A Supreme Court of Appeal (SCA) judgment has made it clear that group schemes that do not comply with the definition of a “group” in the Insurance Act are void. This includes group schemes under a “master policy” where the group does not meet the requirements of the Act’s definition.
The judgment was handed down last week in the matter between KGA Life Limited and Multisure Corporation (Pty) Ltd, an independent intermediary.
The SCA upheld KGA Life’s appeal against a judgment by the High Court in Gqeberha in March 2022 in favour of Multisure.
Read: Dispute between KGA Life and Multisure goes to Supreme Court of Appeal
The SCA noted the consequences of its decision for the funeral insurance industry and said a copy of the judgment would be sent to the Prudential Authority (PA).
KGA, which specialises in underwriting group funeral insurance schemes, and Multisure, which sells funeral cover plans, have been in a dispute since the second half of 2021 after Multisure cancelled the intermediary agreement between the parties and entered a new agreement with African Unity Life (AUL).
Most of the members of Multisure’s funeral group scheme receive grants from the South African Social Security Agency (Sassa). Q Link administers the premium deductions from their Sassa grants.
Approached for comment on the SCA’s decision, Clinton Macdonald, the chief executive of KGA Life, said: “We are satisfied with the outcome of the matter, which confirms and reinforces our ongoing commitment to placing our clients first to ensure that we continue to deliver on our promise of trusted funeral cover, an approach that has served us well for the past 37 years.”
Multisure’s chief executive, Denton Goodford, said: “Without getting into the detail and saying too much at this stage, we respectfully believe that this judgment is wrong and that it will result in a number of serious and negative consequences for the industry as a whole, especially for the thousands of intermediaries who have built big books of clients over many years in some cases, including funeral parlours who sell funeral insurance, and also for the millions of funeral insurance clients in South Africa who took out policies with those intermediaries. As a result, we intend bringing an application to the Constitutional Court for leave to appeal the SCA’s judgment.”
In March last year, the High Court in Gqeberha ordered, among other things, that the intermediary agreement between KGA and Multisure, as well as the master policy that formed part of the agreement, had been cancelled from 1 September 2021. It authorised Q Link to alter the deduction codes so that the premiums could be paid to AUL.
A key issue in the dispute between KGA and Multisure is the implication of the change in the definition of a “group scheme” that resulted from the implementation of the Insurance Act in July 2018.
There were no valid contracts to cancel
The intermediary agreement between the parties provides that if the agreement is cancelled for any reason by either Multisure or KGA, Multisure is obliged to notify “in writing, each and every policyholder on the book of the intermediary that the underwriting agreement with KGA has been cancelled”.
The SCA held there was no dispute that Multisure complied with this but said the issue to be decided was whether there was a valid contract to cancel.
The court drew attention to the following legislation:
- The licensing conditions introduced by the Insurance Act [sections 5(1); 23(4), and 25(2)].
- The transitional arrangements in Schedule 3 to the Act that provided for the PA to convert the registrations of previously registered insurers to licences within two years of the effective date of the Act.
- How Schedule 2 to the Act defines a “group”.
- How a “group scheme” is defined in the 2018 amendments to the Regulations issued under the Long-term Insurance Act.
The SCA said it was common cause on the papers that KGA was a licensed insurer when the parties commenced litigation. “Nothing is said about when it obtained its licence, but it was presumably before 1 July 2020.”
The licensing provisions of the Act “must be interpreted” to convey that no person may conduct insurance business unless that person is licensed under the Act to do so in respect of that business.
From the date upon which KGA became a licensed insurer, the group scheme “became a contractual arrangement for the performance of an unlawful act, namely the conduct of insurance business by KGA in breach of section 5(1) of the 2017 Act”, the SCA said.
“If, upon a proper construction of the provisions of the Act, the contracts comprising the group scheme became invalid and unenforceable, through the intervening legislation, Multisure’s subsequent purported cancellation had no legal consequences, as there were no valid contracts to terminate.”
The Court further held: “The general rule that things done contrary to statutory prohibition are invalid, which has as a consequence that contracts for the performance of those things are invalid, applies.
“In the result, there was no contract to be cancelled at the time Multisure purported to do so, and Multisure had no power or right to appoint AUL as a substitute for KGA as the underwriter of what had become its defunct group funeral insurance scheme. Multisure equally had no right or power to ask Q Link to make deductions from the Sassa entitlements of its former members and to pay those monies over to AUL.”
Insurers and intermediaries had two years to comply
The judgment stated it was the duty of insurers and associated intermediaries, during the transition period, to alter the terms upon which they conducted business, where necessary, because no licence would be available for the type of business for which the insurer was previously registered.
The proposition that despite the legislature’s fixing two years within which these changes had to be made, it was intended that where the deadline was not met, the insurance business could continue as before, subject only to criminal sanction, and that contracts for the performance of the now prohibited insurance would be enforceable, “is simply not sensible”.
The Court said the litigation, and the disputes that gave rise to it, originated in the decision by KGA and Multisure not to reorganise their business to comply with the Act.
The SCA criticised the behaviour of both parties and ordered each party to bear its own legal costs.
Act is intended to protect policyholders
Multisure argued the legislature could not have intended that policyholders should be deprived of any claim they have under a group funeral insurance policy for which no licence is held.
The SCA disagreed.
The Court said it is “significant” that the type of association of persons that qualifies as a group under Schedule 2 to the Act must not only be one formed for a shared or common purpose other than obtaining insurance but must also be democratically controlled.
“The clear legislative intent is to avoid the potentially prejudicial outcomes which are possible when a group scheme is under the control of an intermediary or an insurance company, or both, given that the only interest such parties have in the conduct of funeral insurance business is the extraction of profit from the payments required of the policyholders for the desired funeral cover.”
It would be “irrational” to assume the Act intended to endorse as enforceable group schemes of the type no longer permitted, the SCA said.
Multisure is not a policyholder
Multisure contended it is or was the policyholder, entitled to protection.
But the SCA said Multisure is not a policyholder in the sense in which the term is used in a context such as is found in section 3 of the Act. It pays no premiums, and it is not the beneficiary of any claims that might arise out of what is, or purports to be, a contract of funeral insurance.
KGA’s conduct not endorsed
Multisure also argued that upholding KGA’s appeal will mean the Court gives its approval to the “continued unlawful conduct of KGA of its insurance business in respect of the Sassa grant recipients”.
Putting aside KGA’s contention that it has lawfully insured, and continues lawfully to insure, Multisure’s former members, the SCA said this argument “misses the point entirely”.
To succeed in this litigation, the Court said Multisure had to establish, first, that it had the power, unilaterally and lawfully:
- to ordain that AUL would replace KGA as the underwriter of Multisure’s group scheme (its case on the founding papers); or
- to determine that each of its former members would be bound to enter an individual funeral insurance policy with AUL (its case in reply); and
- to authorise the institution of new deductions against the social grants payable to its members or former members.
“A finding that Multisure has failed at the first hurdle does not constitute an endorsement of KGA’s conduct, or a finding that it has a sound claim as of right to continue to be at risk (against receipt of premiums) in respect of the funeral policy interests of the individual former members of Multisure’s group. Those questions are not reached in this appeal,” the SCA said.
Moonstone’s comment
It remains to be seen what the response of the PA is going to be and whether the PA will use the remedies provided for in section 67 (headed “Unlicensed insurance business”) of the Insurance Act to compel the parties to make arrangements to ensure the fair treatment of the insured members.
Section 67(1) states: “If a person contravened or is contravening section 5(1) of this Act, the Prudential Authority, in addition to any other action that the Prudential Authority may take under this Act or the Financial Sector Regulation Act, may – (a) direct that person to make arrangements satisfactory to the Prudential Authority to discharge all or any part of the obligations under insurance policies entered into or purported to be entered into by that person.”
