CR302 Conclusion of Contract-Reliance theory – credit life policy covering bond

Conclusion of Contract CR302
Reliance theory – credit life policy covering bond – insured relying on information provided by insurer to bank that cover in place – such information in turn furnished by bank to insured – no cover in fact granted.

Mr and Mrs G applied for a bond at a bank, and at the same time completed application forms for a loan protection policy from the insurer to cover the bond. After the bond was approved they received a letter from the bank informing them what the amount of the monthly bond repayments and loan protection premiums would be, the information about the premiums having been formally furnished by the insurer to the bank. Two similar letters from the bank were written to Mr & Mrs G over the next two years, again conveying premium information furnished by the insurer to it. Premiums were duly collected by means of deductions on their bond account, the bank then paying the premiums over to the insurer.

After the death of Mr G, Mrs G submitted a claim for payment of the outstanding bond in the sum of over R1m. In considering the claim the insurer discovered that an application for loan protection cover applied for by some other client had in error been linked to the bond account of Mr & Mrs G, that the application by Mr & Mrs G had never been accepted and that they had therefore never been granted the loan protection cover.

The insurer said, correctly, that Mr and Mrs G had never been provided with a quote for the premiums, and that they were never issued with policy documents. It added that the monthly premium of R102.62 incorrectly collected from them was the premium due by the other client and as such was in an amount obviously too low to be commensurate with the amount of their bond. The insurer therefore contended that the parties could not have been ad idem on the terms of the contract. Its case was that Mr & Mrs G should have realised that there was no cover in place or should at the very least have made the appropriate enquiries in that regard. To resolve the misunderstanding it offered to refund the premiums, but Mrs G complained to the office.

She pointed out that the bond agreement stipulated that life cover was a requirement unless otherwise advised by the bank. She and Mr G had relied on the information furnished in the bank’s letters that noted the existence of life cover, and in doing so believed that the bank, as bondholder, had duly arranged the life cover with the insurer. If they had not intended to take out loan protection cover, they would have objected to the insurance premiums being deducted from their bond account. Mrs G maintained that the insurer’s consistent conduct of retaining the premiums over a period of three years and at the same time issuing the bank with the information passed on to Mr & Mrs G, had led Mr & Mrs G to believe that cover was in place, and being under that impression they did not seek cover elsewhere.

In the office’s exchanges with both the bank and the insurer it was determined that the mistake had not been made by the bank, but by the insurer, and although it was clear that the bank had not been acting as the insurer’s agent, the insurer knew that information of the kind at issue would be furnished by the bank to the insured concerned.

The office considered whether on the facts of the case the so-called reliance theory could be applied. According to the theory, as stated in “CONTRACT – GENERAL PRINCIPLES” by Van der Merwe et al (at page 38), even if the parties are not ad idem, there can nevertheless be a contract
“…based on the intention of one party to an agreement and the reasonable impression or reliance on his part that the other party had the same impression”.
See also “LIFE INSURANCE IN SOUTH AFRICA” by Nienaber and Reinecke (at 10.4), and SHEPHERD V FARRELL’S ESTATE AGENCY 1921 TPD 62.

Before making a determination the office indicated to the insurer that there was room for applying the reliance theory. By taking and retaining premiums over a substantial period of time, by furnishing the bank with the information it did knowing that it would be conveyed to the insured concerned, and by failing in that time to inform the insured that there had been a mistake, the insurer had misled Mr & Mrs G, to their prejudice, into reasonably believing they had cover.

The insurer was asked to re-consider its repudiation, whereupon it agreed to meet the claim.
March 2011