C56
Cession – security cession to bank – bank wrongly instructs insurer to surrender
the policy – insurer not to blame for giving effect to the instructions – complaint
referred to the Ombudsman for Banking Services.
Background
Mr A ceded his policy with insurer X to a bank as security for a mortgage loan.
Neither his premiums on the policy nor his instalments on the loan were in
arrears. Having applied to the bank for a further loan on the security of the
policy, he discovered that his policy had in the meantime been surrendered and
that the proceeds of the surrender had been applied against his loan
indebtedness to the bank. Mr A insisted that the policy be reinstated, against
repayment by him of the amount credited to his loan account, but the insurer was
not prepared to accede to the request for reinstatement particularly since it was
aware that Mr A was contemplating a disability claim on the policy. Mr A
complained to us.
Discussion
1.
The policy in question was ceded to the bank as security for the debt. The
bank, as cessionary, would only be entitled to apply for the surrender of the
policy, in the absence of consent from the policyholder, if the policyholder,
as cedent, were to be in arrears with the repayment of the secured debt
which, in this case, was not so.
2.
The issue, therefore, was whether Mr A was a party to the bank’s instruction
to the insurer to surrender the policy.
3.
Mr A denied that he had ever instructed the bank to apply for the surrender
of the policy. According to him someone in the bank must have converted
his application for a further loan to an application for the surrender, which
the bank in turn forwarded to the insurer and which the insurer had
implemented.
4.
Neither the insurer nor the bank at the request of the insurer, could produce
any convincing evidence to contradict Mr A’s emphatic denial that he had
ever asked that the policy be surrendered and the proceeds be applied to
his loan debt.
5.
The probabilities favoured Mr A’s version. His request for a further loan was
altered in a different handwriting and a further instruction to surrender the
policy was inserted. These changes could have been made after Mr A had
initially signed the document.
6.
The bank eventually conceded that it may have erred in asking the insurer
to surrender the policy. The very fact that Mr A contemplated instituting a
disability claim on the policy was a further probability militating against any
consent on his part for the policy to be surrendered at that stage.
7.
On the facts it followed that:
(a)
the bank committed a breach of the obligation of the
agreement underpinning the said security cession;
(b)
if the policy was not reinstated the bank could face a
substantial claim for damages inasmuch as a claim by the
insured on the policy would certainly have been “within the
contemplation” of the parties.
8.
Viewed from the insurer’s perspective it had received a legitimate instruction
to surrender the policy from the actual creditor of the right, being the bank
as the cessionary.
9.
The fact that the insurer did not inform Mr A of the application for surrender
was not fatal to its case inasmuch as the law, as it currently stands, does
not oblige an insurer to inform the cedent in securitatem debiti, before
paying out on or agreeing to a surrender of the policy, that a claim had been
made on the policy by the cessionary (cf “Some problems involving security
cessions of life insurance policies” 2004 16 SA Merc LJ par 8.3 and 8.6).
10. In the circumstances it was not possible for the office to make a ruling
against the insurer, either as a matter of law or equity, that the policy should
be reinstated against repayment by Mr A of the amount deposited into his
account.
11. Since the insurer was not prepared to reinstate the policy on Mr A’s terms,
we had no option but to refer the matter to the Ombudsman for Banking
Services.
12. The Ombudsman for Banking Services in due course informed the office
that Mr A accepted payment of a substantial sum of money in full and final
settlement of a claim against the bank. The policy, however, remained
surrendered.
JP
October 2005