Correctly answering questions – or disclosing information requested – is vital when applying for life insurance because the information will often determine how much premium is to be paid, what type of cover or protection is provided or even if the cover is to be offered.
There are four main types of life insurance:
- Life insurance pays your family or estate a lump sum amount when you die.
- Income protection pays you a monthly benefit, which may be up to 75% of your income if an illness, injury or accident prevents you from working.
- Recovery Insurance (also known as trauma or critical illness insurance) pays you an agreed amount if you are diagnosed with a specified critical illness event, such as cancer or heart disease.
- Total and permanent disability insurance provides a lump sum benefit if you’re permanently unable to work due to accident or illness.
The Insurance Contracts Act 1984 requires both the insurer and insured (or the policy owner/customer) to be honest when entering into or renewing a contract of insurance.
Of particular importance is the insured’s duty of disclosure and the requirement for the insurer to clearly inform the customer in writing of the importance of their duty to disclose and the possible consequences of not doing so.
It is in the best interests of both the insurer and the customer that complete and full disclosure is provided in the application.
This allows the insurer to properly assess and ‘underwrite’ the risk and determine whether cover can be provided and if so, on what terms.
(Note: Underwriting is simply the process an insurer takes in assessing whether to accept a policy for a customer and what conditions/pricing will be applied to the policy based on medical and lifestyle information provided by the applicant. This may result in standard premium rates being applied, higher rates, some conditions being excluded from cover, or denying the cover due to an unacceptable high risk.)
If the customer has complied with their duty of disclosure, it will mean a claim will be paid providing it meets the policy terms and conditions which have already been outlined to the customer at the time of purchasing the policy.
If a customer’s application contains non-disclosures or misrepresentations, the Insurance Contracts Act provides ‘remedies’ to an insurer so it can redress the non-disclosure or misrepresentation.
These actions may involve denying a claim and cancelling a policy, or varying a policy based on the information that should have been disclosed at the time of application.
Financial Ombudsman Service case study – non disclosure
The following was published by FOS in its 2014 Annual Review page 77.
An applicant seriously injured in a water-skiing accident was denied income protection insurance because of non-disclosure. He brought a dispute to FOS complaining about the insurer’s delay in making a decision.
The applicant, who took out the insurance in December 2010, suffered a broken neck and back, head trauma, nerve damage to his arms and a staph infection as a result of the accident in September 2012.
In the insurer’s application form for the insurance cover, the applicant ticked ‘no’ in answer to a question in his personal statement about engaging in hazardous pastimes.
The question specifically mentioned ‘motor or water sports’, among other activities. In a further personal statement, the applicant said that he used a ‘bullet’ ski boat with maximum speeds of 147kmh, had participated in boat (water-skiing) racing for 18 years, competed in races monthly and was a member of a water-ski racing club.
The financial services provider wrote to the applicant stating that it would not pay the insurance claim because of the applicant’s failure to disclose his participation in water-ski racing.
The Financial Ombudsman ascertained that the applicant was clearly informed of his duty of disclosure, that his history of engaging in hazardous pastimes was known and relevant, and that the financial service provider would not have entered into the contract with the applicant if it had known this information.
TAL case study – non disclosure
TAL received an application for a 21 year old who was seeking Life and Recovery insurance cover. The applicant said they had not suffered from any previous medical conditions and answered a series of questions that indicated no physical or medical concerns.
The application was accepted at standard rates (i.e. the premium was not increased due to any previous medical history).
A year later the customer submitted a Recovery claim arising from an illness. TAL requested medical information to support the claim.
The medical files revealed the customer did not disclose she had a range of serious medical conditions, including bladder issues, left leg numbness, problems with her vision, and difficulty walking prior to completing the application for insurance.
Each of these had led to the diagnosis of MS (multiple sclerosis). However, due to the significant non-disclosure, her claim was declined and the two policies were terminated as a result, and the premiums she had paid were refunded.
Had the woman disclosed her conditions, it is possible her application for life cover would have been accepted with increased premiums due to the increased risk, providing her with life cover, even if the Recovery Insurance cover was not available.