4 minute read
INSURANCE
INSURANCE By Steve Wright
Time to tackle an industry misconception.
How often have you heard
someone in our industry make the bald and usually completely unjustified statement that “they don’t pay claims”? I’m guessing a couple of times at least because, sadly, this does happen. Perhaps more sad, though, is the fact that advisers often don’t treat such statements with the necessary response they deserve. So let’s consider the statement seriously for a moment and dismiss it once and for all as ill-informed (the general public can be forgiven) or self-serving mischief, likely to bring the life insurance industry into disrepute and therefore contrary to the Financial Advisers Act.
Life insurance companies generally have no discretion about whether or not they should pay a valid claim and there are really only two reasons why a client who is up-to-date with premium payments can have a claim declined.
These are: ✘ Material non-disclosure; and ✘ No benefit is provided in the policy.
So let’s explore these a bit more.
Material non-disclosure.
Clients applying for insurance have a legal duty to advise an insurance company of any
matter that might influence its decision to accept the client’s application. This duty must be complied with in utmost good faith - and being a positive client duty, clients must comply even if the insurer does not ask the specific question. This may seem relatively onerous on clients but is absolutely necessary because the client alone knows the matters requiring disclosure.
Insurance companies are entitled to decline claims and even void a policy from inception because of non-disclosure. It does not matter whether the non-disclosure is fraudulent or inadvertent and a “slip” of memory. This is why it is so important that advisers assist their clients by making sure they disclose fully and accurately when filling out the application forms. Full and accurate disclosure is really up to the client anyway, it’s not something within an insurance company’s ability to bring about, so this is not really an area where insurance companies can engage in “not paying claims”!
No benefit is provided in the policy.
Clients are only entitled to the benefits set out in their policy. Not all policies are equal, so in identical situations one policy might be required to pay while another may not, it depends on the policy provisions as set out in the policy wordings. The policy wordings are paramount and this is why all advisers should base their advice on policy wordings, not glossy marketing brochures or hearsay from anyone else. Make sure the circumstances in which your client requires benefits to be paid are actually covered by the product you recommend.
A claim being declined because the claim circumstances do not translate into a benefit provided by the policy is something which, if there is a dispute, can be ruled on by a suitably qualified independent person like the courts or the Ombudsman. Accordingly, this too is not an area where insurance companies can incorrectly engage in “not paying claims”.
Why not just pays all claims and keep everyone happy?
Insurance is a very delicate balancing act. Every claim paid that has not been anticipated and a premium paid for, upsets that delicate balance. Imagine a company that paid claims not provided for in its policies or even where cases of material non-disclosure meant the insurance company did not know the risk it was taking on? Pretty soon it would have to increase its premiums - dramatically. What is worse, this company would soon get a name for being lenient on non-disclosure and so would begin attracting more and more cases: How do you think all its other, diligent, policy holders would feel about that? To keep insurance valuable and affordable for all, insurance companies are obliged to correctly pay valid claims only.
So, in reality, there are only two scenarios where insurance companies can decline claims and both of those are fair and reasonable and important for policyholders and the industry in general.
One final point: In law, insurance contracts are contracts of utmost good faith (uberrima fides) and accordingly, the parties (the policy owner and the insurance company), are held to a much higher standard of legal behavior than is normally the case with contractual relationships. Just as a client who does not fully and accurately disclose material information breaches this standard, so too an insurance company that refuses to pay a claim without proper reason (when evidence of a valid claim is before it) is, in my view, likely to be breaching their obligations. ✚
Steve Wright has qualifications in Law, Economics, Tax and Financial Planning and is General Manager Product at Partners Life.
This article is for information purposes only. Its content is intended to be of a general nature, does not take into account your financial situation or goals, and is not a personalised financial adviser service under the Financial Advisers Act 2008. It is recommended you seek advice from a financial adviser which takes into account your individual circumstances before you acquire a financial product.
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