Secondary

Is Restitution Fair to All?

A reader recently shared an interesting case with me concerning claw back of commission after a claim was repudiated. As this concerns principles, rather than the specific insurers, I removed all references to the parties concerned.

Background

A client took out a life policy with insurer A in 2006 through broker A.

In 2013 the policy was replaced with a disability and dread disease policy with insurer B, through a different broker. As a result of this replacement, the life cover with insurer A lapsed and the commission was proportionately reversed.

The client later lodged a disability claim with insurer B. The claim was repudiated on the basis of non-disclosure of a pre-existing medical condition.

Subsequent to the repudiation, insurer A cancelled the (lapsed) life policy from inception and refunded 75% of the premiums paid to the client. It also requested broker A to repay all the commission received, contending that they made a mistake in issuing the original policy. It further contended that the pre-existing condition dated back prior to 2006 and as such they would not have covered the client in 2006, had the correct information been disclosed.

Refund of Premiums

 The response from the FSB to a complaint by the broker clarifies the rationale behind the decision:

From the information submitted by broker A, insurer A is of the view that the policy taken out in 2006 by the client was void ab initio (i.e. from the beginning). In such a case, each party is, in terms of the Law of Contract, obliged to return the performance that had been received in terms of the contract. In this scenario, it means that, as insurer A was no longer bound to render policy benefits to the client subsequent to them becoming aware of the alleged non-disclosure, it is generally obliged to restore all premiums received by them. This is known as restitution.

There are exceptions to restitution. One may be if the insurance contract between the client and Insurer A contained a clause which provided that, in the event of a material non-disclosure, all monies paid to Insurer A (or a certain percentage thereof) would be forfeited.

The other instance may be where it can be shown that the alleged non-disclosure was fraudulent.

Refund of Commission

 In terms of Regulation 3.5 (2)(ii) of the Regulations issued under the Long-term Insurance Act (the Regulations), if a premium or any part thereof is for any reason refunded by the long-term insurer, any commission paid by the long-term insurer shall be reversed and refunded to it by the person to whom it was paid. There are a few exceptions to this (such as in respect of a fund policy), but none of such exceptions apply in this case.  The Regulations are clear that if a premium or a part of it is refunded, irrespective of the reason, a concomitant result is that the commission that has been paid must be refunded by the person to whom it was paid.

If the client or broker A failed to disclose a pre-existing condition to insurer A and such non-disclosure “materially affected the assessment of the risk under the policy”, the policy taken out by the client during 2006 shall be invalidated – (see section 59(1)(a) of the Long-term Insurance Act).

FSB View

It seems the 25% of the premium that was retained by Insurer A is for costs and expenses incurred in administering the client’s policy prior to its replacement. It is difficult to say whether or not Insurer A’s decision to retain the said percentage of the premium is based on a forfeiture clause or on any alleged fraud by the client or broker A, or both.

What is clear is that Insurer A regarded the non-disclosure of the client’s pre-existing condition as material. Hence they cancelled the policy, refunded a portion of the premiums paid and are claiming all commission paid to broker A.

As pointed out, Regulation 3.5(2)(ii) provides that if a premium, or any part thereof, is for any reason refunded by the long-term insurer (such as Insurer A), any commission paid by the long-term insurer shall be reversed and refunded to such insurer by the person to whom it was paid.

Accordingly it is the FSB’s view that Insurer A was entitled to claim a full refund of the commission from broker A, despite the fact that it only refunded 75% of the premiums to the client.

Response from the broker

It appears that nothing can be done to address this under current legislation. In response to an appeal from the key individual, the FSB commented:

We have noted your concerns about the law as it currently reads, particularly the relevant parts of the Regulations issued under the Long-term Insurance Act dealing with the refund of commission.   

 Your views will be considered when the time for reviewing the said Regulations comes.

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