Law may make insurers treat customers fairly

Critically ill patients who are denied insurance payouts because they did not make seemingly unimportant details clear on applications could benefit from a crucial change to the law.

 

The Law Commission, which monitors the way laws are applied, has put forward plans that mean insurers would no longer be able to deny claims because they weren't given enough information when the insurance was taken out, or subsequently. The issue is particularly important in critical illness and life insurance.

 

Under the current law, which dates from 1906, any person trying to claim on a critical illness or life policy will have their medical history pored over by the insurer. If it is discovered that any detail of their medical history or lifestyle was not made clear when they took out the policy, the insurer has grounds to deny the claim. In such circumstances, most insurers refuse to pay any claim.

 

Is it really a coincidence that some insurers have been recently saying they often do make a partial payout? They have been quiet on the subject for years, but when potential law changes are suggested, they suddenly start to make a noise. Most insurers do not want a law change, as it would make them work a lot harder to deny claims. At present all they have to do is to refuse a claim and put the onus on the upset relatives to pursue them. Nature being what it is, a lot of people when told a claim is not to be paid, simply accept it, rather than use it as the start of negotiations. Unlike motor insurance, where your broker will argue with insurers on disputed claims, on critical illness, even where an intermediary has sold the policy, by the time a claim is made, the intermediary is rarely around to argue the case. The insurance company trade association, ABI, argues that a law change is not needed as insurers already bend the rules to pay claims. This argument misses the point. At present insurers do not have to pay, and customers have to rely on goodwill and partial payments. Dying, or being critically ill, is not the time to find out that your friendly smiling insurance company is one of the bad hats insisting on the letter of the law and effectively telling you where to stick your claim.

 

The current law has created situations where claimants are denied an insurance payout because of seemingly innocent mistakes or oversights when applying for the insurance. For example, a woman claiming on a critical-illness policy for breast cancer could be denied a claim if she forgot to include details of an unrelated back problem that caused her to visit a doctor years beforehand. The current law means she has a duty to tell her insurer all details. Failure to do so could invalidate her insurance.

 

At present, anyone who has a claim refused can appeal to the Financial Ombudsman Service, which mostly but not always sides with the policyholder if they had answered application questions honestly. So, in a case where the insurer has asked for details of 'any condition affecting the nervous system’, an individual who did not mention an occasional numbness in their leg because they didn't think that it was relevant would likely be supported by the FOS.

 

The Law Commission plans would make insurance contracts work on a basis closer to this FOS process, rather than forcing claimants, often sick or recovering from illness at the time, to pursue their case through the Ombudsman. It would mean insurers would have to ask for specific medical and lifestyle information if they wanted to then use information as a basis for denying claims.

 

On 17 July 2007 the Law Commission published jointly with the Scottish Law Commission a consultation paper on insurance contract law.  The closing date for responses is 16 November 2007.

 

Insurance contract law has been criticized as outdated and unduly harsh to policyholders. Reports recommending reform were published by the Law Reform Committee in 1957, the Law Commission in 1980, the National Consumer Council in 1997 and the British Insurance Law Association in 2002.

 

Where the law gives rise to problems, consumers are entitled to refer disputes to the Financial Ombudsman Service.  Ombudsmen can enforce the conduct of business rules issued by the Financial Services Authority.

 

In the view of The Law Commission:

 

Anyone applying for an insurance policy is obliged to disclose all ‘material facts’ to the insurer, regardless of whether or not the insurer asks relevant questions. If the insurer is induced to issue an insurance policy by the non-disclosure of a material fact, there are potentially serious consequences. The insurer may, when it becomes aware of the non-disclosure, set the policy aside from outset, and refuse to meet any claim. As a matter of law, this is so whether the non-disclosure was innocent, negligent or fraudulent. A material fact is one that would have an effect on the mind of a prudent underwriter. It is therefore possible for an applicant to act honestly and reasonably, and still fail to meet the required standard of disclosure.