Cession – security cession – policy ceded to bank to secure a bond – policyholder informs insurer that bond had been repaid and applies for a surrender of the policy – insurer demands proof that the policy had been receded to the policyholder – insurer continues, notwithstanding the notification, to deduct premiums from the surrender value of the policy.
(i) The policyholder ceded her policy to a bank as collateral security for the repayment of a bond.
(ii) The policyholder notified both the insurer and the bank that according to her the bond had been repaid in full and she asked that the policy be terminated and that its surrender value be paid into her bank account.
(iii) The insurer’s attitude was that it required consent from the cessionary and proof of a recession of the policy before it could give effect to her request.
(iv) Failing such consent or proof, the insurer continued to recover premiums from the surrender value of the policy.
(v) The policyholder complained to our office and demanded that the surrender value of the policy be paid to her, with interest, from the date upon which she gave notice of the repayment of the bond.
The attitude of the office was:
(i) that the first and foremost question was whether reliable proof had been furnished by the policyholder as cedent, that the secured debt had in fact been redeemed;
(ii) if so, it would then be for the insurer, and not for the cedent, to obtain confirmation from the bank as cessionary that it no longer retained an interest in the policy;
(iii) once such proof was furnished the insurer had to accept that the policyholder was to be reinvested with all the rights of a policyholder relating to the policy including the right to surrender it and be paid the surrender value;
(iv) that the policyholder would accordingly have to be placed in the financial position in which she would have been if her application for surrender of the policy had been properly processed at the time she made it.
The insurer, in responding, made the point that “it is not sufficient for the cedent to make a statement that the debt has been extinguished, particularly as the cedent has a personal interest in making such an allegation”; that the insurer was accordingly entitled to insist on evidence that the cessionary no longer had an interest in the policy; and that the duty to furnish such evidence rested on the policyholder and not on the insurer.
Nevertheless, so the insurer said, “for the sake of resolving this matter amicably” the insurer had decided to pay the surrender value as at the date notice was given together with interest.
The office wrote back as follows:
“We agree with you that the insurer as debtor, in the case of a cession in securitatem debiti of a policy, is entitled to insist on evidence from the cessionary that the cessionary no longer has an interest in the policy when the policyholder notifies it that the debt for which the policy was ceded as collateral security, has been redeemed. I would go one step further. The insurer is in the first place entitled to insist on adequate proof of that fact from the policyholder as cedent. But once such proof is furnished the insurer cannot ignore it. The insurer is then obliged to take the matter up with the cessionary. And if there should be a dispute between the policyholder and the cessionary as to whether the secured debt has been repaid, the insurer must make its own decision as to which party is in the right and act accordingly.
In this case, happily, it is not necessary to pursue this line of thought because of your decision to pay the surrender value to the policyholder as at 8 October 2004 with interest, for which, in our view, you are to be commended.”
The rights and obligations of an insurer, policyholder and cessionary where there is a dispute as to whether the secured debt has been fully repaid remains a murky one. Clarification awaits another day.