This article explores a recent dispute over an income protection policy, highlighting the dangers of ambiguous insurance contracts and the importance of consumer vigilance in managing their insurance rights.
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Income protection cover is meant to provide financial security when illness or disability leaves a person unable to earn an income. But a case highlighted by the National Financial Ombud Scheme (NFO) shows how that protection can be undermined when policy wording is unclear.
A case study in the NFO's latest annual report illustrates how an insurer that paid benefits consistently for more than a decade was later able to argue that those payments had been made in error because of ambiguities in the policy wording. The dispute serves as a reminder that, in insurance contracts, the written terms ultimately determine what is enforceable.
The case centred on a policyholder, identified only as Mr G, who took out an income protection policy in February 2007. The policy promised a monthly benefit of R45,000 if illness left him unable to work. It also indicated that the benefit would increase by 10% each year.
The policy came into effect in April 2007. Just a few months later, in July 2007, Mr G became ill and submitted a claim. The insurer approved the claim, with the first payment made on 22 July 2008.
For the next 11 years, the insurer increased Mr G's monthly benefit by 10% every year.
However, in 2019, the insurer informed him that the annual increases had been applied incorrectly. It argued that the policy only provided for annual increases linked to inflation, as measured by the Consumer Price Index (CPI), subject to a maximum increase of 10%. According to the insurer, the fixed 10% increases had resulted from a system error rather than the policy's intended terms.
Mr G referred the matter to the Ombud.
The dispute raised important questions about contract law and the interpretation of insurance policies. An independent legal opinion considered two legal principles that could support Mr G's case: quasi-mutual assent, also known as the reliance theory, and the contra proferentem rule.
Quasi-mutual assent applies when one party's conduct leads another party to reasonably believe that a particular contractual term forms part of the agreement. The contra proferentem rule provides that where a contract contains ambiguous wording, it should be interpreted against the interests of the party that drafted it.
In Mr G's case, the legal opinion found that he had every reason to rely on the insurer's interpretation of the policy. The quotation referred to a 10% annual increase, the policy documentation referred to 10%, and the insurer had consistently paid the increases for more than a decade.
At the same time, the policy wording appeared contradictory. One provision suggested that benefits would increase by a fixed 10% annually, while another linked increases to CPI.
The Ombud ruled in Mr G's favour, finding that the insurer should continue paying the fixed 10% annual increases. The decision held that both the reliance theory and the ambiguity in the policy wording favoured the policyholder.
The insurer appealed the ruling.
On appeal, however, the Tribunal reached a different conclusion. Although it accepted that the policy wording had been poorly drafted, it found that the contract could still be interpreted coherently.
The Tribunal concluded that the policy distinguished between voluntary benefit increases before a claim, which were linked to higher premiums, and post-claim benefit increases, which were intended only to protect the value of benefits against inflation. It ruled that the insurer's payment of fixed 10% increases over 11 years was an administrative error rather than evidence of a contractual obligation.
The appeal succeeded, limiting Mr G's future annual increases to CPI, capped at 10%.
Despite overturning the Ombud's ruling, the Tribunal did not require Mr G to repay the higher benefits he had already received. Instead, future CPI-linked increases would be calculated from the higher benefit amount already in payment, leaving him in a better position than if the error had been corrected from the outset.
Denise Gabriels, lead ombud of the life insurance division of the NFO, said the case highlighted the importance of consumers actively managing their insurance policies rather than assuming long-standing payment practices accurately reflect contractual rights.
"Consumers must protect themselves by reading carefully, documenting promises, monitoring payouts, and challenging discrepancies early. Trust is valuable, but in insurance, vigilance is essential."
Gabriels urged consumers to take several practical steps before and after purchasing insurance cover:
Read policy wording carefully, paying particular attention to clauses dealing with benefit increases, exclusions and definitions.
Question any contradictory wording, such as references to both fixed percentage increases and CPI-linked adjustments, before signing the policy.
Obtain written confirmation of any promises relating to benefits or annual increases, rather than relying on verbal assurances or marketing material.
Seek advice from a broker, financial adviser or attorney if any aspect of the policy is unclear.
Raise concerns with the insurer or the NFO as soon as discrepancies arise, as disputes are generally easier to resolve before they become entrenched.
Gabriels said the dispute demonstrates that consumers cannot rely solely on longstanding payment patterns as proof of their contractual rights.
"Contracts can be complex; systems can fail and understanding of promises can shift. What endures is the consumer's responsibility to stay informed, to question, and to safeguard their own future. Income insurance can still be a lifeline when work is no longer possible, but only if vigilance and clarity are woven into every step of the journey," she added.
PERSONAL FINANCE