CR124
Security cession – policy converted to paid-up without notice to the cessionary- reinstatement of the policy

Background
The life insured took out a life policy in order to secure the repayment of a loan he owed to the complainant. The policy was then ceded in terms of a security cession to the complainant by means of the insurer’s own cession form signed by both parties, submitted to the insurer and recorded by it. The document stated: “Please note: ownership of the policy does not change. Ownership remains with the cedent, subject to the security interest of the cessionary.”

The life assured who was also the premium payer defaulted and eventually the status of the policy reduced to paid-up. No notice of any default or of the change in status was ever given to the cessionary since all the statutory and contractual notices were sent to the cedent. The complainant only learnt of the change in the status of the policy when at a later stage he made enquiries.

When the complainant complained to the insurer he was informed by the insurer that “The contract [a reference to the abovementioned document] between Messrs A [the cedent ie life insured] and B [the cessionary ie the complainant] was concluded in their personal capacities and had nothing to do with the [insurer] since they [the insurer] did not loan any money to the cessionary.”

Assessment

The effect of a security cession is indeed that “ownership” of the ceded right remains with the cedent but such ownership is not “true” or “full” ownership. It has variously been described as “bare dominium” or as a “reversionary interest.” In all other respects the cessionary is the new holder of the ceded right with all the privileges and attributes pertaining to the holder of such a right, except that the cessionary cannot enforce the right until the cedent is in default with the secured debt. Until such time as the ceded debt had been redeemed neither the cedent nor the cessionary is accordingly entitled to enforce or “deal with” the ceded right on its own.

The security cession was intended to secure repayment of the life insured’s debt to the cessionary. But since the obligation to pay the premiums remained with the life insured, the security as such was inherently flawed if the life insured should breach the underlying obligationary agreement by not meeting his premium obligations, thereby causing the policy to reduce in value or lapse.

A cessionary’s only protection against that eventuality is to monitor the payments. One way of doing so would be to receive and to react to notices from the insurer that payments were not being made. Thus, the complainant in his letter of complaint stated:
“Indeed the cessionary letter gave me a sense of assurance that all was in order, as once again there was no mention that anything was amiss and if there was I the owner/cessionary would surely be the first to be informed and not merely ignored which is what happened in this instance.”

And again:

“Obviously had I been aware of this situation I would have immediately taken over the premium payments as I was prepared to then and I am still prepared to do. This actually goes without saying as it was I who insisted on the policy in the first place.”

We suggested to the insurer that since the requisite notices were to be given to the policyholder, they should have been given or at least copied to the cessionary as the policyholder’s successor-in-title.

Result

The insurer did not disagree and the matter was eventually settled on the basis that full cover on the policy was reinstated with a new policy commencement date; that the insurer would write-off the premium debt from the time the policy was made paid-up; and that the cessionary took over the duty of paying the premiums in future. In addition the insurer agreed to pay R2 000 to the complainant as compensation for the poor service he received from the insurer after he initiated his complaint with them.
MFBR
April 2006