The warning bells toll

On 21 December 2006, FAIS Ombud Charles Pillai made a determination which will make the insurance industry sit up and take notice. In ruling against SA Home Loans on a rejected bond protection policy, he set a clear precedent for future cases.

The FAIS Act was established to regulate financial service providers with a specific mandate to protect the consumer. Consumers can bring unresolved complaints to the FAIS Ombud, who will consider and rule on these complaints in terms of the Act.

The history of the case in question is straight forward. Mr and Mrs Naidoo bought a bond protection plan (policy) to cover an additional bond taken over their fixed property. The policy was sold to them by direct telephone marketing.

Mr Naidoo died six months after taking out the policy. SA Home Loans rejected Mrs Naidoo's claim against the policy sighting a two year exclusion period on deaths related to pre existing conditions.

Saroja Naidoo, widow of Subramoney Naidoo, complained to the FAIS Ombud in her capacity as the surviving spouse, and joint life insured under the policy.

The customer deserves full disclosure

Without going into too much detail, the determination in this case hinges on two key findings.

Key finding 1: SA Home Loans did not communicate important facts relating to the policy to both the insured. The bond protection plan was a joint policy in which both Soraja and here husband's lives were insured. The policy exclusion clause was only communicated to Saroja.

Key finding 2: SA Home Loans did not take proper care to ensure the key exclusion clause was clearly explained, brushing past the clause in a mere 14 seconds of telephone conversation. A snippet from the telephone transcript reads:

Consultant: "There are some exclusions... If you suffer from a pre existing condition then you won't be covered for that condition in the first two years, meaning let's say if you have had cancer in the past, for the first two years you won't be covered for cancer, that kind of thing... but you sound very healthy to me?"

In the Ombud's view, the final phrase in this discourse is poorly worded, so as to suggest the insured need not make any further disclosure about pre existing conditions.

Extenuating factors

The Ombud mentions some additional factors which, though not in contravention of the Act, influence his ruling. The most prominent here is his concern with the amount of commission charged on the policy. SA Home Loans charged 21.75% commission on the monthly premium - a very high commission given the telephonic sales channel and the amount of financial advice imparted. Another point raised by the Ombud was the policy made no mention of the fact that it provided decreasing life cover.

The pre existing medical condition which might have contributed to Mr Naidoo's death becomes a mute point in this ruling. The Ombud has the final say:

"Clearly the disclosures relating to the exclusion was not properly communicated to Complainant [Mrs Naidoo]. Critically no communication was made to the deceased [Mr Naidoo] who, as the first Assured on the policy was a party to the contract. The disclosures made to the complainant were in any event, not provided in plain language, created uncertainty and was certainly not comprehensive enough. Additionally, it was confusing and misleading.

"It is clear that Complainant has and continues to suffer financial loss, as a result of the failure on the part of the Respondent [SA Home Loans] to render a financial service compliant with the FAIS Act."

The Ombud proceeds to order SA Home Loans to perform on the bond protection plan and reimburse the complainant for bond payments she had made in the interim. To avoid a similar situation, the insurance seller should communicate the terms of the policy to all parties covered by it. In addition, they should ensure that each insured party is fully appraised of and understand any exclusion clauses.

Editor's thought:
Given today's regulatory environment there's no room for complacency when it comes to selling financial products. Your best protection is to ensure that your sales procedures comply with every aspect of the relevant Act - particularly the FAIS Act. Be thorough, or be sorry...