Insurer's unilateral cancellation of policies is declared unlawful
Legal Development2 July 20202 July 2020
Insurance & Reinsurance
On 26 June 2020, the Gauteng Local Division, Johannesburg upheld an application by seventy-four applicants against Constantia Insurance Company Limited and found that Constantia's unilateral decision to cancel their policies was unlawful.
The applicants took out Living Legacy and CoverGrow policies covering death and disability through illness and natural causes with Constantia. At the time of their purchase, the policies were sold under the short-term insurance business licence which Constantia held under the Short-term Insurance Act, 1998. Once that Act was replaced by the Insurance Act, 2017, insurers had to choose whether to apply for either a life or non-life insurance business licence, as they were disallowed from selling products in both categories.
Constantia chose to pursue non-life insurance business and would have had to engage with the Prudential Authority on what to do about the applicants' policies, which qualified as life products under the new Act, so that the Prudential Authority could make sure the policyholders' interests were protected. Instead of doing this, Constantia decided to cancel the policies by giving the applicants and 5427 other policyholders 30 days' notice via SMS. The applicants complained to the Financial Sector Conduct Authority, which dismissed their grievance. Unhappy with that outcome, the applicants approached the court for relief.
The court decided that:
The cancellation clauses in the wordings of the policies, which allowed Constantia to cancel the policies on 30 days' notice without cause, did not form part of the policies because it was a "particularly pertinent" provision which Constantia had not pointed out to the applicants during the telesales calls.
Even though the applicants were told during the telesales calls that the calls did not constitute the contract between them and Constantia, and that they had to familiarise themselves with the wording of their policies, it was not realistic to take it for granted that the applicants had read and understood the wording. The cancellation clauses were not "freely and consciously agreed to" by them. The court was influenced by the fact that:
The policies were targeted at low to medium-income persons who may have a limited education level or linguistic skills. Constantia had a responsibility to show that each applicant was aware of the cancellation clauses but it failed to prove it had done this;
Cover "for life" had been part of the sales pitch of the policies, which would have lulled the applicants into a false sense of security; and
The wording was sent to the applicants long after the conclusion of their policies.
Rule 19.2.1 of the Policyholder Protection Rules does not give insurers a right to cancel policies on 31 days' notice without cause. In general, the rules are intended for the protection of policyholders. Rule 19.2.1 is specifically aimed at overriding shorter cancellation timeframes in policies – not to impose rights on insurers.
By cancelling the policies, Constantia breached the principles of treating its customers fairly.
The frustration by Constantia of the Prudential Authority's powers, in cancelling the policies instead of engaging with the Prudential Authority about their future, was contrary to public policy, especially since the Prudential Authority's powers were meant to be exercised in the public interest and that the policies go to the very heart of the dignity of the policyholders.
Apart from the purported cancellations being of no force and effect and the policies remaining in force, Constantia had to inform all affected policyholders of the court's order, where to lodge claims and where to pay premiums. It would also need to engage with the Prudential Authority as it ought to have done, instead of cancelling the policies.
The applicants did not need to bring a class action, in the context of seeking relief for the other policyholders who did not feature as applicants. The court chose to exercise its inherent powers to regulate its own process in the interest of justice, by virtue of section 173 of the Constitution, 1996.
Treating customers fairly features ever-increasingly in insurance disputes, as evidenced by the court's decision. Insurers would do well to ensure that their policies contain cancellation clauses, in which event they should be pointed out to their insureds at sales stage, to avoid not being able to rely on them. It is further notable that the Policyholder Protection Rules do not give insurers an unfettered right to cancel policies without cause.
To access a copy of the full judgment of Nell and Others v Constantia Insurance Company Limited and Others, click here