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Income Protection: Mis-selling, or Mistaking the Type of Cover?

The Insurance and Savings Ombudsman's office has considered a number of complaints relating to the issue of whether income protection policies were mis-sold.

Tuesday, July 31st 2001, 1:50PM

Case Study

(In this case study C is the complainant and P is the participant - the company offering the policy).

C and his wife had an existing sickness and accident policy with another insurer. In 1998, they arranged a new income protection policy with P, through an adviser.

C and his wife believed the policy provided an agreed value benefit in the event of a claim being made.

However, when C’s wife made a claim, it was discovered the policy was for indemnity value only. Because C’s wife was receiving a benefit from the Accident Rehabilitation and Compensation In-surance Corporation, there was no benefit payable under the policy (due to it being offset).

C argued the adviser led them to believe they were purchasing an agreed value policy. Accordingly, he wanted a refund of all premiums paid.

C also argued that they had never received the policy document from P and, therefore, were unable to exercise their rights under the free-look period.

The proposal completed by C showed the policy was for indemnity value. However, it was noted the proposal was completed by the adviser, who had also indicated the policy was not replacing an existing policy when, in fact, it was.

C was unable to locate any documentation relating to the earlier policy to determine the type of cover provided. The case manager was also unsuccessful in locating any relevant information.

P confirmed the adviser was an agent for P at the time the policy was sold. Accordingly, P would be liable for his actions. Unfortunately, however, the adviser refused to provide his file to this office.

The adviser was no longer an agent of P and, therefore, P could not compel him to do so. Neither was the adviser a member of the Financial Planners and Insurance Advisers Association, which meant there was no way for the case manager to obtain his file to determine how the policy was sold.

After discussing these issues with P, including the question of whether the adviser was not co-operating due to possible self-incrimination, P made an ex-gratia offer to C of 50% of the premiums paid. This was accepted by C in settlement of the complaint.

In respect of whether P had provided the policy document, the case manager was aware it was P’s standard practice to do so. P could confirm the date on which the policy document was prepared, but could not say when it was sent to C.

That notwithstanding, C had noted in correspondence to P and this office, that he had received a document from P, which had the sum assured amount written on it, but it was immediately filed away. This suggested that C did receive the policy document but, given C’s current belief that the policy document was not received, the case manager was unable to resolve that issue.

The Insurance and Savings Ombudsman's office has considered a number of complaints relating to the issue of whether income protection policies were mis-sold. On two particular occasions, the complainants argued that they believed they were purchasing an agreed value income protection policy but, when it came to a claim being made, it was ascertained the policy only provided for indemnity value cover.

In each situation, the fact the complainant was in receipt of a benefit from the Accident Rehabilitation and Compensation Insurance Association, meant they received little or no payment from the insurer, due to the benefit being offset against other income.

 In accordance with normal practice, the policies were arranged by an adviser – in one complaint, the adviser was a tied agent of the insurer at the time the policy was arranged; in the other complaint, the adviser was an independent broker.

When investigating allegations of mis-selling, it frequently comes down to a matter of the complainants alleging they did not get the type of cover they were led to believe they were purchasing. On the other hand, the adviser (be it an agent or broker) argues that he/she clearly explained to the complainants, at the relevant time, the nature of the cover being proposed.

In this "he said, she said" situation, the ombudsman is only able to investigate on the documentation, because the informal nature of the Insurance & Savings Ombudsman’s investigations prevent us from determining who is the more credible witness.

It is usually the case that the proposal notes the policy was not to be for agreed value cover and, potentially, there will be illustrations indicating the cover was for indemnity value. Moreover, when the insurer has accepted the proposal and has issued a policy document, the nature of the cover is generally explained and would be clear, even on a cursory reading of the document.

 The reality is, however, that when people go to an adviser (broker or agent) with the idea of arranging income protection cover, they may not necessarily understand the distinction between agreed value and indemnity value cover.

This can be complicated by a number of factors, including the requirement for the proposer to nominate a benefit amount. If the nature of indemnity value cover is not clearly explained, it is understandable that a proposer may believe the benefit amount is the set amount he/she will receive upon making a claim, rather than being the maximum amount payable.

Also, while it is noted that many proposals specifically ask whether the proposal is for agreed value cover, the fact that it is often the adviser, who completes the proposal (although in consultation with the proposer), means this crucial point may be passed over. (It is appreciated that the declaration in the proposal generally includes an acknowledgement, from the proposer, that he/she has read the proposal and all information is correct).

If an allegation of mis-selling is made against an adviser and the adviser was acting as an agent for the insurer, the insurer will bear the responsibility for the agent’s actions, if it is determined the allegations have foundation.

However, even if the adviser is, in fact, an independent broker, it is arguable that section 10(1) of the Insurance Law Reform Act 1977 may apply and deem the broker to be an agent of the insurer, in which case the insurer will still bear some responsibility. Again, however, the determination of whether a policy was mis-sold will come back to the documentation.

Having considered the two complaints referred to, we believe it is important for insurers to ensure the nature of the cover being proposed is clearly explained to the proposer, by their advisers. Furthermore, insurers need to give careful consideration to the documentation they issue to the insured, to enable the insured to clearly understand the cover provided.

This applies to new policies, when income protection is added to an existing policy and in any subsequent correspondence concerning the policies. This will help to promote good customer relations and makes good business sense, because less time will ultimately be spent on determining what actually happened when the proposal was completed, if a claim is made and the nature of cover challenged. In contrast, if the documentation itself is unclear in respect of the cover provided, an insurer is potentially liable to allegations of misleading and deceptive conduct under the Fair Trading Act 1986.

This article is reproduced from the Insurance and Savings Ombudsman office's Assessment newsletter.

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