‘Free funds’ and premiums: Covid-19 and insurance contracts

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Nobert Musa Phiri
Muvingi & Mugadza, Harare
phiri@mmmlawfirm.co.zw
 

Introduction

In 2009 Zimbabwe adopted a multicurrency regime as legal tender with all business being transacted predominantly in US dollars.[1] In February 2019, a new legal tender of electronic currency, known as the RTGS dollar, was introduced.[2] Its introduction brought with it much anxiety and confusion, including in the insurance sector. Insurance companies have found themselves in an awkward position due to deprecating value of the RTGS dollar combined with hyperinflation.

Under the guise of assisting the public in dealing with the devastating effects of Covid-19, Statutory Instrument 85 of 2020 was promulgated. This has resulted in premiums being payable in foreign currency, but settlements of claims remaining paid in Zimbabwean dollars (ZWL). With hyperinflation being a factor in the Zimbabwean economy and Covid-19 increasing adding to the difficult business operating environment, an insured at the time claim settlement might find themselves underinsured or uninsured. Consequently, the contract currency of all insurance contracts is ZWL and the settlement currency of all insurance contracts remains in ZWL. Premiums can be paid in foreign currency on condition that they are made free funds.

The declaration of Covid-19 as a global pandemic, and in accordance with local law, as a national disaster, has undoubtedly had several ramifications.[3] Virtually all spheres of human dealings, from economic, social to legal, have been adversely affected. This article reviews the effects of Statutory Instrument 85 of 2020 (Exchange Control regulations 2020) on insurance contracts and the effect of the payment of premiums using free funds on the insurance contract.

Zimbabwe’s monetary regime

Zimbabwe reverted to the exclusive use of the ZWL in 2019. This was done through various legislative instruments, particularly Finance Act No 2 of 2019 and Statutory Instrument (SI) 212 of 2019.[4] This latter piece of legislation provides for exclusive use of the ZWL to settle all domestic transactions as well as penalties for failure to do so. It also provides for exceptions allowing use of foreign currency in certain transactions.

The meaning of free funds

Free funds are defined in the Exchange Control Regulations 1996, SI 109 of 1996 as:

‘[…] money which is lawfully held outside Zimbabwe by a Zimbabwean resident and which was acquired by [them] otherwise than as the proceeds of any trade, business or other gainful occupation or activity carried on by [them] in Zimbabwe’.

The courts have been called on to determine the effect of these provisions and in the Supreme Court case of Barker v African Homesteads Touring & Safaris (Pvt) Ltd & Anor,[5] the Court noted:

‘[…] both an actual payment and an agreement to make payment outside Zimbabwe require authorisation by the exchange control authority, except where the act is done by an individual (as opposed to a company) with free funds available to him at the time of the act concerned.’[6]

Therefore, in terms of these regulations an agreement to pay by a natural person with free funds was lawful.

Statutory Instrument 212 of 2019

SI 212 of 2019 provides for the exclusive use of the Zimbabwean currency to settle domestic transactions. Accordingly, the provisions allowing use of free funds to settle domestic transactions was withdrawn by this instrument.

Following SI 212 of 2019, the Insurance and Pensions Commission issued Circular 13 of 2019. In terms of this circular, all pre-existing insurance policies which were denominated in a foreign currency would run to their natural expiry. All new insurance policies however, were to be issued in local currency with the exception of international travel insurance, motor insurance for vehicles in transit, customs bond insurance, bank cash in transit and safari operators insurance.

Statutory Instrument 85 of 2020[7]

SI 85 of 2020 was promulgated under the pretext of assisting the public to deal with the devastating effects of Covid-19. In terms of section 6 of SI 85 (‘payment of goods and services using free funds’), any person can now use free funds for the purchase of goods and services in Zimbabwe. It must be highlighted that it remains that goods and services must be chargeable in local currency, and payment may be made in foreign currency using an official exchange rate on the date of payment.

This, therefore, means that, policyholders may pay their premiums or contributions in foreign currency at the official exchange rate. The premiums and contributions must be chargeable in Zimbabwean currency. Insurers cannot therefore demand payment to be exclusively in foreign currency, but rather, provide an option to pay in foreign currency at the official exchange rate.

It is appropriate to note that SI 85 of 2020, adds to the already confusing monetary regulatory regime as it does not purport to repeal SI 212 of 2019. Consequently, the Exchange Control regulations have laws on the one hand banning the use of foreign currency, while on the other, allowing the use of free funds. SI 212 of 2019 bans a buyer and a seller from transacting in foreign currency while SI 85 of 2020 permits a buyer to transact in foreign currency.

Insurance and Pensions Commission (IPEC) Circular 7 of 2020

Following SI 85 of 2020, IPEC issued Circular 7 of 2020 in April 2020. The Circular seeks to reiterate the position as stated in the Exchange Control regulations on free funds. It clearly lays out that all insurance contracts remain denominated in ZWL, apart from the insurance policies exempted under Circular 13 of 2019.

It may be argued that section 81 of the Insurance Act is an exemption to the scope of domestic transaction, in that allowing a policy to be denominated in another currency is an implication that the premiums for this policy may be paid in that same currency.

Analysis

The purpose of insurance is to be indemnified in the event of loss. It anticipates loss and undertakes to cover part or the entirety of that loss, thereby providing cover and certainty in an eventual loss.

However, the latest monetary regulatory framework (SI 85 of 2020) with the rationale to assist the public in light of the devastating effects of Covid-19 also has its own devastating effects on the insurance sector.

Consequently, the contract currency of all insurance contracts is ZWL and the settlement currency of all insurance contracts shall remain ZWL. However, premiums can be paid in foreign currency on condition that they are free funds.

It is puzzling that the law allows for premiums to be paid in one currency but for claims to be settled in another currency. There also does not appear to be any distinction between local versus foreign risks, except for those that are exempted in terms of SI 212 of 2019. The reality is that any policyholder paying premiums for a domestic policy using foreign currency will always be underinsured and is arguably worse off than those paying premiums in local currency.

The Consumer Protection Act defines a consumer contract as:

‘[…] a contract for the sale or supply of goods or services or both, in which the seller or supplier is dealing in the course of business and the purchaser or user is not […]’[8]

The insurance contract is a consumer contract and falls within the remit of the Consumer Protection Act. Therefore, as provided by the preamble of the Consumer Protection Act, much should be done to protect consumer of insurance products and services by ensuring a fair, efficient, sustainable and transparent marketplace for insurance consumers. The payment of premiums in foreign currency ‘free funds’, is unfair to policyholders where they do not get the return for which they have been paying premiums. It is also unsustainable for the insurance sector. The distortions to the economy caused by currency changes or risks should not lead to the wholesale distortion of the legal principles of the law of insurance.


Notes

[1] See section 17(2) of the Finance (No 2) Act, 2009, No 5 of 2009. The pound sterling, euro, US dollar, SA Rand and Botswana pula were declared legal tender in Zimbabwe. This declaration has not been revoked.

[2] Statutory Instruments 32 and 33 of 2019.

[3] Statutory Instruments 76, 77, 83 and 85 of 2020.

[4] Statutory Instruments 33 and 142 of 2019.

[5] S-18-03 (Sandura JA, Ziyambi & Malaba JJA concurring).

[6] See also Macape (Pty) Ltd v Executrix, Estate Forrester 1991(1) ZLR 315.

[7] Exchange Control (Exclusive Use of Zimbabwean Dollar for Domestic Transactions (Amendment) Regulation, 2020 (No 2).

[8] Consumer Protection Act, Chapter 14:14.

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