Banking Disputes and Insurance Cover: Lessons from an Appeal Court Decision

Commercial security agreements should be read according to their actual wording. Courts are slow to add obligations that were not agreed.

What happened?

Mr B, a businessman in the Free State, ceded a R20 million life insurance policy to his bank as security for a loan granted to his company.

When the company experienced financial difficulty and was eventually liquidated, Mr B struggled to pay the policy premiums. The insurer cancelled the policy.

The dispute

The bank applied to compel Mr B to reinstate the policy or take out a similar policy and cede it to the bank. The High Court accepted the bank’s argument and found an implied obligation to maintain equivalent cover.

The appeal outcome

The Supreme Court of Appeal overturned that decision. It held that the cession agreement did not allow the bank to compel Mr B to pay overdue premiums or take out a new policy. The bank could choose to pay the overdue premiums itself and recover them, but it was not obliged to do so.

Practical point

In banking and security disputes, the wording of the agreement is central. Implied terms should not be assumed lightly.