Unlawful and unenforceable group schemes post the commencement of the Insurance Act No 18 of 2017.
The Supreme Court of Appeal (“SCA”), in KGA Life Limited v Multisure Corporation (Pty) Ltd and Others, recently handed down judgment in which a certain group scheme under the Long-term Insurance Act No 52 of 1998 (“LTI”) was no longer considered as a “group” as designated by the Insurance Act, thus rendering such group scheme void.
KGA Life Limited (“KGA”) is a licensed insurer as defined in the LTI and is registered as such under the Financial Sector Regulation Act No 9 of 2017 (“FSRA”), it specialises in underwriting group funeral insurance schemes.
Multisure Corporation (Pty) Ltd (“Mulitsure”) is an independent intermediary as defined nin the LTI, and regulation 3.1 of the regulations promulgated under the LTI. Mutlisure’s business consists of marketing and selling funeral policies for several companies to individuals and families.
KGA and Multisure have been in a dispute since 2021 after Multisure cancelled the intermediary agreement between the two parties and subsequently entered into a new agreement with African Unity Life (“AUL”).
The High Court granted judgment in favour of Multisure against KGA, among other things, that “the Intermediary Agreement – Multisure Corporation – Underwritten by KGA life Ltd” and the Master policy forming part thereof between the parties had been cancelled and accordingly is of no further force and effect from 1 September 2021.
The key issue for deliberation before the SCA was the consequence of the change in the definition of a “group scheme” as a result of the promulgation of the Insurance Act No 18 of 2017 (“Insurance Act”). In other words, whether there was a contract to cancel, having regard to the provisions of the Insurance Act.
It was common cause that before the Insurance Act was promulgated, the group scheme was valid and lawful. However, this all changed when the Insurance Act was promulgated. This brought about substantive changes to the definition of a group scheme and a policyholder.
The definition of a ‘group’, in Schedule 2 of the Insurance Act, reads as follows: ‘“group” in respect of the classes of insurance business, relates to an insurance policy entered into with an ‘autonomous association of persons united voluntarily to meet their common or shared economic and social needs and aspirations (other than obtaining insurance), which association is democratically controlled’.
In contrast, the regulations under the 1998 Insurance Act defined a “group scheme” as ‘a scheme or arrangement which provides for the entering into of one or more policies, other than an individual policy, in terms of which two or more persons without an insurable interest in each other, for the purposes of the scheme, are the lives insured’.
The definition of a “group scheme” in regulation 3(1) in part 3A was replaced with the following definition: ‘Group scheme in respect of a registered insurer means a scheme or arrangement which provides for the entering into of one or more policies other than an individual policy, in terms of which two or more persons without an insurable interest in each other, for the purposes of the scheme, are the lives insured; and a licenced insurer, means a policy with a group as defined in Schedule 2 of the Insurance Act.
Section 5(1) of the Insurance Act was read together with the licencing provisions referred to in Section 23 and 25 of that Act, of which consequence is that a licenced insurer ‘may only conduct insurance business in the classes or sub-classes of insurance business set out in Schedule 2 for which it is licensed in accordance with subsection (2)’. Section 5(1) of the Insurance Act must accordingly be interpreted to convey that ‘no person may conduct insurance business unless that person is licenced under the Act to do so in respect of that business’.
The overall result of the above was that from 1 July 2020, Multisure’s group scheme constituted a contract for the unlawful conduct of unlicensed insurance business – a contravention of s 5(1) of the Insurance Act.
The court held that with effect from the date upon which KGA became a licensed insurer, the group scheme, under the provisions the agreement entered into between KGA and Multisure, ‘became a contractual arrangement for the performance of an unlawful act’ and consequently breached the provisions of section 5(1) of the Insurance Act. The court held further that:
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 that:
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.
The Funeral Federation of South Africa was admitted to the proceedings of this case a friend of the court. After taking the submission of the Federation into account, namely the consequences of this judgment for the funeral industry, the court directed that the judgment must be made available for the Prudential Authority.
Section 67 of the Insurance Act provides that 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 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. Therefore, in light of this, the appropriate arrangements, in this instance, would be to replace the premium-paying member lives assured under the construction of the previous group scheme regime with individual policies which will allow the premium collection to continue under individual policies – as opposed to group schemes – and allowing for the continued maintenance of the insurance policies. This is so as the treating customers fairly principles dictate that there should be no unreasonable post sale barriers, which may include changing a product. The exercising of the provisions of section 67 by the Prudential Authority may result in the products meeting performance expectations and the services related to the products will be of an acceptable standard. Therefore, the concerned policyholders will be left with valid and enforceable insurance products, which in turn will promote the maintenance of a fair, safe and stable insurance market for the benefit and protection of policyholders while enhancing the protection of policyholders and potential policyholders and increasing access to insurance for all South Africans.
