CR61

Offer to replace existing Life assurance policies by new policies – intention to terminate two original policies but premiums still collected – allegation that the two original policies were still in existence

Background

The complainant represented both a close corporation which took out a life policy on the life of their key man, the deceased, as well as the executor in the estate of the deceased which had an interest in a further life policy on the life of the deceased. In November 1997 the deceased was insured in terms of the aforesaid two policies with insurer A. Insurer A was subsequently taken over by insurer B which offered policy owners of insurer A an opportunity to exchange their existing policies for new policies with insurer B at lower premiums. Both policyholders availed themselves of this opportunity and on 28 September 2000 they completed life application forms with insurer B. In this application form the question was asked whether the application is to replace existing insurance and an affirmative answer was reflected in the appropriate space. On 2 October 2000 both policyholders completed a “Replacement Policy Advice Record” (RPAR) form with insurer B. This form ostensibly informed an insured of the disadvantages of replacing or changing a life policy. Its purpose presumably was to protect the financial adviser who recommended the replacement and was signed by both the policyholder and the adviser. Subsequently the application forms as well as the RPAR forms were forwarded to insurer B which issued new life policies as requested.

The original policies with insurer A were not formally cancelled and no surrender values were paid out to the insured. Furthermore insurer B continued collecting premiums and also issued annual benefit statements in regard to the original policies.

In 2002 insurer C took over insurer B. Insurer C continued to collect premiums and it also issued annual benefit statements as if the original policies were still in existence.

The policyholders were initially not aware of the fact that premiums were still being collected but became aware of that fact during or about April 2003. The complainant alleged that it appeared to the policyholders that both insurer B and insurer C were treating the original policies as not having being terminated. Since the insured at that time felt a need for further insurance on his life he decided to continue paying the premiums under the close corporation’s policy on insuring their key man. No formal notice of this decision had been given to the insurer. The complainant expressed his view that the deceased would have considered further insurance at this stage if insurer B or insurer C had indicated that the original policies could not be continued. In August 2003 insurer C on request confirmed that the original policies were still in force but when the insured died in 2004 insurer C took the position that they were not liable under the original policies. They maintained that the policies had in fact been terminated in 2000 and that the subsequent collection of premiums was to the knowledge of the policyholders a mistake. They tendered the surrender value of the policies as at 1 October 2000 as well as all premiums subsequently paid. They also offered to pay interest. The claims under the new policies were fully met.

Discussion

It was common cause that all parties intended to terminate the original policies and to replace them with policies issued by insurer B. In order to resolve the dispute it is important to obtain clarity about the nature of the transactions involved. Two possibilities presented themselves:
1. the parties could have intended a novation i.e. an agreement whereby one obligation is extinguished and replaced by a new obligation. In the present context this would have entailed a new policy by insurer B which by its express or tacit terms would have terminated and replaced the policy of insurer A.
2. the parties could have intended to enter into two separate transactions namely one to surrender the existing policies of insurer A and the other to issue the new policies of insurer B. On surrendering the existing policy with insurer A the surrender value would have had to be paid to the policyholder concerned.

On the basis of the documentation submitted and the probabilities, our office considered that the parties in fact intended a novation of the original policies issued by insurer A and their substitution by the new policies issued by insurer B. This conclusion was based on the fact that both parties concerned intended to replace the original policies of insurer A. Our view was that the original policies were accordingly terminated by mutual agreement, if not expressly then by conduct.

The complainant had also argued that the insurer’s subsequent conduct of continuing to accept premiums and to issue annual benefit statements had created the impression that the original contracts issued by insurer A were reinstated and revived and as such continued to exist alongside the new policies issued by insurer B. Our office concluded that the policyholders’ erroneous impression was not reasonable for the following reasons: –

1. the onus to establish their position rested on the policyholders and in our view the onus had not been discharged on the probabilities;
2. since the starting point was that the original policies of insurer A had been replaced by the new policies of insurer B that left no room for the impression that the old policies would continue to exist in addition to the new ones. The policyholders knew that the old policies had been terminated and replaced and the conduct of the insurer was probably due to serious errors in their systems, a fact which had been conceded by the insurer. In our view the policyholders should have explored with the insurer in greater detail whether the original policies with insurer A had in fact been cancelled and whether the subsequent conduct of the insurer was not in fact due to a mistake. That question was never asked.

Result

There can be little doubt that the policyholders were significantly inconvenienced by the admitted error made by insurers B and C and we consequently decided, in terms of rule 3.2.5, to make a compensatory award of the maximum amount of R15 000. In respect of each disputed policy this office made a provisional ruling that the insurer was to pay to the complainant the following: –

1. Payment of the surrender value as at 1 October 2000;
2. Interest on the said amount at the rate of 15.5% per annum;
3. Repayment of all premiums received after the termination of the policy;
4. Interest in respect of each such premium at the rate of 15.5% per annum;
5. R7 500 by way of a compensatory award.

The insurer accepted the provisional ruling. The complainant, however rejected the finding and stated that it proposed to institute legal proceedings.

MFBR
Oktober 2005