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Credit Life Assurance
Saturday, September 1, 2007
Conditional selling worries

It is doubtful the provisions of the National Credit Act 2005 will curb the practice concerning compulsory insurance. Most lenders require some form of credit life to secure a loan in the event the borrower dies or, in some cases, becomes disabled and cannot earn a living.
However, how do you monitor what happens in a furniture store or electronics shop? Many customers will not necessarily have any cover of their own. They are borrowing to buy goods anyway, so are unlikely to have been able to pay for insurances. They may not even know the difference between, say, an insurance company, an insurance broker or the retail salesman; may not even fully understand how insurance works. The temptation to go with the salesman’s pitch (he has all the paperwork readily at hand) is insurmountable, to the extent the insurance from the store is almost always automatic, untested and unchallenged as being reasonable.
‘Conditional selling’ was first covered in the Insurance Act 1943. In Section 23 it stated that the debtor is to have ‘free choice’ in respect of the insurer with and the intermediary through whom the policy (to secure a debt) is to be taken out.
The principals were carried forward into the Short-Term Insurance Act 1998 (Section 43) and the Long-Term Insurance Act 1998 (Section 44). Together they essentially state that a consumer must not be subject to any coercion and may exercise freedom of choice in providing an insurance policy to protect the interests of a creditor. The consumer shall have freedom of choice as to whether to enter in to a new policy, use an existing policy or a combination of the two, and as whether or not the total value of indemnity provided shall exceed the value of the interests of the creditor.
Section 106 of the National Credit Act 2005 (which became fully effective 1st June 2007) affords the same consumer protection. In terms of this section a credit provider may require a consumer to maintain credit life insurance, but it must not exceed, during the term of the agreement, the total of his obligations (ie it must be a reducing term life insurance policy, which is cheaper than a standard term life policy). The exception, again, is a mortgage agreement whereby the insurance may not exceed the full asset value of the property (that is, it would not need to be a reducing term product) – see more details below.
Further the credit provider must not force the consumer to maintain insurance that is “unreasonable” or at an “unreasonable cost”. The credit provider may not add any surcharges or additional fees above the actual cost of insurance. The consumer has the right to waive the proposed policy and substitute it for one of his own choice, and such policy may provide for the payment of premiums by the consumer (ie must not form part of the debt). In this case the credit provider may pay the premiums on the consumer’s behalf, for instance, to ensure the policy remains in force.
Where the consumer has paid for an annual policy he is entitled to a refund of the unexpired portion of the premium remaining after the loan has been settled and all obligations have been met – as for instances, in the case of early settlement of a debt.
It is certain the authorities, now armed with three acts that govern conditional selling, will be monitoring business practices very closely, especially since many smaller loans, such as for furniture, televisions and kitchen appliances, are taken out by largely the less-sophisticated members of society.

Exception to the rule

The exception provided for in the legislation, also carried forward from the 1943 Act, concerns ‘immoveable property’ but that the premiums must be ‘reasonable’.
For years banks have been hiding behind this exception which gives them - and other credit providers - the right to choose the insurer when a borrower is granted a home loan. Some are challenging this provision, which has found its way into the replacement act: Section 43 of the Short-Term Insurance Act 1998, subsection 5. This is in respect of a mortgage bond on condition that the premiums so charged are “reasonable” as certified by the Registrar. This would refer to a Homeowners’ Policy, for example.
However, a warning issued December 1983 (yes, almost 25 years ago) is still relevant today, concerning the exception clause. In his circular the then Registrar of Banks pointed out: the purpose of this circular is to obtain the co-operation of banking institutions so as to prevent the latitude, which they presently enjoy, being curtailed by legislation.
Clearly, the subject of compulsory insurance has been a very tiresome one for the authorities and, indeed, consumers. At the time the Commission of Inquiry into the Long-Term Insurance industry recommended that banks be prohibited from acting as life insurance brokers as is the case in some other countries including the US, Canada, West Germany and Switzerland.
It would not be a stretch of the imagination for this threat to be revisited. Furthermore, such prohibition need not necessarily be limited to banks. The likes of furniture retailers, motor car dealers and other intermediary lenders are sailing even closer to the wind since they do not have the exclusion clause to protect them. By Nigel Benetton 

Copyright © Insurance Times and Investments® Vol:20.8 1st September, 2007
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