CR88
Funeral Insurance
Funeral Insurance – Principal life insured took out insurance cover on an extended family member as an additional life insured – principal life insured dies – within a month and during the grace period for the payment of premiums, the additional life insured also dies – whether cover under the policy ceases as a matter of law upon the death of the principal life insured.
Background
1. Mrs A, the policy owner and account holder, took out a funeral policy on her own life, as well as additional funeral cover for another relative of hers, Mr B. She nominated her son, Mr C, the complainant, as the beneficiary under the policy.
2. She died, followed a month later, while the policy was not yet in a state of lapse, by Mr B.
3. The insurer paid out for the death of the principal life insured but refused to do so in the case of the additional life insured. The reason given was:
“The claim was settled on 21/04/2004 and the policy terminated, effective 31//04/2004 as obligations under this policy had not been met. The policy cannot continue after the death of the principal insured.
The extended family member died 02/05/2004. The policy was in fact no longer an in-force contract, and therefore the claim was correctly repudiated.”
Discussion
4. When the insurer was asked by this office whether it relied on a clause in the policy for its stance that the policy did not survive after the death of the principal life assured it responded:
“There is no clause in the policy that specifically states the policy will
be cancelled on the death of the principal life insured, nor is there any
mention of this fact in the information brochure.
The policy being cancelled on the death of a principal life insured is
normal insurance practice for this class of business. Even with normal
life business this would apply to joint life policies. The exception
being policies that are clearly issued on a “last survivor” basis or
where the policy conditions provide the policy being made paid up for a
lesser value on the death of the principal insured.
The policy is cancelled and premium deduction cease on termination of the policy.”
5. The matter was referred to a full meeting of adjudicators. We wrote to the insurer as follows:
I am afraid that we cannot agree with you that it is “normal insurance practice” that a policy is automatically cancelled, in the absence of a clause to that effect, when there is more than one “life insured” and the “principal life insured” dies.
Our office is unaware of any such general trade usage and the books on insurance law that we were able to consult not only make no mention of it (cf Reinecke et al, General Principles of Insurance Law par 449) but would suggest the contrary (Clarke The Law of Insurance par. 18.3A 18.3B).
In the circumstances we are of the view that the claim of the nominated beneficiary should be met in full with interest at the legal rate from the date of demand.”
6. Further correspondence followed: The insurer wrote:
“When looking at ordinary life insurance claims there are two very distinct classes of business.
1) Assistance Business (also known as Funeral business) which is a simplified form of policy with no underwriting being done at new business stage. Mortality experience is normally controlled by the imposition of waiting periods before any claim will be considered. These waiting periods depend on the premium rating and can vary between three and twelve months, except for accidental death.
2) Ordinary life business. This is the class of business that is usually underwritten, and the policy contract is often more complicated than that dealt with by Funeral assurers. With these policies the construction of the policy clearly indicates whether a claim is payable on the death of the first or subsequent life or lives insured.
This policy is a Funeral Policy (falling into Assistance Business category)
It is our understanding that most Assistance Assurers administer their policies the same as we do. If the principal life insured, is the policyholder and premium payor, dies, then the policy is terminated. From an administrative point of view this is necessary. We cannot collect premiums from a deceased’ account, and it is rather pointless sending unpaid premium letters to a person who is deceased. We only correspond with the policyholder, no one else.
(As previously communicated this is our practice in every such instance and has been so for many years.)
We do allow the policy to be reinstated, on request by an insured life under the policy , provided that we have new banking details, and that any arrear premium is simultaneously paid. (this is mentioned in the brochure). In reality we have fewer than 10% of the terminated policies reinstated for this reason.
We maintain our opinion that in this case the claim is not valid. The second deceased’s date of death was after the date of termination of the policy and therefore:
1) The policy was not in force.
2) No premium payment is possible from a deceased banking account.
3) There was no verbal or written request to reinstate the benefits.”
7. We responded as follows:
“We are aware of the distinction between funeral business and ordinary life business but in the final analysis the answer to a problem such as this one must be sought in the express or implied terms of the contract between the parties.
You rely on the manner in which you and some other insurers administer funeral policies. But your practice can only be incorporated into the contract as a term thereof if it qualifies as a general trade usage. The requirements for the proof of such a trade usage are discussed in Christie, The Law of Contract (4th ed) 184-190. As is stated by Christie at 189, the onus to prove such a trade usage is on the party alleging it, which in this case is Capital Alliance. Having regard to the requirements stated by Christie I am sure you will agree that no such proof has been adduced by you.
As far as this particular case is concerned the circumstances were somewhat unusual inasmuch as the second life assured died within a month of the death of the principal life assured (and premium payer). At that stage the policy was not yet in a state of lapse which would doubtless have happened if the second life assured had lived longer. In that event the policy would most likely have lapsed for non-payment since the premium payer had in the meantime died. We agree with you that in those circumstances there would have been no need for you to have collected premiums from the principal life’s deceased estate or to send “unpaid premium letters” to “a person who has deceased” but that, with great respect, is really not the point. When the second life assured died the policy was still in existence. That is the point. Therefore the “date of termination” to which you refer had not yet occurred. I repeat: if he had died later, after the policy had lapsed for non-payment of premiums, you would have been entitled to repudiate any claim arising from the death of the second life assured not because the principal life assured had predeceased him but because the policy had in the meantime lapsed for non-payment.
Take the following example. Mr A is the principal life assured, Mr B is the extended family member whose life is also assured and Mr C is the premium payer. Mr A dies. A claim is made and paid. Mr C continues to pay the premiums. Mr B dies. On what grounds would the insurer be entitled to repudiate the claim?
Having given the matter due consideration the Adjudicators’ meeting confirmed its previous view that the claim is a good one. Our ruling has accordingly become final.”
Result
8. The insurer chose not to appeal and the claim was paid with interest.
PMN
10/2005
