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Short-term insurance ombudsman cracks the whip

31 October 2012 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

It has always amazed me how long it takes to resolve disputes in the short-term insurance space. When I perused the Ombudsman for Short-term Insurance (OSTI) 2011 Annual Report the average turnaround time to resolve complaints was a staggering 223 days. E

The OSTI has also reduced the number of complaints that remain unresolved for periods longer than six months from 1309 (year-end 2011) to 522 at 30 September. With a bit of luck – and a lot of hard work – the organisation could clear this backlog in time for their next annual report. The rand value of complaints resolved by the OSTI in favour of consumers jumped by R1 million to R88 million over the first nine months of the year. There was a slight decline in the total number of complaints received, to 7210, over the period. Even so, there is more than enough of a complaints backlog to keep the schemes’ employees engaged!

The age-old ‘missed premium’ rejection

As soon as I receive the OSTI quarterly update I turn to the case study section. I enjoy discovering how the insurer and insured resolve difficult complaints with the Ombudsman’s guidance, and in some cases persuasion. The case I examine today deals with the rather common rejection of a claim due to a missed premium. A claim was submitted under a personal lines insurance policy for a vehicle which was involved in an accident on 4 November 2011. After declaring the vehicle a write-off the insurer rejected the claim on the ground that the insured did not meet his premium payment for the month in which the incident occurred and was therefore not on cover at the time. Was the insurer justified in rejecting the claim?

Before we reach any conclusion we must consider the facts. The agreed deduction date for the insured’s premium was the 15th of the month and the relevant policy wording, provided here courtesy the OSTI, reads as follows:

“General Conditions:

3. Continuation of cover where premium is payable by debit order:

a) The premium is payable in advance. The insured will have the choice of 3 bank debit order dates for premium payment, namely the first working day of the month, or the 8th day of the month (or the first business day after this, should this day not be a business day), or the 15th day of the month (or the first business day after this, should this not be a business day)

d) Where the insured’s debit order date choice is the 15th of the month, there will be no further debit order presented if the first attempt is returned by the bank, and there will be no cover for that month”.

This plain and simple policy wording seems clear enough. So what went wrong? And how did a dispute arise? You will no doubt be intrigued by what follows.

Insured did not pay post-accident premium

“The insurer was of the view that as the premium was not received on 15 November 2011, there was no cover for the loss which occurred on 4 November 2011,” notes the Ombudsman. “The policy wording clearly stated that should the insured elect the 15th day of the month to pay his premium, he would then not qualify for a grace period and no further attempts to collect the premium would be made by the insurer”. Although the insurer’s reason for rejection seems disingenuous, we must consider that the mid-month premium deduction is actually to pay for cover for that month. In terms of the policy wordings the insured was therefore off risk due to his non-payment.

The insurer changed its tune slightly after the complaint was lodged with the OSTI. They considered the insured’s extenuating circumstances (more on that in a moment) and offered to settle the claim on an ex-gratia basis by paying two thirds of the claim with the insured liable for the balance. The insured was apparently hospitalised for three days immediately following the loss event and had to return to the hospital for treatment on 14 November 2011. The Ombudsman notes that the insured rejected this offer. “The vehicle was still financed and the insured was not able to pay the shortfall to the finance house as he was not deriving an income at the time,” he notes.

Balancing opposing views

An important fact is that the insured paid the outstanding premium, albeit late. In his complaint to the OSTI he indicated that he was of the view that his cash deposit directly to the administrator on 18 November 2011 would ensure uninterrupted cover for the month in question. He also indicated that he depended on the motor vehicle to earn a living. How would the Ombudsman untangle this mess?

At the outset the insurer was requested to provide an explanation as to why an ex-gratia offer was made to settle two thirds of the claim. I guess the Ombudsman wanted to understand why the insurer would make an ex-gratia payment at all. Their response: “The acceptance of two thirds of their liability was not based on any specific aspect / proportion but rather due to the insured’s inability to meet his obligation to pay his premium due to his incapacity to generate an income following the accident”. They concluded that the insured should bear a third of the responsibility for the loss.

Enter the Policyholder Protection Rules (PPR).

The OSTI believes that the insurer’s policy wording was in breach of the PPR “on the ground that the insurer elected the 15th day of the month as the deduction date”. Why? How could this possibly place the insurer in breach? PPR Rule 7.5 reads: “Periods of Grace. An insurer shall ensure that a policy contains a provision for a period of grace for the payment of premiums not less than 15 days after the relevant due date: Provided that in the case of a monthly policy, such provision must apply with effect from the second month of the currency of the policy”.

The insurer’s defence of the PPR breach was disingenuous. They argued that by allowing the premium to be deducted on the 15th of the month they had already provided the insured with the required 15 days grace period. The OSTI was having none of it. “The insurer cannot rely on the fact that by allowing an insured to elect the 15th of the month as his deduction date he or she is already granted a 15 days grace period,” he said.

It is amazing how quickly a ‘cut and dried’ decision – based on simple policy wordings – can be dragged through the mud. Not surprisingly the insurer was requested to, and agreed, to settle the claim in full. “The insurer’s policy wording was in breach of the PPR and as the insured had paid his premium by making a cash deposit on the 18th of November 2011, he had in fact paid his premium within the 15 days grace period and was therefore entitled to cover,” concludes the OSTI.

Editor’s thoughts: A quick look at South Africa’s National Credit Regulator report confirms that many consumers are in deep financial trouble. A consequence of this is that many insured miss premiums. Do you often encounter problems at claims stage due to missed premiums? Please add your comment or send it to gareth@fanews.co.za

Comments

Added by roxanna naidoo, 30 Apr 2018
please can anyone advise me on what the name of the case is that is used in this article
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Added by Candice, 22 Mar 2013
I agree that insurers need to have rules that are steadfast with debit order dates. There are so many out there that tend to break the rules or bend them as far as possible. In this difficult situation I would have liked to also look at the length of time the insured was insured by the insurer, payment history (does he have a record of paying on time) or more importantly how often has he missed a premium and a second one consecutively leading to the policy been cancelled and reinstated. How many years has he been insured consecutively. This would show me if this client poses a risk to the scheme. Then again if he has missed only one premium and paid it within 15 days provided a good payment history. The insurer was unfair and incorrect in this case. For me this is where the client loses faith in insurance. Especially if it is an honest client who has been paying their premiums for many many years. So good to know we have regulatory bodies to assist insurance clients.
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Added by Louise, 01 Nov 2012
Sarah, Santam deducts their premiums strictly in advance..
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Added by humphrey, 31 Oct 2012
I agree with the Ombudsman on this case. It is interesting to note how the Office is getting on top of things (reducing outstanding cases and resolution periods) - perhaps a more reasonable approach (not pro-insurer but reasonable) is being being adopted by the new Ombudsman and this is leading to quicker resolution? I found the old Ombudsman (not from personal dealings but from published cases and claims folk comments) to be biased in the extreme against insurers - was this the reason for long resolution periods as unnecessary time was spent on fighting insurers on too many cases?
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Added by Sarah, 31 Oct 2012
So are you saying that if premiums are collected in arrears ie Zurich and I think Santam that in addition to the 30 odd days the insured has been covered they would then have a further 15 days grace from the end of the month when the debit is not met. Effectively this gives them from1 -30 plus 15 which seems unreasonable to Insurers.
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Added by Ayanda, 31 Oct 2012
As with Humphrey, I too have heard that several of the previous - and apparently now roundly discredited - ST ombudsman's staff are still working at that office. They apparently were poorly trained and do not know much about the law the way it actually is but the way the previous encumbent wished it would be. As a result, insurers are having to re-educate them through the process of individual case management. A long process, bedeviled by a lingering belief among some of them that Alternative Dispute Resolution means the application of alternative Law! SA's Constitution says we are all subject to one law and one law only. The OSTI cannot make its own law. Now that there is a proper lawyer at its head, one assumes we will start hearing of how his decisions are being made in accordance with established common, legislative and case law.
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Added by Jay, 31 Oct 2012
I do concur with the Ombudsman's judgement, he was spot on on this one. Interesting case indeed. However, I note Sarah's comment brings in an interesting aspect worth considering. I will thus reiterate her question, so are we saying that over and above the 30 days credit period, there is supposed to be a further 15 days grace period?
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Added by Cuban, 31 Oct 2012
PPR Rule 7.5 reads: “Periods of Grace. An insurer shall ensure that a policy contains a provision for a period of grace for the payment of premiums not less than 15 days after the relevant due date: Provided that in the case of a monthly policy, such provision must apply with effect from the second month of the currency of the policy”. The key here is "after the relevant due date". Thus if these insurers are happy to make the "relevant due date" 30 days in arrears the rule applies for a further 15 days.
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