There is a common law rule that the interest on a loan cannot exceed the outstanding capital component of the loan. A provision in the Insurance Act 27 of 1943 exempted policy loans from the operation of this rule. It was only when the new Long-term Insurance Act became effective on 1 January 1999 that policy loans were no longer exempted from the in duplum rule. Literally translated, in duplum means ‘double the amount’.
The in duplum rule has been the subject of much debate and opinion. Insurers argue, however, that loans granted prior to 1 January 1999 are still exempt from the in duplum rule. This means that interest continues to accrue on these loans even when it exceeds the capital part of the loan.
The Ombudsman for Long-term Insurance has received a number of complaints about these interest-bearing loans over the past years. In one of the latest determinations by the Long-term Ombud the emphasis is once again on the in duplum rule as it applies to policy loans.
Mr X took out a policy from an Insurer in 1983. In 1999 he made a loan against the policy. In his statement he mentioned that he never made any loan payments as he assumed that his monthly policy premium would be adjusted to include the loan repayment. However, when Mr X enquired about another policy, he was made aware that the loan amount has accrued interest of approximately R48 000 over the years.
Mr X immediately contacted the Insurer to settle the loan, but with the request for the interest to be waived as he has received no correspondence from the Insurer in respect of the policy in question.
The Insurer’s response
In their response, the Insurer stated that no records existed of the loan, but referred the complainant to a previous loan that provided details of the interest as well as repayment arrangements. It argued that the 1999 loan “would have been granted on the same basis” as the 1991 loan.
During the time the Insurer sent statements to the complainant, but as the complainant had changed his address, he did not receive it.
The Ombud’s feedback
The Ombud wrote to the Insurer and questioned if the in duplum rule has been applied in this instance. The Insurer’s response was that they “held a long-standing view that the common law doctrine of in duplum applies in respect of interest which is in arrears. They referred to another case where the judge stated that “the in duplum rule is confined to arrear interest and to arrear interest alone.”
However, the Ombud disagreed with the Insurer’s arguments. At a meeting of the Adjudicators of the Ombud’s office, the meeting “held that the in duplum rule was applicable and that it was applicable to any debt which arises out of a loan or advance granted after 1 January 1999.” It also held that the rule was not limited to ‘interest which is in arrear’ as argued by the Insurer. Furthermore, it noted that the applicability and application of the in duplum rule was accepted and supported by the FSCA and that the rule was accepted and applied by other members of the industry.
The Ombud mentioned in his final determination that the facts of this complaint demonstrate that the unchecked accumulation of interest resulted therein that the complainant is “buried under a mountain of debt” – his loan debt of R5 319 has grown more than tenfold to a policy debt of R55 487.
It also needs to be noted that the final determination does not decide any principle of general application – it relates only to the complaint under consideration. The Ombud stated that he carefully considered the matter and came to the conclusion that, “on the facts of this matter, fairness demands that the protection of the in duplum rule should be extended to the complainant. The printed form which was used for the 1991 loan agreement may have been suitable for policy loans before 1 January 1999, but the law changed on that date.”
With regard to the complainant’s request that the insurer should waive all the interest charged on the 1999 loan the Ombud pointed out the following:
- The complainant had a duty to inform the insurer of any change of his address and, according to the Insurer, this did not happen.
- They (the Ombud) do not think that it will be fair if the insurer is deprived of all interest on the loan.
It was, therefore, the unanimous view of the meeting that, in this case, the Insurer is bound by the in duplum rule in relation to the complainant’s policy loan.
The outcome of the case
The Insurer adjusted the loan accordingly.
Click here to download the determination.