Ombud urges probe into government payment system for insurance premiums in wake of fraud finding

Thousands of unsuspecting public servants may be victims of fraud involving millions of rands whereby unauthorised insurance policy premiums are deducted from their salaries through gaps in the State payment system, the FAIS Ombud has found.

Charles Pillai, the Ombud for Financial Services Providers, has urged Government to take urgent steps to review the insurance industry’s access to the Persal salary payment system which handles about R540 million per month in insurance premiums.

Mr Pillai’s call comes in the wake of his scathing judgment against the “large and high profile insurance company” African Life Assurance, trading as Sanlam Sky Solutions, which had effected an insurance policy and deducted monthly premiums from a widow, yet was unable to produce the document of authorisation.

“I find it highly undesirable that an insurance company of the stature of first respondent (African Life) is able to issue a policy without scrutinising or even viewing an application form or proposal,” the Ombud stated in his ruling.

The Ombud’s determination followed a complaint made by Mrs Nonhlanhla Clara Khawula, a widowed schoolteacher from Umzinto on the KwaZulu-Natal South Coast against African Life after she had discovered that an insurance policy was fraudulently opened under her name.

For 10 months African Life had deducted premiums from Mrs Khawula’s salary despite it being brought to her attention that the policy was unauthorized.

The Ombud found that one Leonard Sandile Mqadi, employed by Durban-based financial services broker Timir Financial Service, trading as Southern Investment Corporation, had fraudulently put in place an insurance policy using Mrs Khawula’s personal details.

The Ombud ruled that African Life Assurance, the first respondent, and Timir Financial Service, the second respondent, had both acted negligently in not preventing this conduct in the first place.

In particular first respondent was negligent in not having taken effective steps once the fraud was discovered to take appropriate action, both to redress the wrong and to ensure that Mqadi’s conduct was appropriately dealt with.

Mrs Khawula, who is the sole breadwinner of two teenage boys, had alleged that Mqadi, the third respondent, had approached her and her colleagues to sell to them a number of financial products. She had accepted certain recommendations made by him and thereby entered into two contracts of insurance.

She had bought a Gold Series Burial Plan with a monthly premium of R93, 50 and a Retirement Annuity with a monthly premium of R165.

Both premiums fell comfortably within her budget, based on her modest monthly salary of R6523.28, and were to be deducted directly off her salary through the government’s Persal system.

Between February 2005 and April 2005, Mrs Khawula noted from her salary slips the monthly deduction of R93, 50 and R165. In July 2005 when she received her May and June salary slips, she discovered there was an unexplained additional deduction of R198.50 per month from her salary.

Upon careful perusal of her salary advice she realised the deduction was by African Life Assurance. She took time off work and visited the regional office of first respondent in Durban. She enquired how and why the additional funds were being deducted from her salary.

She discovered the insurance company’s system had recorded a life policy with the principal life assured as and elderly couple, “Mr and Mrs Khuzwayo” who were unknown to her, and the beneficiary as one “Leonard Mqadi” – the same Mqadi, it appears, that she had instructed to put in place the two authorised policies.

She subsequently requested a copy of the application form to verify the validity of the policy and requested, in addition, the immediate cancellation of this unauthorised policy.

During August 2005, she discovered that first respondent, notwithstanding her efforts, was still deducting premiums for the unauthorised policy from her salary.

She approached first respondent again in September 2005 to inquire as to why the deductions were not stopped. She also followed up on her request for the application form. She was not given a reasonable explanation and no documentation regarding the unauthorised policy was provided by any representative of the first respondent.

Much to her frustration and disbelief, first respondent continued to deduct premiums from her salary for the months of September 2005, October 2005, November 2005, December 2005, January 2006 and February 2006.

Convinced that first respondent was not prepared to resolve her problem, she approached Legal Wise who managed to get first respondent to eventually cancel the policy in March 2006. However Legal Wise was also unable to obtain a refund of the unauthorised premiums and eventually lodged a complaint with the FAIS Ombud.

After lengthy and thorough investigations, the Ombud found that neither first nor second respondent was able to produce an application form or proposal in respect of the unauthorised policy, both claiming that they were “unable” to find the application form in their respective systems.

“This is unacceptable as an application or proposal signed by a client goes to the root of the formation of a contract of insurance.

“The first respondent, notwithstanding the absence of an application form, readily issued a policy and proceeded to deduct premiums from the complainant’s salary.

“The unauthorised policy was clearly a fraud committed by the third respondent;

“After being informed of the unauthorised policy by the complainant, no action was taken against the third respondent.

“For a period of approximately 20 months after finding out about the unauthorised policy, third respondent continued to work for the first and second respondents as an authorised representative.

“To this date no criminal proceedings were instituted by the first and second respondents.”

The Ombud said it was not good enough that African Life merely refunded the premiums that they unlawfully deducted.

“There was no offer of compensation for the time and expense incurred by the complainant, nor did the first respondent offer to account for the funds that they had taken.

“First respondent failed to even offer interest on the amount that they unlawfully obtained from the complainant.”

The Ombud found that African Life had contravened the FAIS Act and General Code by failing to have in place any system that effectively eliminates risk of clients suffering financial loss through theft, fraud or other dishonest acts.

This was indeed poor administration and negligence on the part of the first respondent.

The Ombud ordered African Life to make a full disclosure of the financial benefit it enjoyed from the receipt of Mrs Khawula’s premiums and to pay such amount to Mrs Khawula together with interest at 15.5% per annum from May 2005 to date of payment.

The first, second and third respondents were ordered to jointly pay an amount of R350 as compensation for transport costs and time occasioned by Mrs Khawula in her efforts to resolve the matter.The determination can be read here (PDF file 154kb)