VIC Who should get refund of LPI premium after early payout of loan - me or the bank?

[Lela19]

On 9 Oct 2018, I paid Bank of Melbourne the payout figure for my 7-year car loan 1.5 years after first taking out the loan.

I only recently realised, after going through my car loan documents, that I had actually paid for Loan Protection Insurance, an amount that had been included in my car loan with BOM. I also realised that I should have contacted Eric Insurance to cancel the LPI, as they would then refund the premium to me. Below is an extract from Eric Insurance's PDS for their LPI.

"CANCELLATION BY YOU
If You wish to cancel the Policy, You may do so at any time by providing Us with notice by phone, email or by mail. We will refund to You the portion of the Premium that You have paid to Us that is attributable to the unexpired Period of Insurance remaining under the Policy. We will calculate the amount of Your refund using the formula as set out under the National Consumer Credit Protection Act 2009 (NCCP).
The refund calculation takes into account the total Premium paid, term of the Policy and unexpired portion of the Period of Insurance. Cancellation by You will be effective by 4pm AEST on the day We receive Your cancellation notice or the date specified in Your cancellation notice (whichever occurs last)."

Last week, I contacted Eric Insurance to inform them that I have paid out the car loan, that I wanted to cancel my LPI, and that I would like a refund of my premium. Imagine my surprise when I received the following email from them:

"Thank you for your recent enquiry regarding the above policy.
I can confirm that this policy was cancelled at the financier (BOM) request on 09/10/2018. The rebate of $XXXX was sent back to BOM on 16/10/2018."

My question:
1. Have I missed something here? Does BOM have a right to the refund for the premium for my LPI? I paid for it, not them, so I should be the rightful recipient of the refund, right?

2. Is it a question of semantics? Is "rebate" and "refund" the same thing here?

3. Who should I chase up to get my refund back? Eric Insurance, which says they have sent it to BOM at BOM's request? Or BOM?

4. What does the law say about refunds of insurance premiums? Does the consumer always have the right to get their premium back if they cancel the policy before its expiry date? My LPI commenced in March 2017 and was due to expire in March 2024.

Thanks in advance for your thoughts. Any advice is very much appreciated.

 

[Rob Legat - SBPL]

What's probably happened is the following:

- What most people don't realise is that this type of insurance is not primarily designed for your protection - it's there for the lender. It's in the name.

- Lender's Protection Insurance/mortgagee's insurance/whatever version was implemented to overcome 'loan to value ratio' (LVR) issues. What this is is easiest explained by example in housing area. You buy a house for $500,000, and borrow the whole $500,000 because you don't have a deposit (mythical, but bear with me). The loan ($500k) is 100% of the 'value' of the security (also $500k). That makes lenders uneasy because if you can't pay the loan and they have to enforce it by seizing and selling the security, the practical reality is that they're unlikely to get the whole $500k - especially when you add in penalty interest, depreciation of the property, selling costs and so on. Banks might have, say, an allowable LVR of 85% on a home purchase - given it's different for different types of security. That would mean to buy that $500k house you'd need at least $150k equity to put in. That tended to mean that people without deposits were frozen out of the housing market. So, this type of insurance was brought in to cover the lender's gap in LVR for the first few years. After that, if everything went okay, enough repayments should have been made on the mortgage (and hopefully the house value increasing) to get the LVR under the bank's limits (here, 85%).

- Bastardise the above and apply it to car loans. If you don't have a trade in, you're likely borrowing 100% (or near enough) of the purchase price. Add to that the fact that car's almost universally drop in price - the old adage I heard was by up 30% just by driving it off the lot. If the car needs to be repossessed and sold then there's a high likelihood there will be a shortfall. Cue the insurance.

- The apparent difference here is that the policy covers you and the bank. This can be seen in the definitions of the PDS which state that 'you' means "the insured person(s) named in the Policy Schedule. It also includes the Financier only to the extent of their interest in the loan amount."

Since BOM cancelled the policy, the insurer paid them the refund.

The kicker here is that when the loan was paid out, there was no 'interest in the loan amount' as it was gone - but the insurer would not have known that.

I would suggest approaching BOM for a reconciliation and refund of the amount they received from the insurer for the cancellation of the policy - pointing out to them that at the time of cancellation (i.e. following payout) they no longer had any interest in the loan amount as it was paid out.

 

[Lela19]

T

What's probably happened is the following:

- What most people don't realise is that this type of insurance is not primarily designed for your protection - it's there for the lender. It's in the name.

- Lender's Protection Insurance/mortgagee's insurance/whatever version was implemented to overcome 'loan to value ratio' (LVR) issues. What this is is easiest explained by example in housing area. You buy a house for $500,000, and borrow the whole $500,000 because you don't have a deposit (mythical, but bear with me). The loan ($500k) is 100% of the 'value' of the security (also $500k). That makes lenders uneasy because if you can't pay the loan and they have to enforce it by seizing and selling the security, the practical reality is that they're unlikely to get the whole $500k - especially when you add in penalty interest, depreciation of the property, selling costs and so on. Banks might have, say, an allowable LVR of 85% on a home purchase - given it's different for different types of security. That would mean to buy that $500k house you'd need at least $150k equity to put in. That tended to mean that people without deposits were frozen out of the housing market. So, this type of insurance was brought in to cover the lender's gap in LVR for the first few years. After that, if everything went okay, enough repayments should have been made on the mortgage (and hopefully the house value increasing) to get the LVR under the bank's limits (here, 85%).

- Bastardise the above and apply it to car loans. If you don't have a trade in, you're likely borrowing 100% (or near enough) of the purchase price. Add to that the fact that car's almost universally drop in price - the old adage I heard was by up 30% just by driving it off the lot. If the car needs to be repossessed and sold then there's a high likelihood there will be a shortfall. Cue the insurance.

- The apparent difference here is that the policy covers you and the bank. This can be seen in the definitions of the PDS which state that 'you' means "the insured person(s) named in the Policy Schedule. It also includes the Financier only to the extent of their interest in the loan amount."

Since BOM cancelled the policy, the insurer paid them the refund.

The kicker here is that when the loan was paid out, there was no 'interest in the loan amount' as it was gone - but the insurer would not have known that.

I would suggest approaching BOM for a reconciliation and refund of the amount they received from the insurer for the cancellation of the policy - pointing out to them that at the time of cancellation (i.e. following payout) they no longer had any interest in the loan amount as it was paid out.

Thanks for your quick reply! The car wasn't repossessed or anything - I had extra cash and decided to pay out the car in full. There was no need for the insurance to kick in and cover BOM. So, if BOM has already received the full payout figure from me, it's puzzling why they would then have any right to the refund of the insurance premium. I mean, why did BOM contact Eric Insurance in the first place? Theoretically, if I had contacted Eric Insurance first (ahead of BOM), the Eric Insurance would have paid me the refund? The more I think about it, the more I feel BOM has gotten hold of money that I believe is mine. The refund amount is not small - $2700+.

I will take up your advice and follow up with BOM tomorrow. Apart from what you suggested re: interest in loan, any further advice on what to say to BOM so that I can be more..persuasive? Should I mention Financial Ombudsman or do the banks not even care about that?

 

[Rob Legat - SBPL]

No, just play it straight. If you don't like their response tell them clearly that you're unhappy and want the matter reviewed through their internal dispute resolution processes. From there, if still not satisfied, you can refer the matter to AFCA (the Financial Ombudsman no longer exists - it all goes through the Australian Financial Complaints Authority now).

 

[Mike Love]

www.afca.org.au

The bank WILL care if you make a complaint, as THEY have to pay all costs for the ombudsman service.

I imagine they will refund your fee straight away - not worth their time and money.