by ISO
The first case study shows some of the risks for a financial adviser who completes an insurance application for a client and what may happen if the client later claims you did not include important information.
CASE STUDY 1: ("P" is Participant insurer and "C" is Complainant)
Complaint No: 114049
YEAR: 2008
Casebook Index: Adviser, Non-disclosure - Pre-existing conditions
What happened?
C arranged a life insurance and trauma cover policy with P, with his adviser completing the application form for him. Ten years later, C had a heart attack and made a claim to P for the "Trauma Recovery Benefit" under the policy.
P declined the claim and avoided the policy from inception, on the grounds of non-disclosure and misstatement relating to C's cardiology referral and diabetes. C challenged the decision, because the adviser completed the application form for him and C believed the adviser was aware that he suffered from diabetes.
What was the impact of the adviser completing the application form?
C said the adviser completed the application and the adviser was aware C suffered from diabetes. While the adviser accepted he may have completed the application, he said he was not, in fact, aware that C suffered from diabetes.
As there was contradictory evidence about what had happened, the ISO had to rely on the documentation available. When C signed and dated the application he declared the information provided on the application was true and accurate. As there was no specific evidence that the adviser was told of or knew of C's diabetes, P was entitled to rely on the application as correctly recording C's health at the time. C failed to disclose material information and, therefore, P was entitled to avoid the policy and retain the premiums.
Result: Complaint not upheld
What is your obligation when your client tells you information about their health, but doesn't record it on the application? In this second situation, the adviser thought "material" health information was not important, so it was not recorded on the application form or otherwise relayed to the insurer.
CASE STUDY 2: ("P" is Participant insurer and "C" is Complainant)
Complaint No: 118682
Year: 2011
Casebook Index: Non-disclosure, pre-existing condition, Reinstatement of policy
What happened?
In 1998, C arranged life and income protection insurance with P. In 2010, she made an income protection claim to P, because of significant ongoing symptoms caused by scleroderma, a serious and systemic condition. P declined the claim and cancelled C's policy, because it believed she had failed to disclose material information about her condition in her application.
The adviser confirmed to the ISO that, at the time she was completing her application, C told him that she had a "sore hand". At the time, neither the adviser nor C knew that her "sore hand" was a symptom of a serious condition. C did not record her "sore hand" on the application form and the adviser did not pass the information onto the insurer.
What was the impact of the adviser knowing this information?
The law treats an adviser as a representative of the insurer during the application process for an insurance contract. As a result, the insurer is deemed to be aware of any material matters known to the adviser. Here the adviser knew about the "sore hand" in the negotiation of the contract. Therefore, if this information was material information, P was also deemed to have notice of it and could not cancel the policy.
Could the insurer cancel the policy?
The ISO applied the test of materiality by checking whether the information about C's "sore hand" would influence the mind of a prudent insurer in deciding whether or not to accept a proposal for insurance and, if so, on what terms. The underwriters approached advised that they would have requested additional information regarding the cause and nature of C's "sore hand". If the cause of the hand pain was systemic, they would have applied an extra premium for life benefits and would only have considered extreme underwriting terms for income protection benefits. As the condition causing C's "sore hand" was scleroderma, the information about the "sore hand" was material.
The ISO also looked at whether C's disclosure of the "sore hand" to her adviser was sufficient to put P on enquiry of that material information and decided that this information was material as it clearly indicated there was more information P could obtain in making its decision about whether to accept the risk. Therefore, P was not entitled to cancel the policy on the basis of C's non-disclosure relating to the "sore hand".
Result: Complaint upheld
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