The policyholder had taken out a bond from a bank. The bank required a policy on the life of the house owner to be ceded to it as security.
The premiums for the policy were included in the total bond payment made every month. As interest rates vary this payment amount changes from time to time and the complainant was, therefore, used to fluctuating amounts being deducted. The premium for the policy was deducted on an annual basis from the bond bank account and paid over to the insurer. When there was a take-over of the bank the bondholder decided to move her bond. At the time of the transfer the arrangement with the premium fell by the wayside. The premium was not paid over to the insurer and eventually the policy lapsed.
When the bondholder (and life assured) died the insurer did not pay out the claim as there was no policy in force. The wife of the deceased complained to our office.
We could not assist the complainant as the insurer had been justified in declining the claim. It appeared to us that the bank may have been at fault at the time of the transfer of the bond to a new bank. We contacted the Ombudsman for Banking Services who confirmed that he had jurisdiction in the matter and we, therefore, requested the complainant to complete the necessary forms in order to submit the claim to his office.
It is a concern that when a premium forms part of a bond instalment on a policy ceded to the bank the original policyholder loses control over the policy premium payments. When premium payments are not made for whatever reason the policyholder is “out of the loop” and will be unaware of the premium arrears and the possible lapsing of the policy.
As far as this issue is concerned we wrote to the Banking Council in 2003:
“We are writing to you in the hope that you can assist with the following problem.
As you are doubtless there is a widespread practice of life insurance policies being ceded to banks as security for loans, mortgage loans in particular. When such a cession is no longer operative, because the loan has been repaid, there is a need for the bank to advise the policyholder of that fact and return the policy document to the policyholder. It has come to our notice that policyholders are not, unfortunately, always advised of the cancellation of the cession.
This is particularly important where the insurance premium has been remitted by the bank to the insurer. This occurs where the bond repayment amount includes the cost of the insurance premium. In the absence of such advice the policyholder may in all innocence omit to pay the premium directly to the insurer and the policy could lapse or become paid-up. The policyholder could thus lose valuable policy benefits.
We would request you to please bring this problem to the attention of your members and in particular that it is essential that their clients be duly notified and that the policy document be returned to the policyholder as soon as the secured loan has been repaid.”
We have had no response to this letter and as far as we are aware no standard practice, however desirable, has yet developed in this regard. Equally desirable would be a practice that insurers, as debtors, should inform their policyholders, the cedents, whenever a claim is made on a policy by an outsider, such as a bank as cessionary. This would enable the policyholder to contest the payment, if there are good grounds for doing so. (See, too, “Cession”).