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Insurance – loan protection policy condition of home loan – bank did not require it – failure to notify customer – loan reduction in lieu of compensation for inconvenience
Mr and Mrs A took out a loan with a bank in March 2000, with the assistance of a mortgage broker. It was a condition of the loan approval that life or mortgage protection insurance be taken out by Mr and Mrs A and assigned to the bank.
Sadly, in February 2005 Mrs A died, leaving Mr A with two young daughters to raise and a large loan to service. Shortly after being diagnosed with a terminal illness, Mrs A had called the bank to ask about making a claim on the mortgage protection insurance that she and Mr A thought they had taken out when they obtained the loan. To Mr A’s shock and dismay, it was discovered that no mortgage protection insurance policy existed.
After Mrs A’s death, Mr A complained to my office. He wanted to know why the bank had not ensured that mortgage protection insurance was in place, given that it was a condition of the loan.
Following a thorough investigation, the evidence was not strong enough to say that Mr and Mrs A had instructed the bank to arrange mortgage protection insurance for them. The most that could be said was that it was likely there was some general discussion between Mr and Mrs A and the bank regarding life and/or mortgage protection insurance, but matters had not proceeded beyond that.
As a matter of law, a bank is entitled to waive a condition of the loan contract. Therefore the bank had no legal obligation to insist that Mr and Mrs A take out mortgage protection insurance and assign the insurance to it, nor did it have any legal obligation to ensure that Mr and Mrs A had adequate mortgage protection insurance.
However, I considered that the bank should have told Mr and Mrs A that the assignment of insurance was no longer a condition of the loan. It was clear that Mr and Mrs A had mistakenly believed that they had mortgage protection insurance and had their expectations dashed when Mrs A was diagnosed with a terminal illness. Had the bank told Mr and Mrs A that it no longer required assignment of insurance, they would have had the opportunity to obtain life insurance cover for Mrs A with another insurer. Whilst this was a case where I would have considered awarding the maximum compensation for inconvenience ($4,000) available under my Terms of Reference, I suggested that it would be of greater help to Mr A to have some relief from the loan burden he was carrying. I therefore invited the bank to come up with a proposal that would provide some relief to Mr A.
After the bank and Mr A had considered what I had to say, the bank offered to write off an amount of $10,000 from Mr A’s loan and to discuss with him refinancing options for the remaining balance, which could include making interest-only payments for a period of time. Mr A accepted the bank’s proposal.