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Insurance - mortgage repayment policy when loan refinanced - customer not advised or offered alternative cover- circumstances did not allow reinstatement of policy - bank offered alternative insurance - customer sought cash remedy
Mr G took out a loan in joint names with his (then) wife. He arranged and paid a single premium for mortgage repayment insurance (MRI) in his sole name which provided death only cover. Five years later Mr G and his wife had separated and the secured property had been transferred to Mr G’s name. He asked the bank to remove his former wife’s name from the loan account and to change the loan to his sole name. The bank refinanced the loan and arranged a new loan with a 25 year term. The bank did not explain to Mr G that the MRI was specific to the existing loan and that it was cancelled automatically when the loan was refinanced.
Several years passed before the bank discovered the MRI still existed although the loan to which it referred had been repaid. Arrangements were made to cancel the MRI, and a rebate on the premium was paid into Mr G’s account with no explanation. It was only when Mr G was discussing insurance issues with the bank at a later stage that he discovered he had no insurance cover on his loan.
When the bank realised what had happened it offered to arrange a decreasing term insurance policy to cover the loan but, because he had received a refund of the premium he had paid for the MRI, the bank required him to contribute to the cost of the life cover. Mr G was not satisfied with the bank’s offer. He felt unable to pay for the life cover and wanted the bank to recompense him for the errors it had made.
After investigation I concluded that the bank’s error was not in terminating the original MRI but in failing to:
● tell Mr G that refinance of his loan automatically terminated the insurance cover
● offer him either alternative insurance or a refund of the balance of the premium.
I was not able to identify any loss suffered by Mr G as a result of the bank’s mistakes. The policy originally arranged provided death cover only and the bank’s offer to provide equivalent insurance effectively put him back in the position he was in before the loan was refinanced. I proposed to recommend that Mr G should accept the bank’s offer to arrange decreasing life cover for the remaining term of the loan. I also proposed that the bank arrange an interest free loan to cover the cost of the new policy, on the basis that Mr G did not have to repay it until after the secured term loan was repaid in full. I noted that Mr G had been inconvenienced by the bank’s errors and suggested a moderate payment of compensation to be deducted from the proposed interest free loan.
The bank accepted my recommendation, but Mr G remained adamant that he should receive substantial compensation from the bank. He decided not to accept my recommendation.