Ombud urges full disclosure when buying insurance

An insurance claim may be rejected even if the non-disclosed information has no bearing on the occurrence that initiated the claim.

The Ombudsman for Long-Term Insurance, Judge Ron McLaren, says there is a common misconception that the non-disclosure of material information by an applicant for life insurance has to be linked to the claim event in order for the insurer to be able to repudiate the policy.

“This is not so,” he said, adding the reason why the cause of the claim is irrelevant to the non-disclosed information, has to do with the insurer’s initial decision to grant cover.

“When one applies for a policy and is asked questions about his or her health, hobbies etc., the insurer relies on the answers to these questions to assess the risk it is asked to take on.

“If the questions are answered incorrectly, or incompletely, it is a pre-contractual misrepresentation. The insurer, when it becomes aware of the true facts regarding an applicant’s health or hobbies, can repudiate the policy, that is, cancel it from inception.”

The Ombudsman said it does not matter whether the non-disclosure or mis-disclosure was intentional or not. The fact is that the insurer had relied on the wrong information to decide whether to grant cover or not and, therefore, can cancel the policy.

He gave the example of a proposer for an insurance policy who answers “no” when asked whether he suffers, or has ever suffered, from raised cholesterol. The insurer issues the policy. Six months later, by chance, the insurer finds out that the proposer had suffered from raised cholesterol for many years and was on treatment for it.

“The insurer can immediately cancel the policy because of the non-disclosure, despite the absence of any claim.

“This demonstrates that the cause of a claim is irrelevant to the non-disclosed information because there has been no claim.

“It is because the insurer was misled that it has the right to repudiate the policy.  The causal connection is between the non-disclosure and the conclusion of the contract and not between the non-disclosure and the claim event,” the Ombudsman said.

A person who has raised cholesterol for many years is a higher risk than a healthy applicant. By providing incorrect or incomplete information at application stage, the insurer was not provided an opportunity to truly gauge the risk it was asked to take on.

Had the true status of an applicant’s health or hobbies been disclosed, the insurer would have been able to determine whether the risk was either too high, and the policy thus declined, or whether the risk could be mitigated by loading the premium or placing an exclusion on the policy.

The Ombudsman said his office adhered to fairness jurisdiction. In terms of this, where there is non-disclosure, the insurer has to reconstruct the policy when it becomes aware of the non-disclosure (also called the “Didcott principle”).

If the insurer would have issued a policy if it knew the true facts at application stage, albeit on different terms, then it should also do so when it becomes aware of the true facts at any stage, even at claim stage.

“If the insurer would have issued a policy but with a premium loading i.e. a higher premium, then the insurer must now reconstruct the policy on that basis. The insurer can’t just repudiate the policy.

“Only if a policy would not have been issued at all can it be repudiated on our approach.

“If a policy is repudiated, we instruct the insurer to refund premiums, less reasonable costs incurred,” the Ombudsman said.

Insurers also carry the responsibility of making further enquiries if the information supplied by the applicant raises suspicion.

“There is often a difficulty in non-disclosure cases if the insurer repudiates a policy where the applicant disclosed some, but not all, the material information (or mis-disclosed some information).

“One such case went on appeal and the appeal tribunal confirmed, despite the insurer’s contention to the contrary, that an insurer is required to make its own additional enquiries if such information as is disclosed raises alarm bells or needs further elucidation,” the Ombudsman said.

He gave the example of an applicant who says “no” to the question whether he suffers from diabetes. However, he discloses that he is taking Glucophage (medication used for problems with blood sugar). To the question whether he has sought medical advice for any ongoing medical problems, he indicates “yes” and without giving the condition, he mentions the name of a specialist.

“The insurer should have followed up on the disclosed information regarding the medication and the specialist, despite the negative answer to the question whether the applicant suffers from diabetes.

“An insurer cannot disregard important information which is disclosed at application stage without making further enquiries to find out what the actual position is. This is so in respect of all information, whether medical, financial or otherwise, and whether the information is obtained from the applicant or other sources.

“Where the insurer has been negligent in not following up on disclosed information, the office will not uphold the insurer’s right to repudiate the policy and cover will have to be reinstated,” the Ombudsman said.

“Where the insurer has been negligent in not following up on disclosed information, the office will not uphold the insurer’s right to repudiate the policy and cover will have to be reinstated,” the Ombudsman said.

Where the insurer can prove that the applicant fraudulently or intentionally non-disclosed information, the above approach will not be applied by the office. The insurer will be entitled to repudiate the policy.  However, the insurer has the onus to prove fraud, on a balance of probabilities.

The Ombudsman said it is important for consumers to disclose full information in response to questions asked in an insurance application form.

“Rather give too much information than too little. It can be difficult to remember all the medical information, and if this is the case, then ask for more time so that you can check with your doctor or medical aid on the details before answering the questions.

“Also mention the medication that has been prescribed for your condition. If you have had any symptoms from which you suffer, even if your doctor has not yet given a definite diagnosis, rather disclose the symptoms.

“It is very unfortunate if a policy is repudiated and a claim is not paid because of non-disclosure,” he said.