Do not stop paying instalments when claiming credit risk cover

Judge Ron McLaren, The Ombudsman for Long-Term Insurance.

Consumers who hold credit risk cover are responsible for paying the credit provider the contractual instalments whilst an insurance claim is being investigated.

The Ombudsman for Long-Term Insurance Judge Ron McLaren said consumers were often of the mistaken belief that once a claim has been admitted, the entire outstanding balance should be erased. This is not so.

When credit is granted, and risk cover for that credit obtained, two distinct contracts arise: a credit agreement on the one hand and a credit life insurance policy on the other hand.

A consumer will enter into a credit agreement with a credit provider, in terms of which the credit provider extends funds, repayable in instalments.

A credit life policy is entered into with an insurer, and the insurer will provide cover for an outstanding balance in the event an insurable incident arises. In turn, a consumer is liable for risk premiums.

Credit life insurance is defined by the National Credit Act, 34 of 2005, to “…include cover payable in the event of a consumer’s death, disability, terminal illness, unemployment, or other insurable risk that is likely to impair the consumer’s ability to earn an income or meet the obligations under a credit agreement.”

“What consumers sometimes do not realise, is that whilst an insurance claim is being investigated, the consumer remains liable to pay the credit provider the contractual instalment.

“Consumers are often of the view that once a claim is admitted, the entire outstanding balance should be erased. This may, however, not be the case.

“Be aware of your credit life policy’s provisions. In many cases the insurer will only be contractually bound to settle the outstanding balance as at the date of the claim event,” said the Ombudsman.

He cited three recent cases involving credit risk insurance.

In Case One, the complainant instituted a permanent disability claim during April 2015, advising that she stopped working on 28 February 2015. The claim was initially declined and thereafter, the complainant lodged a complaint with the Ombudsman.
After an investigation and intervention by the Office of the Ombudsman for Long-Term Insurance, the claim was approved about 18 months later.

The insurer settled the outstanding balance as at 4 March 2015, in its view, the date of the event.

The complainant advised that whilst the claim was being investigated, she rightfully continued paying the credit instalments, which included the credit life insurance premiums. She calculated the total amount she paid during the claim’s investigation to be in excess of R100 000, including the credit life premiums.

The insurer refunded the credit life premiums paid by the complainant, but referred back to the policy, which stated the policy benefit as “payment in a single sum of the outstanding liability under the credit agreement, not exceeding the sum assured and excluding arrear instalments and arrear finance charges”.

The insurer didn’t pay the amount equal to the credit instalments between the date of the claim event and the date of payment of the claim. So, during the 18 months between the two dates the complainant had to continue paying the instalments and the insurer didn’t refund that amount. In this particular case it amounted to R67 389.15.

The insurer paid the outstanding amount owed on the car as at date of claim event i.e. R436 480.

“The insurer was correct in stating that whilst a claim is under consideration, the complainant is required to continue making payments to the credit provider. The insurer suggested that the complainant should approach the credit provider itself to obtain a refund.

“The complainant accepted the insurer’s advice and the matter was resolved,” said the Ombudsman.

In Case Two, the complainant instituted two claims, one for each of his financed vehicles, during January 2013. The claims were as a result of an artery bypass operation that occurred in December 2012. The claims were, however, rejected at the end of January 2013, and again during March 2013.

The complainant approached the Office of the Ombudsman for Long-Term Insurance two years later and the insurer offered to settle the outstanding balances as at the date of the claim event, being December 2012.

The complainant, however, advised that in view of the 32 months that had passed since the claim event and the eventual settlement offers, he had suffered substantial financial losses, amongst others, extra premiums that he had paid on both vehicles and extra interest that he was held liable for.

The insurer approached the credit provider that provided the vehicle finance, and the credit provider agreed to refund the complainant the extra instalments paid.

Despite the payments made by the insurer and the credit provider, the complainant advised that there was still a shortfall amount due to him.

The insurer then offered to pay the complainant additional interest and the Ombudsman made a compensation award in favour of the complainant for poor service by the insurer when the claim was initially refused.

Although there was still a shortfall amount the complainant accepted the insurer’s offer and the Ombudsman’s compensation award.

Case Three makes the point that retrenchment benefits in credit life policies do not usually provide cover for the outstanding balance on the credit agreement. Such benefits often only cover the credit instalments for a certain period e.g. six or 12 months while retrenched. There may even be a lower limit on the sum insured for the retrenchment benefit.

In this matter, the complainant had a personal loan with an outstanding balance of R71 104 at the time he was retrenched. The maximum limit on the retrenchment benefit was only R12 500 while on other benefits it was R120 000. He claimed under his credit life policy.

The instalments on the loan were paid for 12 months while the complainant was unemployed. The insurer in effect overpaid as the amount that was paid was R44 143, 06, considerably more than the R12 500 maximum stipulated in the policy.

The policyholder complained to Ombudsman as he had expected the outstanding balance to be paid, i.e. R71 104.

The Ombudsman ruled that there was no further amount due to be paid by the insurer.