Execution of sales or of policyholder rights?

The introduction of “execution of sales” as a method of making financial products accessible to the lower income section of the population may have arisen from noble intentions, but like the expression says, so is the road to hell.

A recent ruling by Judge Ron McLaren, the Ombudsman for Long-term Insurance, highlighted the many pitfalls on this rocky road for both insurers and clients. Add to this the substantially lower competency levels required from representatives operating in this market, and you have a recipe for disaster, despite the FSCA requiring additional controls to be implemented by the FSP.

An FSP cannot hide behind the argument that a policy sold on a non-advice basis places the onus solely on the policyholder to be familiar with terms and conditions, as well as exclusions, as happened in this case.

The case at hand

The complainant applied for a Santam Structured Life policy on 30 August 2018 and the policy commenced on 25 September 2018.  On 5 September 2019, one of the insured lives passed away. At claim stage, the insurer declined the claim since the cause of death was related to a pre-existing medical condition.

The complainant averred that the exclusion was not explained to her at application stage.

Santam confirmed that the policy was sold on a non-advice basis and stated that the sales agent used a script and provided information, not advice. Santam maintained that the onus was on policyholders to familiarise themselves with the provisions and in doing so, be aware of the relevant exclusions. The insurer further relied on the content of an upgrade call, claiming that the policyholder was made aware of the pre-existing exclusion clause.

Ombud’s view

This matter was discussed at a meeting of the adjudicative staff under the chairmanship of the Ombudsman.

The meeting took cognisance of the following:

  • These policies were sold in the lower income market. The script contained no information in relation to the pre-existing exclusion clause and thus no such information would have been brought to the attention of the policyholder at application stage. The meeting held that the policy may be seen as, and assumed to be, a funeral policy and, therefore, the application of a pre-existing exclusion clause for the duration of the policy term, was unusual.
  • Santam’s reliance on the policyholder familiarising himself/herself with the provisions of the policy, was not reasonable.
  • Concerning the upgrade call, the meeting found that the purpose of the call was to sell additional cover, not to make the policyholder aware of the pre-existing exclusion clause.
  • The call had been conducted in an underhand manner and complainant / policyholder did not appear to understand that an additional premium was to be paid.
  • Whilst the pre-existing exclusion clause was mentioned, it was not explained to the policyholder.

The meeting unanimously agreed that the contract was to be considered as void and that all premiums contributed, were to be refunded.

Santam disputed the provisional determination as it was of the view that only the premium relating to the particular life assured who had a pre-existing condition should be refunded because the insurer would have been on risk for every other life assured.

The Ombudsman ruled that the complainant, by the completion of one composite application form, applied for one policy, covering multiple lives. “The consensus or lack thereof is between the applicant and Santam and not between the multiple lives and SSL. The multiple lives are not contracting parties and their consensus is not relevant to the issue at hand,” according to the Ombudsman.

Santam Structured Life was instructed to refund all the premiums contributed and paid the complainant R663.68.

Comments by Paul Kruger, independent editor-at-large

It is difficult to understand why an insurer would go to such lengths for such a meagre sum, bearing in mind the possible damages to its brand. The shortcomings in its script is clearly evident from the findings of the Ombud and will hopefully be revised on an urgent basis, as should all related refuted claims.

Execution of sales places the onus on the FSP to ensure the script is complete and provides all relevant information to the applicant. That was clearly lacking in this instance. Not many clients in this market segment will have knowledge of, or access to informal complaint resolution forums such as the Ombud.

The content of the script is not subject to regulatory approval. If an organisation the size of Santam can falter to the extent that this case indicates, what of the thousands of smaller FSPs who lack the legal expertise of big insurers?

This is also likely to seriously challenge the FSCA’s stated intention of being proactive in ensuring fair treatment of customers.

Click here to read FSCA Communication 1 of 2019 (FAIS) about Scripted Execution of Sales.

Click here to download the case study notes.

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