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Consumer Affairs
Tuesday, May 1, 2007
Stiff lesson

Charles Pillai, the Ombud for Financial Services Providers, has determined against South African Home Loans (Pty) Ltd, ordering the company to pay an unemployed Isipingo Hills widow, Saroja Naidoo, the outstanding indebtedness on her house bond with effect from the date of the death of her husband. It was also ordered to refund all payments against the bond made after the husband’s death prior to settlement of her claim against the company.

SA Home Loans had been found to have made unsatisfactory disclosures to the client: they were confusing and misleading; created uncertainty; were not comprehensive enough; and were not provided in plain language.
Mr Pillai did find that the company had explained an exclusion clause pertaining to pre-existing medical conditions to Mrs Naidoo, but it had not adequately done so, nor had it spoken to her husband, Subramoney, at all, yet who was not only the ‘first life insured’ under the policy but who also happened to be a cardiac patient.
SA Home Loans rejected a claim made by her in terms of the credit joint life policy she and her husband had agreed to take out, which provided for the settlement of the outstanding bond debt in the event of the death of either. The initial indemnity of the policy was R199 436.63, to cover the R100 000 bond and interest, and would reduce in line with the debt over a 16-year period. It was sold through telephonic direct marketing, as an additional means of securing the debt, on the back of the mortgage loan issued for the purchase of their home.
The ‘Basis of Agreement’ included confirmation of the telephone conversation between Saroja Naidoo and Priyadharshni Naicker, in which she “agreed and where applicable declared” that all information supplied formed the basis of the policy.
Repudiation of her claim was based on clause 13 which essentially stated that if a life assured died within 24 months of policy inception due to any pre-existing condition no claim would be paid and all premiums paid would also be forfeited. The premium for the joint life cover incidentally was a hefty R463.63 a month.
Mr Naidoo died six months after policy inception, “as a result of a pre-existing heart condition.”
However, the pre-existing conditions clause was not discussed with her husband, nor was it explained to her adequately enough: otherwise they would not have not have taken out the policy. In determining in her favour, Mr Pillai referred to an important 14-second clip of the taped telephone conversation:
Naicker: “There are some exclusions …If you suffer from a pre existing condition then you won’t be covered for that condition in the first two years, meaning let’s say if you have had cancer in the past, for the first two years you won’t be covered for cancer, that kind of thing… but you sound very healthy to me?”
Mrs Naidoo: “Yes, yes, yes…...”

Comments Mr Pillai, it is an undisputed fact that the company only spoke to one of the life assureds, Mrs Pillai. “No conversation was ever held with the deceased who was also a party to the policy……….the disclosures were made to her alone and not to the deceased.
“Nowhere on the undisputed facts is there any reference to any disclosures or warnings or discussions regarding the pre-existing conditions clause, or any other terms and conditions for that matter, in relation to the deceased.
“Logic would demand that any discussion relating to the pre-existing conditions of the deceased ought to have been discussed with the deceased himself and not with his surviving spouse.”
He said in terms of the FAIS Act, material disclosures must be made to the client to whom the financial service is rendered. “In this case, we have two clients, Mrs Naidoo and the deceased. The responsibility to disclose rests with SA Home Loans.”
The conversation ending as it does with the statement: ‘but you sound very healthy to me’ does not invite Mrs Naidoo to make any disclosures about pre-existing conditions; rather it compliments her on her state of health which, to a person of her circumstances, would communicate a very different message to that which is intended.”
Mr Pillai said a further question that needed to be answered was whether the disclosure about the pre-existing conditions clause was adequate and appropriate in the circumstances of the financial service, taking into account the factually established or reasonably assumed level of knowledge of the client. In the course of the investigation by the Office of the FAIS Ombud, Mrs Naidoo was interviewed and it became quite clear that she was “an unsophisticated woman with only basic education. Financial services and financial products are by their very nature complex. Some simple questions would have led the company to understand that this was a vulnerable consumer.”
Mr Pillai also commented on the amount of commission that was being charged on the transaction, some 21.75% of the monthly premium (close to the maximum legislated rate of 22.5% for group credit schemes where the intermediary also does administrative work).
“It is interesting to note that no mention is made of commission anywhere in the policy documents, except in the Illustrative Benefits and Premiums Schedule. The level of commission is, in any event, high relative to the type of policy, the sales channel and the level of financial advice that was in fact provided in this case.”
The quality of service provided was wanting, bearing in mind that SA Home Loans did not bother to speak to both parties to the contract, provided the barest minimum by way of disclosures and took a mere 14 seconds to provide a pertinent disclosure on which the insurer relied.
Another issue was the company’s failure to explain the nature of “decreasing life cover”. Many consumers labour under the mistaken belief that they enjoy life cover once provided, when in fact all they have is a decreasing life cover.
“Consumer protection demands that material features of any product be communicated to the client,” said Mr Pillai. It was clear, however, that the last thing on the mind of SA Home Loans was to place the interests of the client before its own, as required in the FAIS Act.

Copyright © Insurance Times and Investments® Vol:20.4 1st May, 2007
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