Ombud enforces in duplum rule

Momentum Life didn’t apply the TCF principle – Treating Customers Fairly – when an insured’s loan of R5 319 grew to R55 487 – more than 10-fold – by ignoring the in duplum rule.

Momentum refused to pay a claim after a policyholder was killed in an apparent hijacking because he didn’t disclose his medical history.

The Ombudsman for Long-Term Insurance (OLTI) upheld Momentum’s decision but after public outrage the insurer reversed its decision and amended its life policies.

It seems they haven’t learned from the TCF principle.

The in duplum rule is intended to protect debtors from exploitation, which is why the ombud, Judge Ron McLaren, ordered Momentum to adjust the balance reducing the amount owed because of accrued interest.

The in duplum rule stipulates that interest must not be more than the unpaid capital sum and interest on a debt will cease to run when the arrear interest is equal to the outstanding principal debt.

The insured said that in 1983 he took out a life policy with the Southern Life.

In 1999 he borrowed R5 000 but did not remember making any arrangements with Southern Life to repay the loan separately as he assumed that his monthly premium would be adjusted to incorporate the monthly loan repayment.

However, Southern Life, which has since merged with Momentum, did not tell him he had to make a separate payment for the loan amount, and there was no communication between 1999 and 2017, and though his monthly premium continued he forgot about the policy.

On July 3 2017, when he asked about another life policy taken with Southern Life in 1997, he was told for the first time that the loan had not been paid and had accrued interest of R48 000 over the years.

He wrote to Momentum saying he wanted to settle the loan amount and asked that the interest be waived since he had not received any correspondence from Southern Life or Momentum who said they had no records of the 1999 loan, but in 1991, there was a previous loan which stated, among others, that interest on the loan will be 18% a year, or any other rate that Southern Life may institute.

However, interest will be calculated annually in advance and is payable on granting of the loan and then within 30 days of the policy’s anniversary date.

Momentum said the 1999 loan “would have been granted on the same basis” as the 1991 loan. During 2007 and 2008, the complainant was told that the loan had not been repaid.

Although Momentum said it sent quarterly statements and annual statements, which reflected the debt, they were not informed that the complainant changed his address; that it “cannot be held responsible for the loan status of his policy” and that it “cannot waive the interest as the money was borrowed from external sources”, not the policy.

The ombud said the in duplum rule applied to the debt arising from a loan or advance granted from January 1 1999.

Momentum said in duplum applied to interest which was in arrears.

“An interest-bearing loan allows the risk benefits to remain intact while there is a residual value in the policy to fund the loan. The loan debt increases as interest accrues to the balance.

“Borrowers can repay all or part of the loan debt at any time. If the debt becomes equal to or greater than the cancellation value of the policy, then it is cancelled. It was not in the client’s interest to cancel the policy as cancellation causes substantial reduction in
the benefits, and attracts early termination charges,” Momentum said, and added it was entitled to claim the interest on the unpaid loan.

The adjudicators agreed that the in duplum rule was applicable to any debt which arose out of a policy loan granted after January 1 1999. The rule was not limited to “interest which is in arrears”, as argued by Momentum.

Adjudicators said Momentum had to apply the in duplum rule and adjust the loan balance.

Judge McLaren quoted several cases which ruled that the purpose of the in duplum rule was to protect debtors against exploitation by lenders who permit interest to accumulate.

The ombud said there appeared to be little doubt that the insurer allowed the interest to accumulate, knowing that its investment was safe.

“The loan agreement provided for the payment of interest. The complainant failed to pay any amount of interest, which, in the words of the 1999 loan agreement, became ‘payable on the granting of the loan and then within 30 days of each anniversary date of the policy’. But Momentum did not take any steps to recover the interest.

“Instead, the amount of that interest was advanced as a further loan, causing the original loan to grow from R5 319 in 1999 to
R55 487 in 2018.

“The insurer cannot escape the consequences of the in duplum rule by relying on the addition of the arrear interest to the loan.

“Instead of collecting that arrear interest, Momentum, since the inception of the policy, added it to the capital sum.

“Such an accumulation of interest offends against the in duplum rule,” Judge McLaren said.

“Fairness demands that the protection of the in duplum rule should be extended to the complainant,” the ombud ruled.

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