CR64

Deduction of penalty – no contractual provision

Background

A policyholder extended the term of his policy by five years when the policy reached maturity. No commission was paid at the extension of the term. When he subsequently surrendered the policy the insurer imposed a “penalty/fee” of 3% of the fund value of R343 997 i.e. R10 310. The insurer confirmed that there had been no costs to be deducted at surrender.

Discussion

When we questioned the insurer we at first received some evasive responses but it was finally conceded by the insurer that this deduction was in the form of a penalty because the policyholder, by surrendering the policy, had breached the policy. We pointed out that :

• there had been no breach as the policy expressly provided for surrender, and;
• there was also no policy provision for the imposition of a penalty and the insurer could not in our view unilaterally impose one.

The insurer then made the same mistake that has been made by many others, and equated the fee (that is the “penalty/fee”) with costs (that is to say, the insurer’s actual expenses). It argued that the policy provided for the deduction of costs on surrender and that the fee was synonymous with such costs. We pointed out that this was not in fact correct and made a determination in favour of the complainant and told the insurer that the “penalty/fee” could not be imposed.

Result

The policyholder was credited with the amount of the deduction.

JP
October 2005