Commercial Law: Insurance Claims and Intentionally Missed Payments on Insurance Premiums

An insurance contract is an agreement between an insurer and the insured where the insurer undertakes, in return for payment of a premium, to cover the insured against the happening of a specified future and uncertain event.

Where the insured fails to make a payment towards their insurance premiums, it does not automatically amount to a repudiation of the insurance contract. However, where the insured intentionally fails to make payments and ignored notices to pay, it may result in the insurer accepting such conduct as an act of repudiation the contract. This acceptance of repudiation need not be by notice to the insured nor is there an obligation on the insurer to provide the insured a grace period or extension on the payment period.

In the decision of Discovery Life Limited v Hogan and Another (389/2020) [2021] ZASCA 79 (11 June 2021) an insured took out a life insurance policy with Discovery in 2015 and had nominated her parents (the Respondents) as the beneficiaries under the policy.

On 15 August 2018, the insured informed the insurer by letter that she wishes to terminate the insurance policy with immediate effect. The insurer then responded by writing to the insured’s insurance broker that the policy will be cancelled but a 30-day termination period applies, meaning that the policy would be cancelled effective 1 October 2018 and the last premium would be due on 3 September 2018.

On 23 August 2018, the insured instructed her bank to stop the debit order payments in respect of the premium due under the policy. As a result, on 3 September 2018 when Discovery submitted the monthly debit order to the bank, the debit order was returned unpaid with a notice from the bank stating that the payment was stopped by the account holder. Discovery then wrote a letter to the insured on 10 September 2018 that her policy has been cancelled with effect from 1 September 2018. She passed away on 22 September 2018.

The Beneficiaries, on the advice of the insurance broker, paid the September premium and informed Discovery, who in turn informed the Respondents of the requirement for reinstatement of an insurance policy being that they need to submit a completed declaration of health form. The Beneficiaries did not respond to Discovery and on 19 November 2018 submitted a claim under the policy. On 22 November 2018, Discovery advised the Beneficiaries that the claim under the policy was declined as the policy had been cancelled. Following this, the Beneficiaries launched an Application in the Gauteng Division of the High Court for the payment of the proceeds of the policy with interest.

The Beneficiaries succeeded in their arguments that Discovery had elected to hold the insured to the terms of the policy in its correspondence when the insured sought to cancel the policy with immediate effect, therefore, both parties ought to honour their respective obligations under the policy. They further argued that Discovery failed to inform the insured of the unpaid September premium as required by the terms of the agreement and failed to provide 30-day grace period prior to cancelling the policy.

Discovery appealed the above decision at the Supreme Court of Appeal (the SCA) with leave from the High Court. The SCA held on the issue whether the insured’s conduct in instructing her bank to stop the premium payments amounted to a repudiation of the contract. The Court applied an objective test and stated that the emphasis is placed on what someone in the position of the innocent party would think the insured intended to do and whether a reasonable person would conclude that proper performance will not be forthcoming.

The Court found that, after considering all the surrounding circumstances, the insured had no intention to honour the terms of the insurance policy where a 30-day notice period for termination of the policy was required and for payment of a further premium. The Court also found that the requirement on the insurer to give a 30-day grace period did not apply in instances where the policy is repudiated by the insured.

In conclusion, it is important to note that the general principles of the law of contract apply to insurance contract. Despite the particular terms of the contract, as an insured person, one should not commit an act of repudiation which may be accepted by an insurer. Such an act may result in the cancellation of an insurance contract without notice to the insured.

For any assistance or guidance contact Jacques Odendaal at jodendaal@dkvg.co.za, Gerrie van Gaalen at gvgaalen@dkvg.co.za and Matthew Pillay at mpillay@dkvg.co.za

This article is for general information purposes and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Always contact us At DKVG Attorneys for specific and detailed advice.