The High Court in Johannesburg has ruled that providing credit insurance that includes cover for retrenchment and disability to people who cannot benefit from this cover is a contravention of the National Credit Act (NCA).
At issue in the case was whether a lender’s provision of bundled credit insurance violates section 106(2) of the NCA, as contended by the National Credit Regulator (NCR).
The NCR brought an appeal against a decision by the National Consumer Tribunal (NCT) in 2019 in which it dismissed the Regulator’s application to declare the credit insurance of JDG Trading (Pty) Ltd as prohibited conduct.
JDG Trading (the first respondent) offers credit for household goods, including furniture and electronic appliances. JDG requires its customers to purchase credit insurance as part of the loan process. Consumers can opt for JDG’s bundled credit life insurance – which includes cover for disability and retrenchment – or secure their own insurance.
The provision of this bundled cover to pensioners, disabled people, and consumers receiving social grants was the gist of the NCR’s contention that JDG contravened section 106(2) of the Act.
Section 106(1) of the NCA allows credit providers to require consumers to obtain credit life insurance, limited to the consumer’s outstanding obligations. However, section 106(2) prohibits insurance that is “unreasonable” or at an “unreasonable cost” relative to the risks involved in the credit agreement.
The Regulator submitted that JDG sold bundled credit insurance to people who would never benefit from the cover, because they would not claim for disability, as they were already disabled, or for retrenchment, as they were no longer employed. Therefore, the NCR argued, selling such an insurance cover was unreasonable, or its cost was unreasonable with respect to the actual risk and liabilities involved in the credit agreement.
Further to its argument, the NCR submitted that a pensioner and a young consumer paid the same price for the same insurance. However, the young consumer could claim the full benefits of the cover, whereas the retrenchment or disability cover was “meaningless” for the pensioner or disabled person.
The Regulator said JGD’s bundled insurance was unreasonable when one considered how a consumer might qualify for the benefit. A consumer who wanted to claim for the retrenchment benefit had to provide a contract of employment and a letter from an employer regarding his or her retrenchment. A pensioner would never be in a position to meet these requirements.
Likewise, a consumer who wanted to claim the disability benefit had to produce a medical report from a doctor and a letter from an employer that she or he was disabled. A consumer who was already disabled and unemployed would not be able to meet these requirements.
The NCA also argued that:
- The bundled insurance resulted in cross-subsidisation of the members of the group – the older members subsidise the younger members, who benefit more because they are likely to require retrenchment and disability cover.
- JGD was never at risk to pay out benefits to pensioners for retrenchment or to the disabled for disability cover.
Meanwhile, the Black Sash Trust (BST), which was admitted as an amicus curiae (“friend of the court”) by the High Court in 2021, brought a constitutional perspective to the case. The BST asserted that JDG’s practices exploited vulnerable consumers, particularly those reliant on social grants, and interfered with their rights to social security under section 27 of the Constitution.
Affordable cover that benefits consumers
JDG defended the bundled insurance as low-cost, optional group cover that promoted access to credit.
It argued that cross-subsidisation – where some consumers benefit more than others – is an intrinsic feature of group cover and is common in the insurance industry. This form of cover is the only way to ensure that consumers who might otherwise not obtain cover can so – and at a low cost.
JDG said consumers could choose to obtain their own cover but would not find cheaper cover elsewhere. Further to this argument, JDG submitted that the NCR’s case failed before the NCT because it did not provide any comparative evidence of cheaper products. In this regard, it said the Tribunal had struggled to understand why the Regulator would complain if the bundled insurance was cheaper than separate insurance for each benefit.
The bundled cover was convenient because it did not require waiting periods or medical examinations – aspects which served the interest of the consumer.
In response to the NCR’s contention that the credit agreement was deceptive – thereby breaching of section 90(2) of the NCA – JDG said the agreement clearly set out the nature of the insurance purchased.
No expectation of a claim
The High Court upheld the NCR’s appeal and declared that JDG Trading repeatedly contravened sections 90(1), 90(2)(a)(ii), 92(1), 101(1)(a), 106(2)(a) of the NCA, specifically citing the unreasonableness of its bundled credit insurance under section 106(2)(a).
In reaching this conclusion, Judge Shaida Mahomed noted that JDG conceded before the Tribunal that some members of the group would likely not benefit to the same extent as others. It then asked whether a pensioner or disabled person who knew this at the point of sale would nevertheless agree to such an “imbalance”. She said this practice was unfair, even if the cover was the cheapest available.
Judge Mahomed said a consumer is entitled to hold a reasonable expectation that if he has cover, he can claim in the event of a loss. But an unemployed disabled person who signed up for the bundled cover could not hold such an expectation because he would not be able to meet the requirements to claim. Likewise, a pensioner could not expect to claim retrenchment cover.
The judge accepted that cross-subsidisation is an accepted practice in insurance products. However, this case concerned “a particular kind of consumer, and understanding this individual consumer becomes critical”. In this respect, the court commented that the group comprised marginalised consumers, who “must be understood within their context and position in our economy”.
Judge Mahomed said JDG a secured source of revenue from pensioners and disabled consumers without carrying any risk, because they could not claim. On the other hand, the younger and able-bodied consumers could comply with all the requirements to claim. This was neither fair nor reasonable.
The fact that no cheaper options were available was not an “invitation” to relax the pensioner’s and the disabled person’s rights to dignity and fair economic activity. They paid the same premiums as the other members of the group and were entitled to the same benefits as the others in the group.
Judge Mahomed found that the bundled credit agreement was unreasonable and treated pensioners and disabled persons unfairly and disproportionately. It was insurance cover that “goes beyond common sense in the circumstances of the pensioner and the disabled consumer”.
Although evidence of comparative pricing was not placed before the Tribunal or the court, this was not fatal to the Regulator’s case. “Objectively viewed, the risks to each of the parties is sufficient to demonstrate the unfairness and discriminatory practices that the Act seeks to eradicate,” she said.
