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CR126 Secured debt repaid

CR126
Cession – security cession to secure repayment of instalments under a motor vehicle sale agreement – secured debt repaid – whether the insurer entitled to demand proof of redemption thereof.

Background

The complainant’s policy was ceded to a Bank as collateral security for the repayments of instalments under a vehicle sale agreement. The effect of such a security cession was that, pending redemption of the secured debt, only the bank as cessionary (and not the policyholder as cedent) may claim on the policy but only if the policyholder should default on repayment of the secured debt.

On satisfaction of the secured debt the ceded right reverts to the policyholder. It is not yet settled law whether the policy reverts automatically or whether an actual re-cession is required. (See LAWSA (2nd edition) Part 2 par 56). The Ombudsman supported the first alternative in an article entitled: “Some problems involving security cessions of life insurance policies” (published in 2004 16 SA Merc LJ par 11). If that is correct it would mean that the complainant was in law entitled to apply for the surrender of the policy after the secured debt had been settled without prior recourse to the Bank.

In the present case the complainant informed the insurer on 19 September 2005 that the secured debt had in fact been redeemed. Technically the policy once again vested in the complainant and consequently the complainant was entitled to apply for its surrender as at that time.

But that was not the end of the matter. The real issue was whether the insurer, as the debtor under the policy, was entitled to insist on certain conditions being complied with before acceding to the policyholder’s application for surrender. The answer, in general terms, is yes.

Discussion

An insurer, as the debtor under the policy, is at risk if it should make payment to the wrong creditor, be it to the policyholder, as its original creditor, or to a bank (as its substituted creditor under the cession), or to the policyholder (who claims that the secured debt had been repaid). If the insurer, in the latter eventually, should act on the mere say-so of the policyholder, and make a payment to him, it may be that the insured would still be liable to the bank if it should subsequently transpire that the payment of the secured debt was still in dispute.

In those circumstances it is not unreasonable for the insurer to insist on some proof that it is no longer at risk vis-à-vis the cessionary. Such proof can take a variety of forms: it can be documentary proof of a re-cession or a cancellation of the cession or a release by the cessionary or an indemnity from the cessionary or even incontrovertible proof that the secured debt has in fact been repaid.

The next question is: who is to produce such proof to the insurer: the policyholder or the cessionary? In our opinion it must be the party who claims payment, in this case the former. The policyholder was responsible in the first place for the insurer’s belief that the cessionary was henceforth entitled to the proceeds of the policy; consequently it was incumbent on the policyholder, rather than the cessionary, to adduce proof if it alleged that the situation had in the meantime changed.

The next question is: what sort of proof? The answer is, proof on a balance probabilities, which in layman’s term would translate into any reasonable proof.

What would the position be if reasonable proof were adduced by the policyholder but disregarded by the insurer? The answer is that the insurer would in such circumstances be committing a breach of its contract (the policy) vis-à-vis the policyholder who, on the postulate stated, is entitled to payment of the surrender value. One of the consequences of such a breach could for instance be that the interest on the premium loan debt for the period during which surrender was wrongfully delayed by the insurer would not be for the policyholder’s account.

To return to the facts. On 19 September 2005 complainant, in its application for surrender, informed the insurer “kredietooreenkoms opbetaal”. When the insurer, on 23 September 2005, asked the complainant for confirmation there was, on the information on file, no response from the complainant in that regard.

In our opinion the insurer was accordingly not at fault in not acceding to the application for the surrender of the policy to the complainant without additional proof of the Bank’s concurrence. The mere fact that premiums were no longer being paid by the Bank to the insurer did not constitute sufficient proof to justify the insurer in releasing payment to the complainant.

It follows that the policy continued notwithstanding the application to surrender it. That meant that cover for the complainant continued as well but it also meant that the clause in the policy was activated which states:

“Indien u nie premies betaal nie sal ons ‘n leningsrekening oopmaak en
die premies vir u betaal. Ons sal die kontantwaarde van die polis as sekuriteit vir die premielening gebruik. Ons sal rente by die leningsrekening voeg en u sal ons hierdie bedrag skuld. Ons sal die polis kanselleer indien die leningsrekening meer is as die kontantwaarde van u polis.”

It would accordingly have been in the complainant’s own best interest to submit confirmation from the Bank that it had no further claim on or interest in the policy so that the application for surrender could be processed by the insurer.

We accordingly suggested to the complainant that he should approach the Bank with a copy of the letter we sent him setting out the legal position.

Notwithstanding an invitation to dispute the correctness of our above analysis, alternatively, to provide information from the Bank that the principal debt had been redeemed, there was no response from the complainant.

Result

In the result the complaint was dismissed and the file was closed.

PMN
April 2006

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