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.
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.
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.