Ombud orders reduction of interest on policy loan

22 May 2019 Judge Ron Mclaren, Onbudsman at Long-term Insurance
Judge Ron Mclaren, Onbudsman at Long-term Insurance

Judge Ron Mclaren, Onbudsman at Long-term Insurance

The unchecked accumulation of interest resulted in the complainant being “buried under a mountain of debt” – his loan debt of R5 319 grew more than 10-fold to R55 487.

The disregarding of a rule intended to protect debtors from exploitation by lenders resulted in a loan of R5 319 to a policyholder to balloon to R55 487 because of accrued interest.

The Ombudsman for Long-Term Insurance, Judge Ron McLaren, has ordered Momentum Life to apply the in duplum rule and to adjust a complainant’s loan balance accordingly, thereby considerably reducing the total amount owed.

The in duplum rule stipulates that a creditor is entitled to interest on the unpaid capital sum up to an amount equal to the unpaid capital sum. The rule specifies that interest on a debt will cease to run when the total amount of arrear interest has accrued to an amount equal to the outstanding principal debt.

In his submission, the complainant said that in 1983 he took out a life policy with what was then Southern Life Insurance Company. In 1999 he took a loan of R5000 against the policy. He did not remember making any arrangements with Southern Life to repay the loan separately as he assumed that his monthly premium would be adjusted to incorporate the monthly loan repayment.

He submitted that at no stage was he informed by Southern Life that he had to make a separate repayment for the loan amount. Although his monthly payment to Southern Life continued, he had virtually forgotten about the policy and was not informed of developments regarding additional payments by Southern Life.

Sometime between 1999 and 2017, Southern Life merged with Momentum Life and this state of non-correspondence/notification continued. He said during this period he moved home twice, although his employment address remained the same until December 2012 when he changed jobs.

The complainant said on 3 July 2017, when he enquired about the status of another life policy taken with Southern Life in 1997, he was informed for the very first time that the loan amount on the previous policy had not been settled and that it had accrued interest of approximately R48 000 over the years.

He said he immediately wrote to Momentum indicating that he wanted to settle the loan amount and also requested that the interest be waived since he had received no correspondence from Southern Life or Momentum.

In its response, the insurer said no records existed of the 1999 loan, but during 1991, there was a previous loan to the complainant which provided, among other clauses, the following:
• That interest will be paid on the amount of the loan at the rate of 18% per a year “or such other rate as may be determined by Southern Life from time to time”;

• That interest will be calculated annually in advance “and is payable on granting of the loan and thereafter within 30 days of each anniversary date of the policy”; and

• “Should any such interest be due and payable but unpaid, the amount thereof shall be advanced … as a further loan and all the conditions hereof shall apply to the increased capital.”

The insurer said the 1999 loan “would have been granted on the same basis” as the 1991 loan. It was further stated by the insurer that during 2007 and 2008, the complainant made enquiries about the loan and he was informed that “no repayment of the loan had been made”.

The insurer said it sent quarterly loan statements to the complainant, as well as annual policy statements on which the outstanding debt was reflected.

The insurer also claimed it was not informed that the complainant changed his address; that it “cannot be held responsible for the loan status of his policy” and that it “cannot waive such interest as the loan amount was borrowed not from policy funds but from external sources”.

The Ombudsman responded to the insurer, saying the in duplum rule applied to a debt arising from a loan or advance granted from 1 January 1999 and asked whether this rule had applied to the loan in question.

The insurer responded that Momentum held a long-standing view that in duplum applied in respect of interest which was in arrears.

The insurer said: “An interest-bearing loan allows the risk benefits to remain intact while there is a residual value in the policy to fund the loan. The loan debt increases over time as interest accrues to the loan balance.

“Borrowers can repay all or part of the loan debt at any time. When a benefit becomes payable under the policy, the outstanding loan debt is deducted from the benefit amount. If the debt becomes equal to or greater than the cancellation value of the policy at any time, then the policy is cancelled.”

In the case under deliberation, the insurer said it was not in the client's interest to cancel the policy as cancellation causes an immediate and substantial reduction in the policy's benefits, and also attracts early termination charges.

“This is not consistent with the intent of a product that has a main purpose of providing risk benefits. We, therefore, conclude that Momentum was entitled to claim interest payable on an unpaid loan granted.”

Following a meeting of the Adjudicators in the Ombudsman’s office, it was held that the in duplum rule was applicable and that it was applicable to any debt which arose out of a policy loan or advance granted after 1 January 1999. Also, the rule was not limited to “interest which is in arrears” as argued by Momentum.

The meeting unanimously agreed that the in duplum rule was to be applied by
Momentum to the complainant’s policy and his loan balance adjusted accordingly.
In a final determination, the Ombudsman quoted several settled cases where it was
ruled that the purpose of the in duplum rule was to protect debtors against
exploitation by lenders who permit interest to accumulate.

Judge McLaren said in the case under consideration, there appeared to be little doubt that the insurer allowed the interest to accumulate, secure in the knowledge that its investment was safe.

“In the present complaint, the loan agreement provided for the payment of interest. The complainant failed to pay any amount of interest, which, in the words of the 1999 loan agreement, became “payable on the granting of the loan agreement and thereafter within 30 days of each anniversary date of the policy”.

“Each amount of such accrued and unpaid interest is ‘arrear interest’. The insurer did not take any steps to recover such interest which, in terms of the 1999 loan agreement, was ‘due and payable but unpaid’.

“Instead, the amount of that interest was advanced as a further loan, causing the original loan to grow exponentially from R5319,00 in 1999 to R55 487,00 in 2018.

“The insurer cannot escape the consequences of the in duplum rule by its reliance on the addition of the arrear interest to the capital amount of the loan.

“Instead of collecting that arrear interest, the insurer since the inception of the policy, advanced it to the complainant.

“Such an accumulation of interest offends against the in duplum rule.”

The Ombudsman said on the facts of the matter, fairness demanded that the protection of the in duplum rule should be extended to the complainant.

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