During the period of national lockdown caused by the outbreak of Covid-19, companies will have to shut down and employees potentially laid off temporarily. Employees may also be compelled to take leave. Although employers are encouraged to continue to pay employees, it might not be economically possible. An employee's credit life insurance policy may offer employees some protection in these difficult times; and any bank or insurer's repudiating claims based on the Covid-19 Temporary Employer/Employee Relief Scheme, should be mindful of possible reputational risks.
The Credit Life Insurance Regulations provide for compulsory minimum prescribed provisions that must apply whether or not the policy provides for it. Regulation 3(2) provides that:
"3(2) Subject to sub-regulation (3) to (5), the credit life insurance cover must provide for at least the settlement of -
in the event of the consumer becoming unemployed or unable to earn an income, other than as result of permanent or temporary disability, all the consumer's obligations under the credit agreement that become due and payable- (own emphasis)
for a period of 12 months;
during the remaining repayment period of the credit agreement; or
the consumer finds employment or is able to earn an income,
whichever is the shorter period."
(Notably, the Credit Life Insurance Regulations came into force 6 months after the date of publication and only affects credit agreements entered into on or after the commencement date.)
In terms of regulation 4(1), however, limited exclusions are allowed in respect of unemployment or inability to earn an income. The most relevant exclusion in this case relates to the voluntary forfeiture of salary, wages or other employment income.
Regulation 5 provides for additional benefits and in terms of regulation 5(1) a benefit may be provided in terms whereof the outstanding debt would be settled. The question is whether, in lockdown, it may be argued that the person that is otherwise employed is unable to earn an income. In our view, in the current circumstances, a person otherwise employed may become unable to earn an income.
The Regulations issued under the Disaster Management Act by the government creates an objective intervening impossibility with the result that the employee, due to the impossibility, is not able to render the employment services and accordingly the employer may, due to this impossibility, refuse to pay a salary to the employee.
In our view it does not mean that the employment agreement comes to an end due to impossibility and that the employee becomes unemployed. Such an interpretation will mean the employee upon liquidation of the employer will lose its rights to claim accrued benefits and will have various other implications such as for instance that the employer may refuse to conclude a new contract after the lockdown which clearly cannot be the case.
In the current circumstances due to the impossibility, the employee will be unable to earn an income as foreseen in regulation 3(2)(c) of the Credit Life Insurance Regulations, which as stated are minimum prescribed benefits. One must, however, consider the exclusions which includes voluntary forfeiture of salary, wages or other employment income.
Related to this, Notice 215 of 2020 headed "Covid-19 Temporary Employee/Employer Relief Scheme", issued by the Minister of Employment and Labour must be considered. The Notice establishes a Covid-19 relief scheme that provides assistance to employers and employees under the Unemployment Insurance Act. It is a scheme that provides relief to employers that will apply the relief to pay income benefits to employees.
It is important to note that it is the employer that will apply for relief and then will apply the relief for payment of the cost of salary to employees. The employee will therefore receive a benefit in the form of a salary which its employer has applied for. In these circumstances an employer will be able to pay the benefits to the employee and the employee will not be able to argue that it is unable to earn an income because a mechanism was provided to pay an income to the employee.
In circumstances where the employer, with the consent of the employees, simply does not apply for the relief because the employee wishes to claim under the policy, the exclusion provided for relating to voluntary forfeiting of salary or other employment income will apply. To the extent that the employer simply does not apply for the relief even without the consent of the employee it can still be argued that the employee is objectively entitled to earn an income because the rights afforded in terms of the relief scheme are objectively available. Naturally, for those employees who have not contributed to the Unemployment Insurance Fund, these benefits will not apply, and they will be in a position where they are not able to earn an income.
We have seen that several banks have indicated that they will pay the minimum prescribed benefits without a reference to the Covid-19 Temporary Employer/Employee Relief Scheme. It may be that those banks were simply not aware of the Notice. Be that as it may, if any bank or insurer, on a wide scale, starts repudiating claims based on the Covid-19 Temporary Employer/Employee Relief Scheme, it may hold certain reputational risks for that insurer or bank.