The Entrepreneurial Lawyer

1. The Entrepreneurial Lawyer Identifying possible Class Actions in the Long Term Insurance Industry

2. Class Action Screening Potential Cases • Look for conduct involving large scale, widespread, consistent uniform harm through a common (institutional) practice • Avoid cases where the harm is individualised • Look for cases where disputes do not arise only from oral (mis) representations • Ideally look for instances where the harm per person is too small to justify individual claims being litigated (the negative value lawsuit) but where collectively the claims have an economic litigation mass

3. Class ActionScreening Potential Cases continued… • Ensure that the are no contractual requirements or procedures that apply before any disputes / claims may be launched • Ensure that the claims have not prescribed • Identify a suitable class representative • Investigate whether the target defendant has the means to meet the likely value of class claims, or has insurance cover to meet any liability

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5. The Funeral Assurance Market • The sale of funeral assurance policies is a significant unregulated market • The Financial Services Board is responsible for regulating “long-term insurance business” • The Long Term Insurance Act does not refer to “funeral policies” only to “assistance policies” being a life policy with a maximum policy benefit of than R 18 000 • No person may conduct the business of an insurer (long or short) without being registered and authorised • No person may issue an assistance (funeral) policy unless registered as an insurer • Most policies are offered under the guise of a Voluntary Group Funeral Scheme

6. The Funeral Assurance Market continued … REALITY • A significant number of so-called funeral policies are issued by entities that are not registered as long term insurers and the policies are not underwritten by an insurer • And the Financial Services Board knows all this!

7. The Standard FSB Warning … “The FSB warns the public to be careful when buying funeral policies” • The financial services board (FSB) is again calling on the public to be cautious when purchasing funeral insurance policies. The purpose of funeral insurance is to provide cover to help pay for the costs of funerals. The most important feature of a funeral policy is that it must be underwritten by a registered long-term insurance company. This is to ensure that the policyholder and their beneficiaries are guaranteed of their benefits being paid to them in the event of a claim. The policyholders must receive a copy of their policy document, which must bear the name of the long-term insurance company which is underwriting the policy. • The FSB investigates entities who sell funeral policies to the public whilst those policies are not underwritten. The conduct of these entities amount to unregistered insurance business and as such these entities are in breach of the provisions in the long-term insurance act, and may be subject to a fine or imprisonment, or both, upon conviction.

8. The Standard FSB Warning continued… • The FSB is investigating the following entities who are selling funeral policies. They have been requested by the FSB to provide proof that they are underwritten by a registered long-term insurance company and were afforded 21 days to respond. These entities have either failed to respond to the FSB timeously or they have failed to confirm that they are underwritten by a registered long-term insurance company: Then a list of offenders names is published. And then?

9. The Typical Voluntary "Group" Funeral Scheme • Premiums generally payable for life and are set in age bands • Benefits are a broadly described funeral service by a pre-nominated undertaker • Generally no cash benefits are available or a reduced benefit is paid if any other undertaker conducts the funeral • Premiums generally payable in cash (collected by a field agent on a commission basis) • Premiums can be increased on notice • Benefits remain constant through the term of the policy

10. The Typical Voluntary "Group" Funeral Scheme continued… • There is no paid-up or surrender value on the policy  • The policy lapses if premiums are more than 30 days in arrears  • The Policy is silent on who receives any policy benefits (if any) on death of any life assured • No provision made for or any beneficiary nomination for any policy benefits • No medical underwriting takes place and pre-existing exclusions for medical conditions are seldom dealt with • Waiting periods are age related, ranging from 3 to 12 months

11. Market Practice • Most buyers of these policies (“dood-boekies” ) are members of the lower income groups • Most of these so-called "dood-boekies" are issued by funeral undertakers under the guise of a group funeral insurance scheme • The objective is to pre-sell funeral services  • Generally, no cash benefit is available, rather a poorly defined and limited funeral service is the only benefit • Most of these schemes are not underwritten by a registered long-term insurer

12. Market Practice continued… • Any "underwriting" that is in place is more correctly a reinsurance arrangement. • The potential exists for the scheme to double underwrite. • Premium collection commissions can exceed 30 % of the monthly premiums. The FSB continues to issue warnings to consumers to be careful when buying funeral policies and publishes, on it's website, notices and warnings.

13. The Problems with these Schemes • Many schemes are not underwritten by a registered insurer • Incorrect payment of death benefits • No cash benefits. Exclusive undertaker nomination. • Increasing premiums without contractual provision • Cover is on a month-to-month basis • Failure to provide paid-up values • Absence of an insurable interest • Double Underwriting • Actuarially unsound premiums • “Pre-paid” funeral plans • Excessive commission payments • Term vs Whole Life cover – policyholder pays after retirement

14. Possible Class Action Claims The voluntary funeral scheme market presents a multitude of potential class action claims Three potential class action claims will be briefly considered for illustration purposes: • No cash benefit offered • No underwriting by a registered long term insurer • Payment of benefits to the incorrect person

15. No Underwriting by a Registered Long Term Insurer • If a policy is issued by a person who is not authorised to issue the policy, the “policyholder” may cancel the policy on written notice and recover all amounts paid. • This would include a policy that has been issued but not underwritten by a registered insurer. • The class: all members of the identified funeral scheme where the policy has not been underwritten by a registered insurer. • The basis: breach of section 7 read with section 60 of the LTI • The damages: all amounts paid under the policy prior to cancellation.

16. No Cash Benefit Offered • Section 53 of the LTI requires that any policy benefit expressed otherwise than in a sum of money (such as a funeral service) must nevertheless be available as a sum of money equal in value to the cost the insurer would have incurred had the benefit been provided otherwise than as a sum of money. • In short, a policy providing a funeral benefit only is invalid and a cash benefit must always be available. • Many funeral schemes offer a funeral only but no cash benefit. • The class: all members of the identified funeral scheme where the benefit includes a funeral service only and not a cash alternative. • The basis: failure to provide a cash alternative is a contravention of section 53 of the LTI. • The damages: the cost of a funeral with another undertaker.

17. Payment of Benefits to the Incorrect Person • Policy benefits must be paid to the nominated beneficiary of the estate of the deceased. • Payment of benefits directly to another person, such as an undertaker, would not result in the discharge of the obligations of the insurer concerned. • The sub-classes: • (1) Any beneficiary under a long term policy issued by the identified funeral scheme / insurer where the policy benefit was not paid to the nominated beneficiary • (2) Any executor where the deceased held a long term policy issued by the identified funeral scheme / insurer where there was no beneficiary nomination and where the policy benefit was not paid to the estate of the deceased. • The basis: failure to discharge an obligation to pay benefits. • The damages: the cash value of the policy benefit.

18. Certification Issues • Most of these schemes have in excess of 1000 premium paying members (NUMEROSITY) • Are the class members objectively identifiable (ASCERTAINABILITY) • Is there a cause of action raising a triable issue • Policy wordings in relation to polices are generally identical, the only difference being age related premium rates and waiting periods. Additionally, either the entire book is underwritten or nothing is underwritten (COMMONALITY) • Any individual policyholder by launching a claim would inevitably have a claim typical of all other members of the scheme provided the claim is not unique – of course depending on the actual claim and provided it would not require individual adjudication (TYPICALITY) • Any individual policyholder by launching a claim could represent the interests of any class of claimants provided the claim is not unique to that individual (ADEQUACY OF REPRESENTATION)

19. Is there a Claim against the FSB? • Does the function of the FSB extend beyond simply issuing warnings? • Does the FSB owe consumers a duty of care? • By not closing down unregistered “insurers”, of which it is aware, can the FSB be held liable for any damages suffered by members of these unregistered schemes? • What of the proposed amendment to section 23 the Financial Services Board Act which seeks to immunise the FSB and its officials from liability for loss or damage caused in the performance of their duties? This by removing reference to the conduct not being “grossly negligent” essentially absolving the FSB from most liability.

20. Is there a Claim against the FSB continued…? • It is a common view that the FSB is not known as an organisation that acts proactively, invariably only getting involved when all has already been lost. • Is it the risk of liability that prevents the FSB from acting timeously?

21. A Class Action against the FSB • If the FSB is aware of an unregistered “insurer”, it is bound to act • Failure to do so could give rise to claim consequent on an omission and a breach of the duty of care • Damages would include any sums lost by members of the unregistered insurer by paying premiums to the scheme • The class could include all members of the unregistered scheme and sub-classes could be included where circumstances require • The same could apply to a person who is conducting a business in contravention of FAIS. If being aware of this, the FSB fails to act An organ of State, such as the FSB, will be held strictly to account for the failure to adequately discharge its statutory functions.

22. Defining the Class • The key questions: • Who will be entitled to relief? • Who will be bound by judgment or settlement? • The class definition cannot be merits-oriented. • Avoid the words “unfairly”, “improperly”, “wrongly”, “unconstitutionally”, “unreasonably”, or “defrauded” - they all deal with the merits and are not objectively verifiable criteria.

23. Possible Defendants • Funeral / Burial Scheme • Undertaker (if issuing the policy) • Financial Services Board • Financial Service Provider • Underwriter (registered insurer) Applicable Legislation • Long Term Insurance Act • FAIS • Consumer Protection Act- applies both to any policy and separately to any funeral service

24. Where can potential cases be found? • Ombud websites-types of complaints and determinations • FSB website - warnings that are published and enforcement actions • Clients and referrals • Press reports, consumer articles, general newspapers • Prior government investigation reports (i.e. competition commission) • Advertising and “infomercials”, ever mindful of the professional rules on touting