Class action against funeral assurers ‘just a matter of time’

There are at least three grounds on which holders of funeral assurance policies could bring a class action against a life company or the Financial Services Board, an advocate says. Angelique Ardé reports Understanding certification

Abuses in the funeral assurance market are rife, and the Financial Services Board (FSB) knows it. It’s a matter of time before a class action is brought against the regulator or a life company.

This is the view of Advocate Chris Shone, who was part of the team of advocates who argued the bread distribution price-fixing case earlier this year in the Constitutional Court. This was the first class action to be fought successfully in South Africa. Small-scale bread distributors, represented by Imraahn Ismail Mukaddam, brought the case against bread producers Pioneer Foods, Tiger Brands and Premier Foods.

At a recent seminar hosted by consulting firm Burns-Hoffman and Associates, Shone identified possible class actions that could be brought against the FSB or the long-term insurance industry.

Shone says the bread cartel case has opened the way for class actions in South Africa, and if a “class” or group of people who meets the legal criteria to bring an action can be identified, it is likely they will obtain a settlement from a party that is found to be responsible for the damage or loss they suffered.

About 95 percent of class actions in the US in which a class is certified – in other words, meets the legal criteria of a class – are settled, Shone says (see “Understanding certification”, right). “It’s a very powerful threat,” he says. Obvious abuses in the funeral industry have been allowed to continue for many years, but, until now, the victims have not been able to take legal action, because the harm they have suffered has been too small to justify individual claim.

A class action is one involving an abusive practice on a large scale, and it is about “hundreds of Davids taking on Goliath, who is pulling off small rip-offs on a large scale and making massive profits”, he says.

The funeral assurance market is ripe for class actions, particularly in three areas where policyholders are the victims of illegal practices, Shone says.

The Long Term Insurance (LTI) Act does not refer to “funeral policies” but regulates them through “assistance policies”, which are life policies with a maximum benefit, Shone says. The maximum benefit was recently increased from R18 000 to R30 000, because the FSB found that, with the lower limit, consumers were being sold multiple policies.

“No person may conduct the business of an insurer without being registered and authorised, meaning no person may issue an assistance (funeral) policy unless registered as an insurer,” Shone says.

He says the three areas where policyholders are victims of illegal practices are: To be able to bring a class action, “certification” is required, which means the applicants (the would-be claimants) have to apply to a court for the certification of a “class”. The criteria for certification include:

◆ Numerosity. Your class needs to be significant in size. Considering that most funeral assistance schemes have more than 1 000 premiumpaying members, this would not be a problem, Advocate Chris Shone says.

◆ Commonality. All class members must be in the same boat for the class to be certified. For example, either the entire book is underwritten, or nothing is underwritten, Shone says. “Policy wordings are generally identical, the only difference being age-related premium rates and waiting periods.”

◆ Ascertainability. Your members need to be “objectively identifiable”.

◆ Triability. Your case must have a reasonable prospect of success.

◆ Typicality. A policyholder launching a claim must have a claim typical of all other members of the scheme.

◆ Adequacy of representation. An individual policyholder who launches a claim should represent the interests of any class of claimants, provided the claim is not unique to that individual.

Many funeral assistance schemes provide a funeral only, but no cash benefit, and this is a contravention of the LTI Act, Shone says.

“The LTI Act 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,” he says.

Members of a funeral scheme where the benefit is a funeral service only, without a cash alternative, would be capable of bringing a class action, Shone says.

The LTI Act stipulates that an entity must be registered and authorised to conduct the business of an insurer, and if someone has issued a policy that has not been underwritten, you, as the policyholder, may cancel the policy and claim your money back from the insurer.

Many funeral policies are issued by entities that are not underwritten by a registered insurer, Shone says.

Many schemes are re-insured, rather than underwritten, but this does not satisfy the requirements of the LTI Act, and such schemes are therefore in breach of the Act, he says.

( In insurance terms, an underwriter would be the direct insurer, and a re-insurer insures the underwriter’s risk, Shone says.)

All members of any funeral scheme where the policy has not been underwritten by a registered insurer could lodge a class action, he says.

Insurers are required by the LTI Act to pay cash benefits to a nominated beneficiary or the deceased’s estate, but many entities that offer funeral assurance pay benefits directly to other parties, such as undertakers. This contravention of the law “is a real problem and applies to illegal insurers, as well as registered insurers”, Shone says.

A class action could be brought by a beneficiary under a long- term policy issued by a funeral scheme or assurer that has paid the benefit to someone other than the beneficiary, such as an undertaker.

It could also be brought by an executor of an estate where the deceased held a long- term policy issued by a funeral scheme or assurer where there was no beneficiary nomination and where the benefit was not paid to the deceased’s estate.