CR191

Misleading marketing practices – “Education Plan” – refund of premiums – four variations on a common theme.

This office has recently had to deal with four separate complaints about Company X’s “Education Plan”.

In all four cases the structure of the product was broadly the same. The plan (termed the X Education Plan) was marketed by Company X during the late 1990’s.

In each case it was presented to prospective policyholders as an education plan that would provide for the secondary and tertiary education of their children.

The product consisted of:

(a) a life policy component with both life and disability cover and a subsidiary cash benefit payable into an education trust fund on the death or disability of the parent (the policyholder). A specific premium was stipulated;

(b) a unit trust savings component “to meet the cost of education in the medium to long-term” with a separate contribution.

The rationale was that the unit trust component would grow as contributions were received and invested. This would supply the savings element to fund the future education.

The application form for the plan had one section relating to the life policy component and a separate section relating to the unit trust component.

The problem in some of the complaints lodged with our office was that neither the marketing material nor the representations by Company X’s agents made it sufficiently clear to prospective policyholders that it was essential for a policyholder to complete both sections for the plan to function at its optimum. As it was put by one of Company X’s senior representatives in correspondence: “Our intention in selling the plan was as a comprehensive education plan. Initially the Education Trust was set up as a single needs sales organisation to sell a holistic product to people faced with the rapidly rising costs of education. The plan had a two-fold objective; to give cover for the child in the event of the parent’s early death, combined with a trust set up by Company X to look after the proceeds for the benefit of the orphan’s education, and also a savings element in the form of a unit trust. Either portion of the plan can stand on its own merits but ultimately the plan was best in combination”.

In two of the cases the policyholder’s grievance was that he/she laboured under a misapprehension as to the true nature of the product and the reciprocal obligations of the insurer; and that the plan was misunderstood because of the ambiguous nature of the marketing material and the manner in which the product was explained to them. It appears that the policyholders had in mind, when they purchased the product, that it was a standard policy that would pay out when their children reached tertiary education age. It was never properly made clear that the unit trust investment, although an optional extra, was essential for the plan to fulfil its stated purpose; and that if the unit trust section was not completed and implemented the plan would be little more than an ordinary life policy with only a minor savings element.

As the plan was structured by Company X the main component was the life cover and not the unit trust savings element. Yet Company X’s representative conceded: “It should be borne in mind that the initial life cover was not great, giving this plan an element of savings. However, without the savings element inherent in the unit trust, the plan would not fulfil its potential”. If the emphasis was, as it should have been, on the savings element, the unit trust selection should have been the anchor provision and not the life policy which was only intended to cater for the eventuality that the policyholder should predecease the child. The life policy should at best have been an adjunct to the savings portion and not, as was the case, the fulcrum of the plan.

First case

In the first case the complainant complained that what she got, a life policy, is not what she wanted, “a savings plan for my two sons’ education”. That is because she did not complete the unit trust section of the application form which remained blank. The premiums paid also related only to the life policy section.

The complainant, when she discovered after nine years that she had basically signed up for a universal whole life policy with disability benefits, wanted her premiums back.

We pointed out to the insurer that the absence of the unit trust investment defeated the purpose of the plan. When Company X retorted that “the unit trust part was optional”, we pointed out that this was not in accordance with the “Advisers’ Guide” it issued, which emphasised that the basic plan “combines” a universal whole life policy with investments in unit trusts.

The insurer thereupon responded that “after careful consideration of the fact that [the complainant’s] intention was a savings plan for the education of her children and the non-activation of the unit trust savings plan” they had decided to comply with the request “to refund premiums and interest thereon from the date of commencement of the risk cover”. And so it was done.

Second case

The facts of the in this case were broadly on a par with those of the first case but with one notable variation. As in the first case the unit trust section remained blank and only the life policy section was completed for which a premium was paid. The distinguishing feature was that the policyholder, on discovering that the product was not what she thought it was and was in effect merely a life policy with a minor savings element, surrendered the policy and pocketed the proceeds.

At an adjudicators’ meeting we considered and debated the potential causes of action open to the complainant. These were:

(a) Pre-contractual misrepresentation

The misrepresentation would conceivably be the ambiguous marketing material and the misleading manner in which the product was explained to her by Company X’s agent. But the fact remains that the product as such could function as an education plan proper if both sections had been duly completed. The “misrepresentation” was therefore not so much as to the nature of the product but as to the completion thereof by the complainant herself. Moreover, the misrepresentation, having been made in 1997, could hardly be raised as a ground for rescission in 2006, particularly not when the complainant chose to surrender the policy in terms of the policy provisions, which served as an affirmation of the policy rather than as an election to rescind it.

(b) Pre-contractual breach of mandate

This could conceivably be on the footing that the complainant instructed Company X’s agent to provide her with an education plan whereas the agent in effect signed her up for a life policy. Here again the difficulty is that the product as such was indeed an education plan but only effectively so if both sections had been completed. The difficulty arose not with the plan as such but because of the advice (or absence of advice) she received in completing it. The problem was therefore not so much the mandate that was breached but:

(i) that she did not fully appreciate that if she did not complete the unit trust section the plan would only provide for the eventuality of her predeceasing her child; and

(ii) that she was not properly forewarned or informed what the situation would be if she failed to complete the unit trust section as well.

(c) Absence of consensus

There can be little doubt that on the probabilities the complainant did not fully understand the nature of the product and in particular that it was only a life policy and not a savings plan. Was she entitled to rely on her mistake? As a rule she would only be able to do so if her mistake was reasonable. In the particular circumstances of this case, however, there was a duty on Company X, in its marketing material and through its agent, to explain to the complainant that the manner in which she completed the form would not secure her child’s education and that it was restricted to the situation where she would predecease her child, an eventuality which was in any event covered by her own existing life policies. To the extent that her misapprehension as to the nature of the policy was therefore attributable to the other contracting party, Company X through its agent, it remained open to her to rely on her absence of consensus. The consequence would be that there was no contract and she would be entitled, subject to what is said below in relation to her surrender of the policy, to a refund of her premiums.

(d) The effect of the surrender

Was the fact that she had earlier surrendered her policy an insurmountable obstacle in raising the invalidity of the policy on the grounds of an absence of consensus? That was a consideration that troubled the meeting since the fact of surrender postulated the existence of a valid contract. If the contract itself was invalid because of an absence of consensus, so too would be the act of surrender, since one cannot surrender an invalid contract. That is particularly true if the policyholder’s decision to surrender was due to the very reason rendering the contract void from inception, namely that the complainant was never informed that the policy was merely a life policy and not a true education policy. The decision to surrender was an ill-conceived decision but coloured by exactly the same cause which affected the validity of the policy in the first place, namely the lack of a proper understanding of its terms. As such the meeting concluded that it should not be regarded as an insurmountable obstacle for the corollary would otherwise be that the ill-conceived surrender of the policy would breathe life into an otherwise invalid policy.

On the premise that the policy was invalid and that the surrender did not preclude the complainant from raising the invalidity, we informed the insurer that the complainant was in principle entitled to a refund of the premiums paid but that the amount already received by way of surrender should be deducted from that sum.

Moreover, since the insurer had the use of the excess it should pay interest, not at the legal rate but, so we suggested in fairness to both parties, at the lower Standard Bank rate for 12 months deposits as recommended in the Life Offices Association protocol in respect of death or disability claims.

This latter aspect opened up a new area of debate. The insurer made the point that if the insured had died, Company X would not have been able to resist a claim on the policy on the grounds that the insured laboured under a misapprehension as to what she had purchased. That line of defence was open to the insured because of the conduct of the insurer; it was not open to the insurer itself. Notionally, if not actually, Company X was accordingly at risk. The insurer suggested that the costs of life and disability cover should be deducted from the refund, but the meeting felt that the most equitable solution would be to account for that factor in a reduced rate of interest.

A provisional ruling was made to repay the difference between the premiums paid by the complainant and the surrender value she received, which amounted to some R4500,00, plus interest at 7.25% per annum from the date of payment of the surrender amount to date of payment of the balance. This was less than the recommendd rate in the LOA protocol. Neither party raised any further submissions and the matter was disposed of on that basis.

Third case

8. The third case followed a different course from the previous two cases inasmuch as the unit trust section was fully completed and a managed fund was selected as the investment option by the two complainants, the parents of the children to be benefited. They undertook to pay an additional contribution by way of a debit order in respect of the unit trust portion. That, however, never happened because, as Company X discovered later, “the debit order for the unit trust portion on the policy in force had never been lodged…..Unfortunately it would appear that the unit trust department never contacted the client concerning this and as a result the debit order was never activated.” The premiums paid were only in respect of the life insurance portion.

As in the previous two cases the policy was conceived as an education plan. Both the life and the investment portions thereof were integral to the effective functioning of the education plan as Company X conceded. The plan spelt this out and expressly referred to the monthly premiums and contributions in respect of each portion thereof. Both sections of the application form had been duly completed.

Company X also conceded that the fault was theirs for not activating the debit order and offered a sum of R3000,00 “by way of a conciliatory goodwill offer”.

The complainants were not interested in reinstating the unit trust portion of the policy and accepted the offer. The file was closed.

Fourth case

The last case resembles the third one in the sense that the complainant completed both the life cover section at a premium of R100 per month and the unit trust section of the application form, inserting R50,00 as the contribution, and selecting both an escalation rate and a designated fund.

The problem was that the insurer in the follow-up documentation reflected only the premium for the life cover component and made no mention of the unit trust option selected by the complainant. Again no contributions were collected by debit order in respect of the unit trust portion.

The complainant, on discovering this state of affairs some time thereafter, stated that she was not interested in life cover and wanted the entire transaction set aside and her premiums returned to her.

We were unable to agree.

We pointed out to her that she was bound by the application form which she understood, completed and signed and which was accepted by Company X; that the documentation clearly spelt out from the outset that there was a life policy component which she selected and that, as a result, it was not possible for her to contend that as a reasonable person she was unaware of that fact. Accordingly she was not entitled to have the entire transaction set aside. This was not, after all, a case of lack of consensus about the terms of the policy; it was a case of lack of proper implementation of the agreed and understood terms of the policy.

Company X was prepared, at our insistence, to accommodate the complainant by reconstituting the plan to what it would have been if the unit trust account had been activated as it should have been at the time; or, if the complainant was not prepared to pay in the arrear contributions, that the sum assured could be adjusted and downscaled to allow for the payment of the arrear contributions on the unit trust account. The insurer was also prepared to pay R2500,00 as compensation for poor service.

The complainant thereupon asked us to explore the best way of reconstituting the contract.

The insurer submitted various calculations on the premise that the complainant would have to pay in a certain lump sum for arrear contributions. Matters reached a fairly advanced stage when the complainant suddenly decided, without any explanation to us, to surrender the life policy – and everything came to an abrupt end. Much effort, little reward.

PMN/SM/DM/DW
November 2006