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Validity of lapsing of a policy – When does repudiation apply?

An insurer’s obligations concerning the lapsing of a policy was recently the subject of an investigation by the Long-term Ombud, following the repudiation of a claim.

“Repudiation involves disputing the validity of a contract and refusing to honour its terms. Repudiation is therefore conduct which shows the clear and explicit intention of the party concerned to no longer be bound to the contract.”

Background

The complainant took out a Funeral Dignity Plan for the deceased which commenced on 1 July 2013. The policy covered him for a funeral benefit of R18 000 at a monthly premium of R115.00.

The insurer states that they received messages from the complainant’s bank confirming that there was no authority to debit the May 2014 premium and that there was a stop order placed against the insurer’s debit order for June 2014 premium. According to the insurer, the complainant had instructed his bank intentionally that the insurer did not have authority to debit his account and that they must be barred from doing so in future. As a result, the policy was cancelled.

The policy has a provision which states:

“Should you miss 3 consecutive Premiums your Policy will lapse.”

The complainant contended that he had negotiated with the insurer to reinstate his policy after it had “lapsed” on the same terms as prior to the lapse. The insurer contended that during the reinstatement of his policy new benefits were negotiated. The new benefit was R15 000. When the life insured died the insurer paid out R15 000 and not the R18 000 under the original policy. That gave rise to the complaint.

The insurer’s contention

The insurer’s argument was based on the following:

  • Section 52 of the Long Service Insurance Act 52 of 1998
  • The repudiation of the original policies during May and June 2014
  • The prescription of the complainant’s claim in terms of section 11(d) of the Prescription Act no 68 of 1969

The Ombudsman’s determination

This matter was discussed at a meeting of adjudicators which took place on 30 November 2018 and the original reason for the determination was based on the three issues stated in the insurer’s argument.

The meeting decided that it is unnecessary to consider the issue whether the insurer was obliged to send a notice in terms of section 52 where the policyholder denies that the insurer has a right to debit his account for the reasons mentioned.

In determining whether the conduct of the complainant amounts to a repudiation, an important consideration is the following: the policy would only lapse if three consecutive premiums have been missed. It was noted that the policy was cancelled after the complainant had missed only two consecutive premiums. As such, it was the view of the Ombud that the insurer’s decision to regard the policy as lapsed was premature and inconsistent with the terms and conditions of this policy.

If the complainant simply misses two premiums, that cannot be a repudiation. It should not make any difference if he cancels two payments. He had a right to keep the policy alive by paying the third instalment, which would have prevented the lapsing. And the payment would have broken /interrupted the three consecutive month period. If viewed objectively his conduct must be considered in the light of the fact that contractually he still had a chance to save the policy by paying in July 2014.

At reinstatement stage, it may be that the complainant (although he agreed to the terms) had mistakenly thought this was a reinstatement. If the insurer did not breach/repudiate the policy by “lapsing” the new agreement would never have been concluded.

The Ombudsman’s decision

It was a unanimous decision of the Ombudsman that the insurer should honour the complainant’s claim and pay the benefit on the original policy less the shortfall in premiums and the amount of the benefit that has already been paid.

The insurer challenged the provisional determination, but after considering all the evidence the Ombudsman re-confirmed its original ruling.

According to the Ombudsman “fairness dictates that the insurer should pay the claim on the basis that the default was capable of being rectified as shown by the facts of this case that the complainant had not intended to repudiate the contract. If it was his intention to do so, he would not have reinstated his policy.”

Outcome

The insurer paid the R3 000 which was in dispute.

We welcome readers’ views on this decision. If a client wilfully cancels a policy, applies for reinstatement a year later, and does not note the terms and conditions of the new contract, is he really entitled to the benefit decided on by the LT Ombud?

The issue of “Prescription” will be discussed in a future article.

Click here to download the detail of the Ombudsman case.

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