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Bulletin

A series of unfortunate events: Interpretation of a policyholder’s repudiation of a life insurance policy

Fasken
Reading Time 5 minute read
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On 7 May 2020, the Supreme Court of Appeal (the “SCA”) considered whether the actions taken by the holder of a life insurance policy with Discovery (the “Policy”), amounted to a repudiation of the Policy. The action was instituted following the death of Ms Church by her parents, Mr and Mrs Hogan as the nominated beneficiaries under the Policy. The amount payable under the policy was R 4 million (the “Claim”). Discovery defended the Claim on the basis that the Policy had been cancelled by Ms Church and accordingly it had ceased to be on risk on 10 September 2018, a mere twelve days before Ms Church’s untimely death on 22 September 2018.

The series of unfortunate events leading up to the Claim are set out below.

1 January 2016

Commencement date of the policy insuring Ms Church’s life for R3 million, which was to escalate until the date of the occurrence of her death.

6 August 2018

Ms Church telephonically advised Discovery that she had decided to cancel the Policy as she was moving over to Liberty Life.

15 and 16 August 2018

Ms Church wrote to Discovery informing them that she was cancelling the policy with immediate effect. Discovery advised Ms Church’s insurance broker by letter that the Policy would be cancelled as per Ms Church’s request. He, however, advised the broker that a notice period of 30 days applied to cancellations.

23 August 2018

Unbeknownst to Discovery, rs Church instructed her banker to stop the payment of the debit order in respect of the premium due under the Policy for September 2018.

28 August 2018

Discovery wrote to Ms Church’s broker and advised that the policy would be cancelled with effect from 1 October 2018. It was further advised that the last day of cover would be 30 September 2018, with the final premium payable on 3 September 2018. It was reiterated that the cancellation was subject to the 30 days’ notice period.

3 and 10 September 2018

When Discovery submitted the monthly debit order to the bank for payment on 3 September 2018, the debit order was returned unpaid with the remark “payment stopped by account holder”.

Discovery advised Ms Church in writing that her policy had been cancelled with effect from 1 September 2018. On the same date, Discovery sent Ms Church a text message advising her that her Policy had been cancelled and advising her on the process to reinstate the Policy.

27 September 2018

Five days after Ms Church’s death, Mr and Mrs Hogan paid the September premium to Discovery. The Claim was submitted around a month later, but was rejected on the basis that Ms Church had not paid the September premium.

 

The High Court Proceedings

The High Court found in favour of Mr and Mrs Hogan on two primary grounds:

  1. The Policy was still valid at the time of Ms Church’s death since Discovery had accepted the payment of the premium on 27 September 2018.
  2. In terms of the Policy, Ms Church was entitled to a 30 day grace period to remedy the failure to make payment of the premium.The Court held that Discovery had failed to adhere to this term of the Policy as Ms Church was not granted the 30 day grace period and accordingly, Discovery was liable to pay the Claim.

The judgment was appealed by Discovery.

The SCA

The SCA, in upholding the appeal by Discovery, considered two pivotal issues:

  1. Where Ms Church’s instructions to her bank to stop payment of the September premium amounted to repudiation of the Policy; and
  2. Whether Discovery should have afforded Ms Church the 30 day grace period in order to pay her outstanding premium.

Whether Ms Church’s instructions to her bank to stop payment of the September premium amounted to repudiation of the Policy

In addressing this issue, the SCA applied the objective test of repudiation:

The test is whether such a notional reasonable person would conclude that proper performance (in accordance with a true interpretation of the agreement) will not be forthcoming. The inferred intention as manifested by objective external conduct accordingly serves as the criterion for determining the nature of the threatened actual breach.”

In applying this test, it was held that “a reasonable person in the position of Discovery would have interpreted Ms Church’s conduct as evincing an intention no longer to be bound by the terms of the contract.” The Court’s reasoning was based on the series of events demonstrating Ms Church’s unequivocal indication that she had no intention of continuing with the Policy and wanted it cancelled immediately.

First, she had telephonically and in writing notified Discovery of her intention to cancel the Policy. Secondly, she had instructed her bank to stop payment of the premium payable on 3 September 2018 despite Discovery having informed her of the 30 day notice period. Discovery was therefore, entitled to accept the repudiation and cancel the policy immediately.

Whether Discovery should have afforded Ms Church the 30 day grace period in order to pay her outstanding premium

The Court held that the 30 day grace period for an unpaid premium does not apply in cases where the cancellation is as a result of repudiation by the insured. The grace period only applies where the non-payment of the premium is not a repudiation of the policy, for example, non-payment due to an error of the bank or insufficient funds in the insured’s account. Further, the Court highlighted the importance of considering Ms Church’s cumulative actions, which all indicated an intention to repudiate.

Conclusion

In conclusion, Ms Church’s Policy was cancelled not due to the non-payment of the premium per se but because Discovery elected to accept Ms Church’s repudiation of the contract. The SCA judgment therefore underscores the autonomy of parties to a contract – although they may cancel as they please (subject to the terms of the contract), they must accept the inevitable consequences of such cancellation.

This bulletin was prepared by partner Deanne Wood, associate Emma Alimohammadi and candidate attorney Kedibone Seroka.

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