OMBUZZ

IN THIS ISSUE

Beneficiary nominations

The following two cases demonstrate some of the difficulties which may arise with beneficiary nominations, and the need to keep nominations updated in the records of the insurer.

First case:

A disputed beneficiary nomination

The nomination and its revocation

The policyholder, a prison warder was sold a policy by an insurance agent who regularly visited the prison for that purpose. The policyholder was single at the time and nominated his mother as his beneficiary. In 2000 the policyholder married and had a child (he later had 2 more).

In 2001 when the insurance agent visited the prison again she met with the policyholder and his wife. The previous beneficiary nomination was revoked at this stage by the policyholder indicating on a beneficiary nomination form that the benefit should be paid into his estate. (A beneficiary nomination form was used although in effect it was a revocation of the earlier nomination).

According to the agent she faxed the revocation to the insurer’s head office after the meeting. The information was, however, not recorded in the insurer’s records at the time.

The murder

The policyholder was murdered in 2004. His murderer was arrested and confessed that he was hired to do the job without, however, identifying the person who hired him to do it. Before he could be brought to trial he escaped.

An insurer in two minds

The insurer, on being notified of the policyholder’s death, duly notified the policyholder’s mother of her nomination as a beneficiary and she accepted the nomination.

Before payment could be made to her a fax mysteriously arrived at the insurer’s head office. It seemingly bore the signatures of the policyholder and his wife, it was dated 14 June 2001. It was the revocation of the earlier nomination of the policyholder’s mother. No explanatory letter accompanied the fax and its origin was obscure.

On the strength of that document, and without further enquiry by the insurer, for instance, by speaking to its agent identified as such in the policy, the insurer made payment of the proceeds amounting to R228 348.87 to the trust company acting as the executor in the estate. (The estate would devolve upon the deceased’s wife and three children in terms of intestate succession).

The policyholder’s mother protested. She denied the validity of her son’s signature on the faxed document. The insurer thereupon submitted the document to a handwriting expert who concluded that it was indeed a forgery. On the strength of that information the insurer made an about-turn, recovered the money from the estate and paid it to the policyholder’s mother.

The policyholder’s wife then protested. It was only then that the insurer took the trouble of contacting their agent, which they should have done in the first place. After they had taken a statement from her the insurer made another about-turn and instructed their attorneys to threaten the policyholder’s mother with legal action if she did not repay the amount received by her and that they would hold her liable for the costs if she resisted the claim.

The office is involved

It was at that stage that the policyholder’s mother approached the office of the Ombudsman for help.

Our first problem was that there were serious disputes of fact about the validity of the revocation which could not readily be decided on the documentation. Was this truly the policyholder’s signature? If so, and if this was a genuine document, did the agent fax it through to, and was it received at the insurer’s head office before the policyholder was murdered?

Our second problem was that the policyholder’s wife was not a complainant to our office. Accordingly we would have no jurisdiction over her in her capacity as the newly appointed executrix in the estate of her late husband and we would not be able to hear her version of events. Fortunately she consented to join in the proceedings and that enabled us to hear her version.

Some legal issues

There were also some complicated legal issues:

• Would the mere notification of the beneficiary revocation to the agent of the insurer satisfy the formal requirements for a valid revocation of the first nomination?
• Were the requirements of writing and notice stated in the policy and the later document intended to protect both the insurer and the policyholder or only the former?
• If the requirements were simply for the protection of the insurer, could it unilaterally waive them, either before or after the death of the insured?
• The beneficiary nomination form signed in 2001 contained a provision stating that the new nomination would replace any previous beneficiary nominations and may, in turn, be revoked or amended by the policyholder. But there was a proviso. That was that any such retraction or amendment would only be valid if it was (a) in writing; (b) signed by the policyholder and (c) reached the insurer’s head office before the death of the insured. (In this respect the provisions of the new nomination form differed from the provision in the policy itself which simply required that the retraction had to be in writing, had to be signed by the owner of the policy and had to be received by the insurer before the death of the insured. In other words, it did not require that the nomination should be received at the insurer’s head office).
• If the revocation failed because the agent negligently failed to forward it to the insurer, would that amount to a delict for which the insurer, as the agent’s employer, incurs liability towards the policyholder’s estate?
• On the other hand, if the revocation was indeed valid with the result that the original beneficiary nomination was revoked and the mother no longer had a right to retain the payment previously made to her, was the insurer in the circumstances legally entitled to the recover the amount it paid to her considering their slipshod enquiries preceding it?

A hearing

These were all troublesome questions of law and fact which arose in the case. But the fundamental factual difficulty, on which all the other issues hinged, was whether the policyholder in fact signed the document or not.

Normally the office resolves disputes of fact on the documentation and on a balance of probabilities but disputes such as these cannot be disposed of in that manner. All the parties agreed and an informal hearing was then held where they were all present, including the insurer’s agent.

The agent’s evidence

In the course of the evidence of the agent, supported by the policyholder’s wife, it became plain to all, including the policyholder’s mother, that her suspicion that the document was a forgery was unfounded and that her son truly intended to benefit his estate. It also meant that the contrary conclusion of the handwriting expert was wrong.

But there was considerable doubt as to whether the agent truly forwarded the beneficiary revocation to the insurer’s head office in June 2001. If she did not do so, she was clearly negligent and such negligence would severely have compromised the estate’s claim to the proceeds of the policy. The agent had no convincing explanation of why there was no trace of her 2001 fax in the insurer’s files and records. She admitted that she made no effort to follow up on the matter in 2001 or thereafter, to ensure that this important document was filed with the policy file and recorded in the insurer’s records.

Three years later, so she testified, she heard from the wife that the policyholder had been murdered. She immediately went to her files, found the original document, checked on the insurer’s computer system only to discover that the 2001 revocation had not been noted against the policy. It was then that she faxed it through once again to the insurer, admittedly again without a covering note and again without following up to ensure that it reached its destination and was properly understood.

It was only later when the insurer eventually contacted her that she informed them of what had happened in 2001.

Exploring a settlement

Against that background the possibility of an overall settlement was explored.

The policyholder’s mother now knew that her son meant the proceeds to go to his estate and not to her. Her difficulty was that she had already spent about half of the funds that were paid to her by the insurer and that she could not afford to repay it. All she had left, she said, was a policy into which part of the proceeds was invested.

The wife’s difficulty was that if it could not be found that the revocation reached the insurer’s head office or, at the very least, an office of the company, the revocation might be found to be legally invalid. The fact that the agent herself knew about the revocation and had it in her file could not help since she herself worked from home and not from any of the insurers’ offices.

On the other hand, if the agent had not faxed the form recording the revocation to the insurer she was clearly negligent, for which the insurer might well be legally liable because an employer is liable for the wrongs committed by its employees in the course of their employment.

A settlement

Taking all these factors into account the matter was eventually settled on the following basis:

The policyholder’s mother did not have to repay the money she had in the meantime spent but she ceded to the insurer the policy which she had earlier taken out with part of the proceeds paid to her. An amount of R10 000 was payable to her by the insurer if the policy amounted to at least R120 000.

The deceased’s estate, represented by the wife, was persuaded to reduce its claim to R195 000 which represented about 85% of the claim value because of the uncertainties surrounding not only the validity of the revocation but the prospect of success of a delictual claim against the insurer.

The insurer was prepared to settle even though it had to pay more than 100% of the proceeds of the policy because it faced the very real danger of having to pay both claims in full, the mother’s claim because the later revocation of her nomination might be found to be legally invalid and the estate’s claim because of the negligent conduct of their employee. (The first claim would be contractual and the second delictual).

As the matter was settled it was not necessary for this office to decide on the legal issues.

Second case:

The nominated beneficiary predeceasing the life insured

The facts

The policyholder, who was also the life insured, nominated a beneficiary for the proceeds of the policy on her death, in terms of a revocable beneficiary nomination. (The policyholder could, in other words, revoke the nomination and appoint another beneficiary).

The beneficiary died before the life insured. She omitted to revoke or amend the beneficiary nomination before she herself died. (The policy did not provide for this eventuality). Who was entitled to the proceeds of the policy?

The issue

The insurer’s position was that it was still open to the executor of the estate of the nominated beneficiary to accept the nomination after the death of the policyholder. But the executor of the beneficiary’s estate expressed doubt in this regard and approached our office for assistance.

The legal position as we saw it

It is usually said that a beneficiary under a revocable nomination can only acquire a right by accepting the benefit on the death of the life insured provided the nomination has not been revoked.

There is case law that if the beneficiary in terms of an irrevocable nomination dies before the life insured the benefit may still be accepted by the beneficiary’s executor. The correctness of this view has, however, been questioned.

Is a beneficiary where the nomination is revocable in a different position? There is no case law directly in point.

We reasoned that a beneficiary under a revocable nomination is in a different position from one under an irrevocable nomination. A third party contract in the insurance context involves in the first place an agreement between the policyholder (who usually is also the life insured) and the insurer, instructing the latter to pay the proceeds of the insured’s policy to the third party nominated by the insured. This agreement ordinarily gives rise to an obligation between the insured and insurer to effect payment as instructed.

A third party contract is also intended to give rise to a second obligation flowing from the same contract. This second obligation is forged between the insurer and the third party (the beneficiary) entitling the beneficiary upon acceptance of the benefit to claim the proceeds of the policy from the insurer. It is only on acceptance that his entitlement is secure. This first obligation serves as the determining cause of the second obligation with the result that the second obligation depends for its validity on the first.

Taking a closer look at the obligation between insured and insurer, it is clear that in the case of a revocable nomination, the insured has not finally made up his mind whether or not the insurer must pay the proceeds of his policy to the particular third party. The insured has merely expressed a provisional intention to benefit a particular third party but he clearly reserved for himself nothing less than the right to nominate a different third party.

Since the proposed obligation between the insurer and the third party is dependent on the obligation between the insured and the insurer, the third party in terms of a revocable nomination derives no right, not even a conditional one, from the nomination. At most he has an expectation to acquire a right in future.

If a revocable nomination does not create a right of any description, it follows that upon the prior death of the beneficiary he simply drops out of the picture. There is nothing that can be accepted by his executor to secure his position. In the result the nomination fails.

Result

In the light of the above we came to the conclusion that the policy in the present case fell into the estate of the insured on her death with the result that it was not open to the executor of the beneficiary’s estate to accept the benefit. Both parties accepted our ruling.

The insurer has indicated that it intends requesting the Life Offices’ Association to submit proposals for legislation which would codify the legal principles applicable to revocable beneficiary nominations.

In the interim it may be prudent for policyholders to stipulate in the beneficiary nomination that the nomination is conditional upon the survival of the beneficiary to the life insured’s date of death. This would only be necessary if the policy does not provide for such an eventuality.

By the end of this month more information on beneficiary nominations will be posted on our website at: www.ombud.co.za