Multisure claims game-changing high court victory against KGA Life
A loophole in the Long-Term Insurance Act’s Policy Protection Rules has been the subject of a long-running court case involving funeral policy underwriter KGA Life, which has been ordered by court to release intermediary Multisure Corporation from its contract.
KGA Life Limited, a funeral insurance underwriter specialising in group schemes, has lost yet another high court case involving a financial services provider – with repercussions for underwriters and funeral policyholders across the country.
This is not the first time KGA Life has lost legal disputes with intermediaries.
In 2017, KGA Life approached the Western Cape High Court in legal action against African Unity Life (AUL), the Registrar of Long-Term Insurance, former KGA staff members and four funeral parlours over restraint of trade issues. In that matter, the court took a dim view of KGA’s conduct, dismissed the application and issued a punitive costs order to show its displeasure.
In another matter, taken to arbitration, KGA Life took on two funeral parlours, E&S Russell and Rob Edwards & Associates, over contractual issues after the intermediaries attempted to move to AUL. This, too, KGA lost with costs.
The latest court action was instituted last year against the Stellenbosch underwriter by Multisure – which offers funeral insurance cover and legal assistance to low-income earners – because KGA Life had refused to release it from its contract and delayed payments to claimants, despite undertakings to the Financial Sector Conduct Authority (FSCA).
KGA, said Multisure, had flouted the FSCA’s “treating customers fairly” (TCF) principles and Policyholder Protection Rules (PPRs) of the Long-Term Insurance Act.
In June 2021, Multisure informed KGA Life it wanted to cancel its contract (to move to rival underwriter, AUL), but KGA blocked it by informing Multisure that it needed signed consent from each of its more than 9,000 individual clients, most of whom are pensioners.
KGA never informed Multisure about changes to the PPRs, introduced in September 2018, and continued accepting group scheme premiums and new group business from Multisure since October 2018. This is a violation of the PPRs, because group scheme benefits have only been available to employers, funds and autonomous bodies since that date.
The changes to the PPRs mean that all policyholders under Multisure’s group scheme should have been converted to individual policies.
But KGA used this loophole for more than three years to hold on to Multisure’s client book, despite flouting the same rules by not informing its client that new contracts needed to be entered into with policyholders.
In September 2021, KGA finally informed Multisure about the change – and only once Multisure had tried to cancel its contract.
KGA also refused to inform Sassa that premiums should henceforth be paid to Multisure’s new underwriter, AUL, and would not refund Multisure for claims paid since 1 September 2021, despite undertakings to the High Court, the FSCA and in email correspondence to Multisure.
KGA had assured the court it would continue to honour all valid claims, but Multisure says KGA only refunded two claims since September 2021, out of more than 50 funeral claims. It was also not paying Multisure’s monthly commission since August last year, which jeopardised the family run business.
Multisure said KGA had blocked it from switching underwriters by withholding its Sassa client book from AUL and gross negligence for failing to inform it for three years about regulatory changes to group schemes – despite signing thousands of new policies under the old regime and accepting millions of rands in premiums.
On Tuesday, 15 March, Judge Irma Schoeman of the Eastern Cape High Court ordered that KGA Life must pay AUL, within 24 hours, all the premiums it took from Sassa group scheme members since 1 September 2021. The court declared the intermediary agreement between Multisure and KGA Life ceased to exist from that date, and noted that KGA Life had failed in its duty to notify Multisure about changes in regulations that required group schemes to be converted to individual policies.
Schoeman further said it is not within the realm of the first respondent’s (KGA Life) rights or obligations to see to it that either Multisure or AUL comply with regulatory prescripts once the contract has been cancelled.
The government made a big mistake and did not properly consult with some of the most important players in the funeral insurance industry [the intermediaries] with regard to its decision to change the group scheme definition, which hugely impacts on the entrepreneurs’ businesses and their clients.
Q Link, the company authorised to alter the deduction codes at Sassa to pay Multisure, was authorised and directed to, within 24 hours, alter the deduction codes on its electronic administrative system and transfer them to AUL. This means Multisure will finally receive its commissions and policyholders’ outstanding claims will be honoured.
KGA was ordered to pay the costs of the application.
Schoeman said it was clear from the reading of the present PPRs and clause 20.3 that “it is the duty of the insurer [KGA Life] to inform the authority [the FSCA] of the termination or intended termination and replacement of the group scheme by the policyholder”.
Quoting from an article by Judge Peet Nienaber, the former Ombudsman for Long-Term Insurance, Schoeman added: “Much of the funeral insurance business in South Africa, many believe, is blighted: fraud is rife; irregularities abound; some operators function both illegally and unscrupulously; and the public, especially the less affluent segment, is on occasion cynically exploited. But all is not unsavoury.
“Many registered insurers and licenced intermediaries active in this area are above-board and render an invaluable service to the community as a whole. Funeral insurance fulfils an unmistakable need and there are thousands of policies in South Africa operating regularly and without mishap.”
KGA has since filed an application for leave to appeal the judgment.
The FSCA has come under fire over the matter. Intermediaries, including funeral parlours, have denounced the authority for the manner in which the amendments to the new Insurance Act and PPRs were introduced – they say these were done without proper consultation and issuance of clear directives on how group schemes should be converted.
The change meant that underwriters can no longer accept group scheme funeral policies from intermediaries that are not a fund, autonomous body or employer. Existing group scheme policies had to have been converted to individual policies by 1 July 2021.
They say no guidance was offered on how to institute Rule 2A, which has created a situation where insurers’ compliance officers are interpreting the changes in different ways, often to the detriment of intermediaries and clients.
Effectively, it has meant that intermediaries lost control of their client books.
The regulation disallows intermediaries from offering group scheme benefits to individual policyholders and policies that were not sold by employers, funds and autonomous bodies since that date would have to be individual policies, meaning that the intermediary now acts as a representative or agent of the insurer.
The change should have been communicated by insurers to the intermediaries, but in many cases, it was not.
Multisure founder and CEO Denton Goodford says the rule change has affected the lives of millions of policyholders, without proper consideration of what should be done to keep the policies “alive”, and ensure that policyholders’ lives are in fact covered.
And because there was no clarity on the conversion process from group to individual schemes, KGA Life used the legal loophole to argue that Multisure’s group scheme was “somehow” converted to individual policies, which cannot happen automatically.
Chairperson of the Funeral Federation of South Africa John Storom has previously criticised insurers for interpreting the changes to their advantage rather than for those who it was meant for – the clients.
He said withholding client books might be unethical, but the law allows it. “It is a loophole that underwriters misuse to hold on to clients.”
Pressure is also mounting from the industry: the funeral association protested in Pretoria late last year and has threatened to go on strike – which could put funerals across the country on hold. Its president, Mduduzi Masilela, says the rules need to work for all parties so funeral undertakers can also be protected.
“At the current point, I don’t see us as funeral directors being protected by the same law, because it is abusing us as if we are slaves to the insurance companies.
“We are now working for the insurance companies,” he says. “We are no longer the owners of our businesses.”
Last month, 16 funeral parlour associations met with the FSCA – each representing about 100 funeral parlours and intermediaries – to call for urgent changes to the new Insurance Act, as well as to include funeral parlours and other intermediaries in the definition of group schemes again, as was the case up to 2018.
They submitted two petitions to the FSCA, outlining reasons it needed to act urgently and giving it a week to respond. They threatened a protest at the authority’s office.
The funeral parlour associations slammed the legislation as being antithetical to transformation in the industry as it afforded more power to larger and established insurers rather than empowering entrepreneurs, thereby allowing them to grow their books and obtain their own microinsurance licences, which the act now effectively prevents. The government’s objectives are clearly being hijacked by its own act, Goodford says.
“Having a group scheme with an insurance company – that’s what you build on. That’s what your children’s future is built on. And because that’s how your company’s value as an intermediary is determined… Some work 40 or 50 years to build up their book – that’s their asset.
“What’s more, it is us who take our business and clients to these insurance companies with the understanding that the clients are our clients who we worked for and built relationships with, only for a company like KGA to now claim that it is their clients, abusing the new definition of group schemes in the act to their advantage.
“They had no problem when I moved my business from another underwriter to them, but now that I want to move away from them, they want to force themselves on us and our clients,” says Goodford.
“The government made a big mistake and did not properly consult with some of the most important players in the funeral insurance industry [the intermediaries] with regard to its decision to change the group scheme definition, which hugely impacts on the entrepreneurs’ businesses and their clients.”
The FSCA told Business Maverick that it was studying the judgment on the Multisure-KGA matter, but “due to strict confidentiality requirements, we are not in a position to comment on the specifics of the case at this stage”.
“On the broader issues raised by the funeral industry associations, the FSCA has made significant progress to address these over the past few years, and we are committed to continuing to do so in the interest of both the industry and policyholders.” BM/DM