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