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Lack of data hinders good debate on disclosure rules

Should New Zealand scrap the consumer’s duty to disclose? That statement appears shocking at first, but it has a particular meaning. It doesn’t mean that it would be OK for applicants to lie on their application forms.

Wednesday, April 19th 2017, 11:29AM 5 Comments

by Russell Hutchinson

Karen Stevens, Insurance & Financial Services Ombudsman

The duty to disclose requires that applicants provide insurers with any information that could affect the insurer’s decision to insure them. This duty reaches beyond the questions asked in the form – so even if an insurer fails to ask a question, the consumer is required by law to provide the information.

Almost no consumer fully appreciates the extent of this requirement or the effect it might have on potential claims.

Some commentators, such as Karen Stevens, Insurance & Financial Services Ombudsman, say that ‘Updating our insurance law on unintentional “non-disclosure” would help prevent consumers finding themselves uninsured or uninsurable in future’.

Rebecca Sellers from Melior Law covered legal issues relating to disclosure, at a recent event run by Fidelity Life. Sellers pointed out that the law does not distinguish between ‘intentional or unintentional’ and that most consumers would assume that simply answering the questions on the form honestly would be sufficient to fulfill their duty of disclosure. Yet that is not the case, and claims could be declined for failing to disclose relevant information.

This is a problem area. Increasingly, in society, we are used to being asked to discriminate less: making judgments based on gender, age, and physical ability is generally considered not okay. Never mind that everyone does it a bit, consumers are still surprised at how much insurers can and do ask on the forms.  they don’t think to themselves after completing a good ten pages ‘now what else should I mention’. In fact, we’re lucky if they read the declaration they are signing in full.

But is the claims situation so bad? We don’t know. This is where data lets us down. What would help is to know how many claims were:

  • Blatant, obvious, non-disclosure: bare-faced lies: like the case where the client filled in the application form still wearing their hospital identification bracelet, cheerfully ticking ‘no’ to all the health questions.
  • A bit hazy: the kind of non-disclosure that could have been due to an overly reassuring doctor. The kind where the Doctor has helpfully said “there’s nothing to worry about” when they really mean “there’s nothing more I can do”
  • Totally forgivable: they didn’t disclose that a claim for pet insurance was declined in 1976, when a teenage son ran over their own dog, which, while technically a breach of their duty, has nothing to do with whether they should get paid out for an open and shut heart attack claim today.

Having said that, really good insurers don’t hunt for irrelevant reasons not to make a claim – and they do pay plenty of claims.

Tags: Russell Hutchinson

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Comments from our readers

On 20 April 2017 at 12:19 pm Referee said:
What's happened to the Law Commission's report (Nov 2004) which provided specific recommendations on this subject??? I recall it was put aside in preference to other more pressing Legislation and it appears to have been lost.

As Insurance Ombudsman, Karen Stevens has earlier raised this issue about this (lost) Report but again with apparently little action by parliament.

Being election year, now is a perfect time to push for this very good work by the Law Commission to be re-examined.
On 21 April 2017 at 4:10 pm Tash said:
The law commissions recommendations are not very different from what at least one company does anyway (as contractually evidenced and guaranteed by their policy wording). Any real adviser will know who this is.

The simple reality is this:
Less disclosure = more exclusions for pre-existing conditions at claim time:
Less disclosure and a law outlawing exclusions for pre-existing conditions = no cover at all or cover for accidents only:
The end of insurance advice and insurance advisers!
On 26 April 2017 at 11:56 am Referee said:
Tash, I am certainly not suggesting less disclosure. My viewpoint is it needs to be fairly distributed, particularly for unintentional mis-statement.

This issue needs to be resolved for the public at large, not for any exclusive Advisers.
On 27 April 2017 at 10:00 am Tash said:
Hi Referee. Thanks for engaging. What do you mean by 'fairly distributed'? Why should anyone other than those who don't properly disclose pay for non-disclosure? The insurer is certainly not to blame, neither are other, more diligent, policy holders who take the time and effort to carefully read the application form and properly disclose.

Perhaps you are suggesting advisers should pay? After all, it is we who are advising the client and taking the client through the process of applying for insurances. (Incidentally, I believe advisers are on the hook to some extent anyway, this is why the clients need to be made absolutely clear about their disclosure duties and the potentially severe consequences of non-disclosure and then hold their hand through every question, questioning their answers where necessary, so that they cannot claim ignorance in the absence of advice and point the finger at the adviser).

Perhaps everyone should pay a little? premiums go up, commissions come down life company claims go up. But why should they? why should the diligent pay to cover the acts of a relatively few who can't do their part of the deal properly?

In my experience, non-disclosure which is minor and irrelevant is not a problem. The final, patently ridiculous, example given by Russell in his article could never legally amount to non-disclosure for which a life insurance company could decline a claim.
On 2 May 2017 at 12:13 pm Referee said:
I am happy to engage and to clarify. What I mean by "fairly distributed" is that an increasing proportion of people purchasing insurance no longer use a qualified Adviser. Too often the full extent of the Duty of Disclosure is not fully understood - like you or other ethical Advisers take care with.

More policies are being underwritten at claim time and this is why I echo the legal advice recommended by the Law Commission, which I recommend you study if you haven't.

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