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ISO Case Studies - ASSET Sep 2011

September's case studies demonstrate some of the issues you may encounter when working with customers who are children. These special customers have their own needs and issues which are important to consider when advising them.  

Wednesday, September 28th 2011, 7:40AM

ISO CASE STUDY 3:            Investment Statements and Young Clients

Year: 2009

Complaint No:  115217

Casebook Index: Cash Value, Charges/Fees, Suitability of policy, Fair and reasonable

("P" is Participant insurer and "C" is Complainant)

Case Study 3 highlights how young customers' personal circumstances may mean you need to look at the types of products and information about these products that you provide to them. This case looks at what is fair and reasonable when applying the terms of investment and savings plans to young people.

What happened?

In 2007, C commenced a savings plan with P. In 2008 C terminated the plan and was paid $652.64.  C sought a refund of all contributions, which totalled approximately $4,600 on the basis that he did not understand what he was getting himself into when he took out the plan.

C was 16 when the plan was arranged, and had signed the application acknowledging that the adviser had explained the charges associated with the plan and given C an Investment Statement.  The Investment Statement showed that the establishment fees of 50% of the amount payable annually and 50% of any increase in the amount payable annually would apply.

The documentation provided to C by P included generic illustrations and, although they outlined the assumptions on which the figures had been calculated, they did not include details of the contributions paid. Consequently, unless additional calculations were made by C, the relationship between the contributions paid and the illustrative cash values was not evident on a year by year basis. The policy gave no indication of how the cash value would be calculated.

It was evident in the ISO's discussions with C that C did not understand the nature of the charges associated with the plan.  Despite the signed acknowledgement, there was some doubt about whether C had received an Investment Statement.  The adviser who sold the plan to C was no longer in New Zealand, and as such it was not possible to seek his comments.

How did age influence the ISO's decision?

Under the provisions of section 66B (1) of the Life Insurance Act 1908, C was legally entitled to enter the contract.

However, under the provisions of paragraph 5.7 of the ISO's Terms of Reference, in considering any complaint, the ISO is required to consider what is "fair and reasonable in all the circumstances".  In doing so, a number of factors were taken into consideration.  These included doubt over whether C received an Investment Statement and, if so, whether he would have understood it. All the correspondence from C was written by a family friend and there was some concern about the degree to which C would have understood the written material provided to him when the plan commenced. Additionally, payments initially represented approximately 10% of C's gross pay, increasing to 20% in January 2008.  After considering C's age, it was questionable whether payments at the amount C was paying were sustainable. This was supported by the fact that during the time the plan was in force, C failed to make more than 25% of the payments due.

It was therefore considered fair and reasonable for C to receive the total contributions paid.

Result:  Complaint upheld


Take particular care when dealing with young clients to ensure they understand the terms and conditions of any policy or plan and that this product is suitable for their circumstances.



CASE STUDY 4:        Health Insurance - Pre-existing conditions

It is important to ensure that insurance applications are correct and complete.  This case study looks at non-disclosure of medical history, which can be crucial even where it seems unlikely that any adverse medical history exists.


Year: 2010

Complaint No:  117196

Casebook Index: Non-disclosure - Pre-existing conditions

("P" is Participant insurer and "C" is Complainant)


What happened?

In 1997, C and D arranged health insurance with P.  In 2006, C and D's adviser added F, their 11 month old daughter, to the policy.  In 2009, C applied for pre-approval for surgery on behalf of F, due to recurrent tonsillitis and bilateral glue ear.  P requested further medical information to assess the application.  Prior to acceptance F had the surgery.

P subsequently discovered that F had a history of ear, nose and throat conditions ("the ENT conditions").  P declined to pay for the cost of the surgery, because the ENT conditions existed prior to commencement of the policy cover for F and, had they been declared on the application, P would have placed a specific exclusion on the policy for F.  C and D believed P should pay for the cost of the surgery, because they believed that cover for their children was automatically accepted and they were not told at any stage to stop the surgery as there was a chance they would have to pay for it.

What was the impact of the adviser adding F to the policy?

The adviser had indicated on F's application that F had never had symptoms or was currently being treated for disorder of the nose or throat, recurring sore throat, tonsillitis or ear infections.  The application was completed by the adviser. C signed the declaration on behalf of F, indicating that all information given in support of the application was true, correct and complete. 

Was the insurer entitled to decline the pre-approval?

The ISO applied the test of materiality by checking whether the information about the ENT conditions 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 they would have placed specific ENT exclusions in respect of F under the policy.

Given the information in the underwriting review, P was entitled to avoid the policy.  However, P did not elect to rely on its right to avoid the policy (which would have affected the whole family), but instead declined the pre-approval application for the surgery.  

Result:  Complaint not upheld


All material information needs to be included on the application or passed onto an insurer, irrespective of the age of the customer.  Ensuring clients fill out application forms themselves may help prevent non-disclosure or the risk of a claim that you did not include important information on the application form.

« ISO Case Studies - ASSET Aug 2011ISO Case Studies - March 2012 »

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