Death claim payment of interest
This case study looks at a complaint about a life insurance death claim and issues around the payment of interest from the Insurance and Savings Ombudsman (ISO) annual report.
Monday, October 11th 2010, 3:34PM
Background
In June 2002, a life insurance policy was arranged with P and, in August 2003, the life insured died.
From August 2003, there were delays in providing the information P required to enable it to consider the claim made by relatives of the life insured, who were acting on behalf of the Estate.
The claim was not accepted until May 2008. Solicitors were subsequently instructed to act on behalf of the Estate.
In April 2009, the Estate's solicitor sent P the information it required to pay the claim. When the claim was settled, P paid the sum insured, but did not include any interest.
The Estate's solicitor queried the non-payment of interest on the basis that, in accordance with the provisions of section 41A of the Life Insurance Act 1908 ("the Act"), the payment of interest was mandatory from the 91st day after the date of the life insured's death.
P responded with the payment of interest of $10,209.40 from October 2008, when the solicitor fi rst advised P he was representing the Estate, to the settlement date. The amount was challenged by the Estate's solicitor, who referred to the mandatory requirements of section 41A of the Act.
Although P subsequently offered to pay additional interest (initially of $51,878.42 - based on a rate of 5% and, later of $77,409.60 - on the basis of P's actual earnings over the period), it defended the claim for interest on the bases of a breach of the duty of good faith, breach of contract, negligence and unjust enrichment.
In making its final offer of additional interest of $77,409.60, P advised the Estate's solicitor it did not believe it was required to pay interest in accordance with section 41A of the Act, "in circumstances where [the Estate was] seeking to be unjustly enriched as a result of its own unreasonable and inexcusable delay in providing [P] with the evidence necessary for it to process and approve the claim".
When considering P's final offer of additional interest of $77,409.60, the Estate's solicitor queried whether P would pay interest on the unpaid interest.
P offered to pay interest on the unpaid interest at the rate of 4% for a specified period. The offer was not accepted and the matter was referred to the ISO.
Assessment
Payment of interest in accordance with section 41A of the Act
To obtain information on industry practice in the situation, the Case Manager provided 6 companies with an outline of the facts and asked what their practice would have been in relation to the payment of interest.
Two companies indicated they would have paid interest in accordance with the Act - irrespective of the cause of the delay. Three companies indicated their position could be affected by the reason for the delay. The sixth company indicated it would not have paid any interest, because its policy wording required all proofs to be provided before the provisions of the Act applied. (The ISO disagreed with this approach and the matter was pursued separately with the company concerned and resolved satisfactorily.)
Having regard to the provisions of paragraph 5.7 of the ISO's Terms of Reference ("TOR") and, in particular, the manner in which C had been dealt with by P and the degree to which P was in control of the systems and procedures which were the subject of the complaint, the Case Manager believed P could have provided a better level of support to the Estate.
Although there were significant delays on the Estate's part in providing information to P, the Case Manager believed P had also contributed to the delay and provided P with a number of examples of his reasons for coming to this view.
Notwithstanding P's arguments of defending a claim for interest on the basis of the duty of good faith and unjust enrichment, the Case Manager believed the payment of interest from the 91st day after the date of the insured's death under section 41A of the Act was mandatory.
Consequently, any arguments about a set-off or a counter claim would be after the fact and any decision which accepted those arguments would not be fair and reasonable. For that reason, the Case Manager concluded that interest was payable as provided under section 41A of the Act, with no deductions for set-off.
Interest on unpaid interest
The provisions of section 41A of the Act do not extend to paying interest on interest which is unpaid and, as the Case Manager understood it, there is no statutory requirement for payment of interest in this situation.
Consequently, the Case Manager considered whether P should be required to make an additional payment under the provisions of paragraph 6.6 of the ISO's TOR which provide as follows:
"If either an Assessment ... or a Recommendation ... partly or wholly upholds a complaint ... the ISO may also require the Participant to pay [a] monetary amount, not exceeding $1,000, as is in the opinion of the ISO appropriate to reimburse or compensate the Complainant for any incidental expenses incurred by the Complainant in making and pursuing the complaint and for any loss arising from any delay in settling the claim. This discretion is only to be exercised in cases where special inconvenience and extra expense has been incurred."
The Case Manager considered this from 2 perspectives:
- First was the question of whether "incidental expenses [were] incurred". Although the costs were not known, it was evident the Estate had incurred additional legal costs in pursuing the claim for interest and in making and pursuing the complaint.
- Second was the question of whether "any loss [arose] from ... delay in settling the claim". If the required interest had been paid when the claim was settled, the Estate would have had the opportunity to invest the additional amount.
Based on calculations made by the Case Manager, applying the 4% interest rate which P had offered to pay and the "Use-of-money interest" rate which is used by Inland Revenue where tax has been overpaid, either of those bases would have produced interest on the unpaid interest which was in excess of the $1,000 maximum payment which the ISO can require a Participant to pay in cases where special inconvenience and extra expense have been incurred.
The Case Manager concluded that, in accordance with paragraph 6.6 of the TOR, P should pay an additional $1,000 to the Estate.
Result: Complaint upheld
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