CR257 Cession – of life policy after sequestration of insured’s estate
Cession – of life policy after sequestration of insured’s estate – to what extent policy protected against creditors of the insured in terms of section 63 of the Act.
The insured took out a life policy. After the sequestration of his estate he ceded it to the complainant, his former wife, in terms of a divorce settlement. The trustee in the insured’s estate demanded a surrender of the policy from the insurer and was paid the surrender value of R58323. The insurer allowed the complainant, as cessionary, to continue with the policy at a value less the amount paid to the trustee, but she contended that under section 63(2) of the Long-term Insurance Act (LTIA) the sum of R50 000 of the policy enjoyed protection from the insured’s creditors and to that extent should not therefore have been paid to the trustee.
Two issues were involved. First, had the trustee been entitled to the full surrender value of the policy; and secondly, was the cession of the policy to the insured’s former wife valid in spite of the insured’s insolvency?
The first question, leaving aside the cession, was whether the policy in principle fell into the insolvent estate. The trustee contended that it did. He relied on section 20 of the Insolvency Act of 1936 which provided that all of an insolvent’s assets vest in his trustee upon sequestration.
Section 63(1) of the LTIA protects certain policies, to the extent of R50 000, from the creditors of the insured. It provides that a policy qualifying for protection shall to the extent of R50 000 “… not be liable to be attached or subject to execution under a judgment of a court or form part of his or her insolvent estate.” Section 65 goes on to limit and define the rights of the trustee in respect of a protected policy. It lays down that if the trustee is in possession of such a policy, he may deliver it to the insurer liable under it for the purpose of payment to the trustee of the sum to which he is entitled. If the trustee is not in possession of the policy, the person in possession of it shall deliver it, at the request of the trustee, to the insurer involved; the insurer must thereupon pay to the trustee the sum he is entitled to and deal with the balance of the proceeds in accordance with section 52(2) of the LTIA, which provides that the insurer must inform the policyholder of the policy’s remaining value and notify the policyholder that it will remain in force. This procedure ensures that the trustee and insolvent each receives that which he or she is entitled to.
The insurer also contended that, by virtue of section 63(3) of the LTIA, the protection provided by section 63(1) only applies in the case of the insured’s death. The office pointed out, however, that section 63(1)(a) expressly provides for protection during the insured’s lifetime.
The office’s conclusion was therefore that the policy did not fall into the policyholder’s insolvent estate but had to be dealt with in accordance with the provisions of section 65 of the LTIA.
The second question was whether the insured could validly have ceded the policy to his former wife in spite of his estate having been sequestrated. The office took the view that the insured was entitled to cede the policy but that he could not thereby of course transfer more rights than he himself had. The cession was therefore subject to the provisions of section 63 of the LTIA. The effect of such a cession would be that the insured’s creditors could not lay claim to any remaining benefits of the policy after the trustee’s claim has been satisfied. A cessionary will of course not enjoy any protection as far as his or her creditors are concerned.
In the result the insured’s former wife, by virtue of the cession, was regarded as the policyholder even though the cession was effected after the sequestration. There was after all nothing against upholding the cession, because the insured’s creditors could not be prejudiced by it. The cession entitled her to have the policy dealt with in terms of sect 52(2) of the LTIA.
The realisable value of the policy at the time of the sequestration was R58323.00. The insurer’s duty had been to pay to the trustee only the unprotected portion of the policy viz R8323.00. The remaining portion of the value of the policy had to be dealt with in accordance with sect 52(2) of the LTIA (read with section 65(3) (b)).
In the circumstances the insurer had overpaid the trustee to the prejudice of the complainant, the insured’s former wife. The insurer had therefore to top the value of the policy up to R50 000.
(For the purpose of this case it was assumed, and the parties accepted, that the current LTIA was applicable; and, although the trustees indicated that they would adhere to our determination, whether or not the insurer would have had recourse against the trustee was not considered.)