been surrendered and that it was not willing to accede to his request. Seven years later, on 7 April 2004, the complainant again enquired about the policy and it was then that he found out that the cheque had been paid into an account of which his former employer was the account holder.

Discussion

The term in the cession agreement referred to above (that the policy would become his property after five years) can either be construed as a cession subject to a resolutive condition or as a re-cession subject to a suspensive condition; the effect was that the policy revested with the complainant after the expiry of five years in service, ie. 1993. The insurer was aware of this provision and was therefore at risk when it made payment under the policy without first contacting the cedent. When the five year period expired the complainant was entitled to either surrdender the policy or to continue with it. While he remained in the business the premiums were deducted from his salary and paid to the insurer. Thereafter, and until the policy was surrendered, premiums were apparently paid by the new owner of the business. Therefore, the instruction from the erstwhile employer to surrender the policy in 1997 was unauthorised and wrongful. Accordingly the insurer was at fault when it acted on these instructions and surrendered the policy. Such action by the insurer amounted to a repudiation of the contract by the insurer which the complainant was entitled to ignore.

After the surrender of the policy in September 1997 the insurer received no further premiums for this policy but the policy would still have had a surrender value of R27 411.37 in September 2005 if the insurer had not surrendered it in September 1997.

The insurer argued that the complainant’s claim against it had prescribed, and that there was in any event a duty on the complainant to mitigate his loss. We disagreed. Since this was a claim on the policy and not a claim for damages for breach of contract the principles relating to prescription and mitigating of damages were not relevant.

But, it was also our opinion that the complainant was not free of blame. In December 1997 he was aware that he had a lawful claim to payment under the policy but that the insurer did not acknowledge it. By not enforcing his claim and by not paying any premiums after April 1997 he brought the insurer under the impression that he acquiesced in this state of affairs. This wrong impression continued until April 2004 when he reopened enquiries about the policy. As a result of this wrong impression the insurer was not afforded the opportunity of taking steps to try and recover the monies wrongly paid out.

Result

In our opinion both the insurer and the complainant were to blame for the current situation: the insurer for making payment to the wrong party and the complainant for his delay in pursuing his claim under circumstances where it could reasonably have been expected of him to know that such delay would be to the detriment of the insurer. A reasonable and fair solution to the problem, we believed, required a substantial reduction of the amount to which the complainant would otherwise have been entitled. We suggested that the insurer pay an amount of R12 000 to the complainant. Both parties accepted this solution and payment was made accordingly.

AS
April 2006