Ombuzz Issue: Credit life retrenchment claims - Some Issues

Credit life insurance is taken out to cover an outstanding balance of indebtedness to a credit provider – on home loans, personal loans, credit card purchases, and vehicle and furniture purchases, etc. The insurance pays in the event of death, disability, critical illness, and also retrenchment.

The purpose of retrenchment cover is to protect the consumer (and also the credit provider) when the consumer loses a job and cannot pay a debt. In general, to avoid anti-selection, insurers impose exclusions covering situations where the person had a hand in losing his/her job, or when the end of the job is foreseeable/manipulatable. For example, there is no payment in cases of resignation, retirement, voluntary retrenchment, misconduct or "coming to the end of a fixed term contract". Insurers also define "retrenchment" in the policy, and will not pay if the policyholder loses a job in circumstances which do not meet the definition.

Complaints arise over disputes as to whether these situations have arisen, and there is sometimes a grey area. Some recent cases highlight this:

The complainant worked in a hair salon. Her employer gave her (and other employees) a letter stating that the business could not carry on due to the economic climate. The employer offered the employees the chance to "rent a chair" in the salon and work on a self-employed basis. The complainant did not want to do this, so she lost her job. The insurer argued that she had accepted voluntary retrenchment. We pointed out to the insurer that offering to rent space and be self-employed was not an offer of continuous employment, so declining the offer could not be seen as voluntary retrenchment. The economic climate had led the employer to close the business, and the employees were faced with involuntary unemployment as a result. The insurer agreed to pay.

The complainant was employed to manage bush-clearing work under a year-long fixed term contract, which was annually renewed for four years. Towards the end of the fourth year his employer notified him that his contract would only be renewed if there was sufficient work from its clients. The work dried up, and the contract was not renewed.

The insurer declined to pay a retrenchment claim, citing an exclusion in the policy: "we will not pay any amount if your unemployment was due to the expiry of a non-renewable fixed-term contract or a contract of a temporary or casual nature". The insurer also maintained that the situation was not a retrenchment as defined in the policy: "your forced retrenchment... as a direct result of new technology being introduced by your employer, reorganisation by your employer, or expectation of adverse conditions by your employer, which results in staff reductions".

We pointed out that the complainant's contract was in fact renewable, depending on the availability of work. The insurer in response argued that the employment agreement was non-renewable: the termination date of the contract was known every year in advance, and only changed when the employer gave notice of renewal. We took the view however that the complainant had a reasonable expectation that the contract would be renewed again, since it had been renewed several times before. The complainant had lost his job as a direct result of reorganisation by his employer, alternatively the expectation of adverse conditions, which resulted in staff reductions. The fact that the contract was renewable, and was renewed several times, would remove the possibility of anti-selection that would exist with a non-renewable fixed term contract, where the date of termination of employment would be known in advance. We made a provisional ruling to the effect that the insurer was liable to pay the retrenchment benefit, and the insurer complied.

The following cases illustrate the more straightforward application of exclusions or policy wording, where we upheld the insurer:

The complainant was unhappy with the fact that the insurer declined his claim for a retrenchment benefit. One of the exclusions in the policy provided that the insurer would not pay "if the insured person lost his/her job due to theft, fraud, dishonesty or any misconduct on his/her part". The available evidence indicated that the reason the complainant lost his job was misconduct. He had referred the matter to the CCMA, and the outcome of that process was an Arbitration Award. The Commissioner found that the employer had established that the complainant’s work was shoddy; she also found that the complainant had failed to comply with accepted standards for financial management and had refused to follow the legitimate instructions of his boss. While the dismissal was found to be procedurally unfair, the Commissioner therefore found the dismissal to have been substantively fair, with dismissal being an appropriate sanction. Since misconduct was the reason the complainant lost his job, he fell within the ambit of the exclusion and no claim was payable.

The complainant’s policy had an exclusion to the effect that no retrenchment benefit was payable "if the insured comes to the end of a fixed-term contract of employment, the expected end of and/or the early termination of a casual or temporary or work contract, or the insured finished the job he/she was specifically employed to do".

We examined the complainant’s contract of employment, and it was clear that he was appointed on a fixed-term, from 1 May 2013 to 31 August 2013. A clause in the contract read: "As this contract is for a fixed-term, you will not be entitled to any discharge or severance benefits upon termination of this contract. It is specifically recorded that there will be no expectation that your contract of employment will be renewed or prolonged beyond the date of completion as mentioned above. The termination of this contract as provided for in this agreement, shall not be construed as being a retrenchment, but shall be for the completion of the contract". The insurer’s defence that the policy exclusion applied in these circumstances was clearly justifiable.