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CR382 Mistake, lapsing, reliance, reinstatement

CR382

Mistake, lapsing, reliance, reinstatement

Lapsed policy – insurer informing policyholder that if arrears paid the policy would be reinstated, and mistakenly advising that this would be without underwriting if reinstatement took place before a mentioned date – policyholder paying arrears before mentioned date – insurer invoking its mistake – policyholder entitled to enforce contract on basis of reasonable reliance.

Background:

1. The policyholder had a “key person” policy on the life of an employee.  Premiums for October and November 2017 were paid late, after the thirty day grace period. 

2. On 25 November 2017 the insurer sent the policyholder a letter advising that “Your policy has lapsed (been cancelled)”.  The letter also advised that “you may be able to reinstate the policy within 6 months”.  It stated further:

“You may be able to reinstate your policy

If you decide to pay the arrear premiums, the policy may be reinstated depending on [the insurer’s] underwriting requirements at that time.

Please speak to your financial adviser or call us to discuss your options.  You will need to apply for reinstatement within 6 months of the date of this letter”.

3. The policyholder requested that the policy be reinstated.  On 29 November 2017 a letter was sent to the policyholder’s broker (agent for the policyholder) stating as follows:

“The total outstanding amount (December 2017 premium included) is R1 479.76 to reinstate the policy without formalities.  Should the policy be reinstated after the 28th February 2018, the reinstatement will be subject to underwriting assessment”.

4. A similar letter was sent on 8 December 2017.

5. The policyholder paid the outstanding amount of R1 479.76, which included the premium for December, on 20 December 2017. 

6. The insurer then stated that it made an error in offering to reinstate the policy without formalities.  It insisted that the life insured be underwritten again before it would reinstate the policy.  The policyholder complained to our office.

Discussion:

7. We noted that the policy is silent on the issue of reinstatement.  This means that there is no right to reinstatement flowing from the policy.  An agreement on reinstatement would thus have to be reached between the parties.  There would have to be an offer and an acceptance, to constitute a binding agreement (a contract).

8. The letter sent on 29 November 2017 (paragraph 3 above) appears to be a clear offer by the insurer to reinstate, without formalities, if the total outstanding amount is paid.  The time within which payment must be made for reinstatement without formalities is not made as clear, but the implication is that it should be before 28 February 2018.

9. The policyholder paid the total outstanding amount of R1 479.76, which included the premium for December, on 20 December 2017.  In doing so the policyholder indicated acceptance of the insurer’s offer.

10. The insurer then stated that it made a mistake in offering to reinstate the policy without formalities.

11. This mistake would be regarded as causal, since according to the insurer it intended to contract on different terms, ie on the basis that underwriting would be required.  The mistake is material (essential), since it led to dissensus between the parties on a material term of the contract.

12. An essential mistake in principle means that a contract is invalid (void ab initio), because of the lack of subjective agreement. 

13. Contractual invalidity in this situation may be seen as unfair to the other party, if he reasonably believed that there was a valid contract, and the reasonable reliance approach may then come into play.

14. In accordance with the reasonable reliance approach, it must be asked whether the policyholder (the non-mistaken party) reasonably believed that there was subjective consensus between the parties.  If so, he should be able to enforce the contract despite the insurer’s mistake.  In terms of the reasonable reliance theory, the contract will be valid if the mistaken party (the insurer) created the impression that it subjectively agreed to the contract; and there was reliance on this impression by the non-mistaken party; and the reliance was reasonable.

15. In this case the insurer created the impression that it would reinstate the policy without underwriting/formalities if the arrears were paid before 28 February 2018.  The policyholder relied on this impression, paid the arrears on 20 December 2017, and attempted to pay subsequent premiums.  In our view the policyholder’s reliance in this case was reasonable.  We stated our view that the insurer should be held to the contract.

Result:

16. The insurer reinstated the policy without underwriting.

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