Beware of insurance traps

19:41, May 25 2014

Many an insurance policy has been torn up by an insurer because its investigations at claims time uncovered things it believes the policyholder should have told it when applying for cover.

It's called "non-disclosure", and insurers go looking for it when faced with a hefty claim.

When people apply for insurance, an insurer uses the information they provide to decide whether to provide insurance, whether to add in special "exclusions" to policies, and how much it will charge in premiums. People are expected to disclose everything that a prudent insurance underwriter would want to know, and the insurer will attempt to guide a person with the questions it asks.

But even so, too many people seem to be falling foul of accidental and innocent non-disclosure, and the insurers, who have been earning premiums in some cases for years, just "avoid" the policy, effectively treating it as if it never existed. When people complain to the Insurance Ombudsman about an avoided contract, its case officers go to other insurers to check what they think, with their answers guiding the ombudsman's ruling.

Given that a "jury" of insurers is likely to side with another insurer in the "dock", it's essential people leave nothing undisclosed when applying for cover. Years of complaints to the ombudsman provide a guide to the rest of us on how not to find ourselves being tripped up by insurance investigators at claims time.

The rule of 2000: At claims time, expect an investigator


A man's home contents were destroyed in a house fire. The investigator appointed by his insurer interviewed him twice. During the interviews, the man admitted he had previously suffered minor losses in a burglary in the previous year, and that he took out insurance because of it. On learning about the prior claim, the insurer claimed "non-disclosure" of material facts that would have influenced its decision to provide insurance, or at least the terms of it, and "avoided" the policy.

The rule of 2001: ‘Fess up to your crimes

A man's home was burgled, but an investigator found the man had criminal convictions he had not disclosed, and "avoided" the policy, arguing that was material non-disclosure. In most cases this would have meant the policy was avoided, but this one had a happy ending. The convictions were 12 years old. The ombudsman found the insurer's underwriting took into account only convictions in the past 10 years so the non-disclosure was not material.

Not all the endings in 2001 were so happy. A woman who failed to tell her insurer about convictions had her policy torn up following a house fire.

The rule of 2002:

Get permission to "modify"

Though it seems hard to credit, a man put a $5400 stereo into his car. When the car was stolen, the insurer avoided the policy, saying failure to tell it about the modifications was a material non-disclosure. Modifying cars can make them more attractive to thieves. In some cases it can make them less safe.

The rule of 2003: They will get your medical notes

Seeking cheaper critical illness cover premiums, a man switched insurer. When he suffered a heart attack, the insurer checked his medical notes and found he had failed to disclose he had been on an anti-cholesterol drug the year before the application. It avoided the policy. In such cases the ombudsman checks with other insurers to see what they would do. In this case the other insurers all claimed they would have charged higher premiums, so it was considered material non-disclosure, so the insurer was within its rights to avoid the policy.

The rule of 2004: Don't rely on the broker

Every year people tell the ombudsman they told their insurance adviser something that didn't end up on the application form. Sometimes they claim their adviser said it was not material, so it didn't need to be put in. But in each case, the policyholder is the one who signs the declaration that everything they said in the application is true.

This happened again in 2004 to a man who thought his chest pains were indigestion, but later went on to have a heart attack. He was also accused of failing to disclose enough about his family history of heart attacks.

The rule of 2005: The insurer is not always right

A man claimed for flood damage on his contents insurance. The insurer, which had put a "flood" exclusion on his house insurance, tried to argue the policyholder had failed to tell it about the flood risk, and that it did not have an obligation to cross-check information across the policies. That, it said, was the policyholder's job. The ombudsman disagreed.

The rule of 2006: Your interpretation of your medical history may not match an insurer's

A woman claimed under a mortgage protection policy when Parkinson's ended her career. The insurance company avoided the policy saying she hadn't disclosed depression. She hadn't done that, she said, because the application had asked for her to disclose any mental disorders, and she hadn't felt depression was a mental disorder. Just because the claim was not related to her depression did not remove the ability of the insurer to avoid the policy.

The rule of 2007: Each year is a new year

With personal insurance, once you have the cover, any changes in your health do not alter the premiums, and the insurer is not allowed to cancel the policy as a result. But with asset insurance, the renewal each year brings a new opportunity to fail to tell the insurer something. A man had failed to disclose his partner had a number of traffic convictions, and he failed to do so at each of several renewals. When she crashed the car, it didn't pay the claim and tore up the policy.

The rule of 2008: Switching brings danger

A woman switched medical insurer after being cold-called by an adviser. But when she made a claim, several years' later, the insurer wouldn't pay and avoided the policy, leaving her with no cover at all thanks to accidental non-disclosure.

The rule of 2009:You have to tell an insurer about previous claims

A woman insured the contents of her home for $150,000, but failed at the time to say she'd been burgled before. When it happened again, the insurer wouldn't pay, saying previous claims had to be disclosed so it could assess the risk of providing cover.

The rule of 2010: Even relatively trivial things matter

At claims time, even things that seem trivial can become matters over which a policy can be avoided, so it is best not to take the risk. When one life insurance policyholder died, his insurer refused to pay, telling his widow that his failure to disclose a sleep study, which is done in cases where people are having trouble sleeping well, meant it was legally entitled to cancel the policy. It claimed it would never have offered him insurance had it known. The ombudsman ruled in its favour.

The rule of 2011: Once it's in black and white, it's gospel to an insurer

A woman cancelled a gym membership by pretending to have a bad back. She also experienced a period of bullying in the workplace. Both events were recorded in her medical notes. When she made a disability claim after injuring her back in a car crash, her claim was turned down for non-disclosure. Her insurer said she had failed to disclose a back injury and depression. She argued she'd had neither. Other underwriters told the ombudsman they'd have excluded back injuries and any mental illness claims, had they seen her medical notes. Her explanations may have been correct, but the insurer was not going to accept them.

The rule of 2012: Don't guess

When a man was arranging life and income protection cover, he was not sure about his height and weight. He telephoned the insurer a number of times and each time gave a different height and weight. He finally told them he was 6"1' and his weight was 72kg. Just weeks later he had a heart attack and was unable to work as a result, so he made a claim. His doctor recorded he was 5"8' and 122kg. The insurer avoided the policy.

The rule of 2013: Insurers will go back a long way to avoid a claim

In 2008, a man arranged life cover. He died in 2012 and his estate claimed, but on getting his medical history the insurer found the man had a history of elevated blood pressure in 2001 and 2003. The insurer argued the man should have answered yes, not no when it had asked if he had had "ever experienced or suffered from, or had treatment or investigations or symptoms relating to ... any vascular condition", and again when asked if he had during the last 5 years "suffered from any other health problem or physical impairment."

The man's doctor said his ex-patient wouldn't have realised the high blood pressure could have been symptomatic of a vascular disorder, and was not feeling impaired or in ill-health.-

The law does not distinguish between intentional and accidental non-disclosure. In the end, perhaps feeling a bit sheepish, the insurer made an ex-gratia payment to his estate.

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