Ombuzz: Pre-existing condition exclusion clauses in credit life policies
Issue Number 15 August 2010
The most common complaints to this office are about claims that are declined because the insurer relies on a pre-existing condition exclusion clause.
A pre-existing exclusion clause allows an insurer to avoid paying a claim where the cause of a claim is linked to a medical condition which existed prior to the inception of the policy. When an insurer does not medically underwrite a policy one of the main ways that it will limit its risk is by way of a pre-existing exclusion clause. Sometimes the application of the clause is limited for a certain period e.g. 24 months.
Pre-existing exclusion clauses are found in credit life policies but can also be found in other types of policies e.g. funeral cover, hospital plans etc. The following case study demonstrates how the clause works.CASE STUDY 1
In November 2006 the complainant purchased a motor vehicle. A telemarketer from the insurer phoned the complainant and sold him a credit life policy covering him for death, dread disease and disability benefits.
In November 2008 the complainant had a stroke and he claimed the disability benefit from the insurer. The complainant had suffered from diabetes and hypertension since 1986. Medical reports reflected that the hypertension and type II diabetes were contributory factors to the stroke.
The pre-existing exclusion clause in the policy read:
“No amount shall be payable if in the opinion of the insurer:
Your illness, bodily injury, physical defect, ill-health or any other incident or condition which materially contributed to the death, disability or dread disease claim against the policy existed prior to the commencement of the policy.”
The insurer relied on the pre-existing exclusion clause to decline the claim. We upheld the decision, explaining to the complainant that the insurer was justified in its decision based on the medical reports and the application of the exclusion clause.
Insurers cannot rely on a pre-existing condition in every case. There must be a proven causal link between the condition and the claim.
CASE STUDY 2
Background
The insured had purchased a credit life policy in October 2005 to cover his outstanding credit when he bought a motor vehicle. The insured’s policy provided that “No amount shall be payable in the event of your illness, bodily injury, physical defect, ill health, or any other condition which materially contributed to the death claim against the policy, if it existed prior to the commencement of the insurance.”
The insured died of a heart attack on 23 December 2007 and the insurer rejected the death claim because, prior to the inception of the policy, when the insured life was 55 years old, he had been diagnosed with hypertension as well as cholesterolemia (according to a report done after death).
The insurer did not submit any blood pressure readings or cholesterol counts to the office, nor did it attempt to prove when these conditions had commenced. One post contractual blood pressure reading of 149/80 was submitted, and as to cholesterol the overall ratio, after conclusion of the contract, was found to be satisfactory. The insured life had no history of any symptoms of heart disease such as angina or shortness of breath. No post mortem was carried out to determine the actual cause of death.
Discussion
The office pointed out that the onus was on the insurer to prove that the pre-existing conditions materially contributed to the death.
It is well known that hypertension, even if properly managed, could have a damaging effect on a person’s arteries and heart, especially if it is accompanied by hypercholesterolemia. Thus if a person had these symptoms before conclusion of the contract and suffers a heart attack resulting in death, insurers usually assume that the pre-existing conditions as such were a cause of the heart attack. It is not in every case, however, that those conditions will be proved to have materially contributed to the heart attack. In the final analysis the real cause is always a question of fact.
The office asked for expert medical opinion to assist with the assessment of the available evidence. The first expert said he presumed the pre-existing conditions had been present for some years. In his opinion the two risk factors are implicated in coronary heart disease. They promote atherosclerotic vascular damage which persists despite adequate control aimed at reducing the progress of such damage.
The second expert’s opinion was that the post-contractual blood pressure reading had not been bad for a person of the life insured’s age. Considering the evidence and the probabilities he could not conclude that the pre-existing conditions materially contributed to the death.
The office was not persuaded by the views of the first expert. The seriousness of the particular conditions and their duration were relevant and should therefore have been proved, which they were not. Speculation was not enough.
Result
The office ruled that there was insufficient evidence to support a finding, on the probabilities, that either of the risk factors materially contributed to the cause of the insured’s death.
(See our Newsletter Number 14 on Causation)Sale of policies
From the complaints we receive it appears that the concept of the pre-existing exclusion clause is not well understood by consumers. Complainants often state that they were under the impression, because there were no medical examinations or medical questions at inception of the policy, that their medical history and condition would be irrelevant to a claim.
Credit life policies are often sold by way of telesales or other direct marketing methods. The sales people selling these policies to consumers do not always explain the pre-existing exclusion clause to the consumer, merely mentioning that there is a pre-existing exclusion clause in the policy, if mentioning it at all. Consumers will not necessarily understand the implications and the operation of this term. It is after all industry jargon.
Credit policies appear to be sold extensively in the lower end of the market, with the possible exception of home loan policies. More sophisticated consumers may make other arrangements to provide security for credit. It is even more important that the financially unsophisticated consumer be given a proper explanation of the product and its limitations, at the sales stage. Sales people need to explain the meaning of the term “pre-existing exclusion” and demonstrate its application, preferably with reference to examples of how it operates.
It is strongly recommended that ASISA Credit Life guidelines be followed.
Hints for consumers
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If you have a credit agreement, check whether you have a credit insurance policy. Consumers are sometimes unaware that they purchased a credit policy at the time credit is granted.
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If you have such a policy, check whether there is a pre-existing exclusion clause in your policy so that there is no nasty surprise for you or your beneficiaries if the insurer relies on the clause at claim stage. Be aware that if you suffered from a medical condition prior to taking out the policy this could impact on the claim.
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A credit grantor (e.g. a bank, finance house, retailer) can make the granting of credit dependent on the existence of a policy as security. You have free choice as to the insurer who underwrites the policy and as to whether you wish to take out a new policy or make use of a suitable existing policy.
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The credit provider or retailer who sells the policy will benefit from the sale of the policy they suggest. They may therefore resist a consumer’s attempt to use a different policy as security. Don’t be rushed into a sale. You should shop around. Find the policy that suits you best. The credit policy offered by the credit grantor may not be the most suitable and will more than likely not be the cheapest option available. If you are healthy, an underwritten policy (one where the insurer underwrites your individual medical risk) should be a cheaper option. If you do have a medical condition you may still be able to take out an underwritten policy. It may have a loading on the premium but that could be a better option in respect of the cover that you would have (i.e. no exclusion in respect of any pre-existing condition).
- If you do decide to buy a non-underwritten policy then try to buy a policy with a limit on the period that the pre-existing exclusion clause operates.
Credit insurance
According to “A report by the Panel of Enquiry on CONSUMER CREDIT INSURANCE IN SOUTH AFRICA” credit insurance is very profitable for all those involved in the transaction. (Credit insurance can also be provided under a short-term insurance policy and the same cautions mentioned above would apply to the purchase of such a policy). The reason for the profitability of this business appears to be linked to two features: the premiums are not cheap, and the claims ratio is low.For more information about the office and its activities, please visit our website:
www.ombud.co.za
Third Floor, Sunclare Building, 21 Dreyer Street, Claremont, Cape Town, 7700
Private Bag X45, Claremont, Cape Town, 7735
(T) +27216575000
(F) +27216740951
(E) [email protected]
Ombudsman Central Helpline: 0860OMBUDS / 0860662837
Ombuzz is published for general guidance only. The information it contains reflects our policy position at the time of publication. This information is neither legal advice nor a definitive binding statement on any aspect of our approach and procedure. The case studies are based on actual complaints we have dealt with.
