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Lying about your credit history could be a costly mistake

31 August 2009 Gareth Stokes
Gareth Stokes, FAnews Online Editor

Gareth Stokes, FAnews Online Editor

Can misrepresenting your credit history result in the cancellation of a short-term insurance policy? And would an insurer be within its rights to decline a claim on the basis of such misrepresentation? In the August issue of the Ombudsman’s Briefcase, the Ombudsman for Short-term Insurance publishes an interesting case study that answers these questions.

Complete disclosure the best policy

Prospective clients are asked a number of questions when taking out a short-term insurance policy. The insurer wants information about the insured’s age, address and ‘no claims’ bonus, details of the security arrangements for the vehicle (including anti-theft devices, tracking devices and where the vehicle will be parked at night) and information about the primary use of the vehicle. And we already know that misrepresenting any of these facts will lead to problems at claims stage. But there is other information the insurer will ask for at policy inception.

In today’s case the insurance company asked the insured whether the regular driver of the vehicle “had ever been blacklisted, liquidated or sequestrated.” The insured’s response to this question was, “not that I’m aware of.” When the insured submitted a claim for damage to the motor vehicle (some three months later) the insurer determined that the insured had actually been blacklisted for a number of unpaid accounts prior to inception of the policy. The claim was rejected on the basis of non-disclosure! Does this omission really constitute non-disclosure? The insured felt wronged and laid a complaint against her insurance company with the Ombudsman for Short Term Insurance.

Should the credit check occur pre-policy?

The complainant’s argument in this case is compelling. She felt that she hadn’t intentionally withheld information from the insurer and expressed the opinion that the insurer’s credit check could have been performed prior to policy inception rather than at claims stage. She also alleged that the insurer was unable (or not prepared) to provide her with a copy of the voice recording of the policy sale. A summary of her complaint: “The complainant was of the view that her insurer was not able to prove their allegation, should have conducted the credit check prior to granting the policy cover and by failing to do so, should therefore be made to entertain her claim in full!”

Another twist in the argument – which we quite enjoyed – was that risk of non-payment due to a poor credit history generally lies with the finance house. The insured argued that since the finance house had no trouble granting the loan (after completing a credit check), why would the insurer have a problem carrying her insurance? Once the case reached the Ombudsman the insurer was able to produce a voice recording of the sale. The insurer provided the complainant’s policy schedule, a copy of the credit check conducted on the complainant and a copy of the voice recording of the sales conversation. “The insurer argued that had they been notified of the complainant’s credit history during the sale of the policy they would not have granted the complainant cover and would therefore, not have exposed themselves to the moral risk that the complainant represented.” From our perspective it’s not that easy to understand how the client’s credit history impacts on a short-term monthly paid policy. If she missed a payment she wouldn’t be covered in any event. The Ombudsman frequently rules for complainants around vehicle and drivers licence issues. Would the Ombudsman side with the complainant in this case?

Insurer’s decision upheld

The Ombudsman noted that the complainant’s credit check indicated five separate instances of bad debts written off totalling R71 201 in the 18-months prior to the inception of the policy. “It was the view of the office of the Ombudsman that it was clear that the complainant could not have been unaware of her bad credit history under the circumstances and intentionally withheld such information from the insurer during the sales conversation,” said the Ombudsman. On advice from the insurer that they would not have accepted this risk if they had known about the insured’s debt history the Ombudsman rejected the claim and accepted the insurer’s decision to reject the claim and cancel the policy.

Editor’s thoughts:
It’s difficult to sympathise with someone who ‘bends’ the facts when applying for insurance cover. The reason they exclude the information is out of fear of being denied cover, which is ironically what happens in the long run anyway. This ruling comes at a time when thousands of South Africans are struggling with debt and could have a profound long-term impact on the industry. Do you believe the insurer would have refused the cover if the insured had advised them of her credit history? And do you think the Ombudsman is correct in upholding the insurer’s decision in this case? Add your comments below, or send them to gareth@fanews.co.za

Comments

Added by Wilma, 17 Sep 2009
Dit gaan my verstand te bowe .... Daar is soveel mense wat gelys is op die kredietburo! As die maand se premie nie tegemoet gekom is nie geniet die kliënt nie sy/haar dekking nie, alvorens al die agterstallige premies nie inbetaal is nie. Daar is seker mense wat skelm is en hulself wil probeer "verryk" uit versekering met vals eise ens, maar hoekom moet daar nou teen almal gediskrimineer word. Dit was 'n voertuigeis gewees, die kliënt se voertuig sou herstel word deur 'n paneelklopper en die uitbetaling sou na die die paneelklopper gegaan het. Inteendeel sou die kliënt 'n bybetaling gehad het, m.a.w sy sou geld moes inbetaal het. Hierdie uitspraak was volgens my nie regverdig nie ....
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Added by Chrisitne, 10 Sep 2009
It is not quite clear as to what extent the damage to the vehicle was. My feeling is that if the client wanted to gain from the insurer, she might submit a false claim, but not by claiming for damages to her vehicle. We all know that insurers have the right to choose settlement, and usually repair the vehicles - using a panel beater on their panel. So with other words, what does the fact - non-disclosure have to do with the claim. She would not gain anything in initiating a claim. Yes, non-disclosure are for sure a policy condition - but with relevance to the risk. No premium - no cover. Insurance is not a loan. You are to pay before you enjoy cover...
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Added by Carol, 03 Sep 2009
Unbeknown to the insurer, the insurer should be investigated going forward to determine whether they do in fact decline insurance to clients who have bad credit histories. This is the only way to determine whether this insurer was being sincere or whether they just wanted this specific claim repudiated. Personally, I don't think that the client would have been declined, I think that the insurer may have loaded a heavier premium on the client. A partial settlement could have been made and determined by calculating how much they would have charged had the client disclosed the credit history, and then determine what the insurer would pay out .
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Added by Frank, 01 Sep 2009
Ek het oorspronklik gedink dat 'n mens versekering uitneem teen onvermydelikhede en dat wanneer dit plaasvind die "fatcats" dan sal betaal, maar lyk my hulle skuil nou agter of ek slegte skuld het en die oorsaak van die eis is nou nie meer relevant nie. Ek dink dit is pataties. Bly by dit waaroor ek verseker.
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Added by Johan, 01 Sep 2009
Sou die versekeraar kon bewys het die versekering is uitgeneem en die ongeluk is doelbewus veroorsaak, dan sou ek saam stem met die wyering van die eis. My krediet waardigheid status is nie veronderstel om my nog verder bloot te stel aan moontlike verliese, wanneeer ek my probeer beskerm teen verdere verliese nie. dit klink eerder asof die uitspraak reeds sukkelende mense nog verder in die afgrond in dwing. Ek aanvaar die stelling dat daar "non-disclosure" was aan die kant van die polis houer, maar die probleem le by die feit dat die vraag in die eerste plek gevra is as deel van die proses. Vrae oor insolvensie is aanvaarbaar omdat jy toestemming van die kurator nodig het(langtermyn versekering), maar hierdie is net weereens 'n versekeraar wat 'n "loop hole" soek.
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Added by Cass, 01 Sep 2009
Unless the article has missed an important fact in the summary, this is a pathetic ruling. Whole heartedly agree with comment that "If she missed a payment she wouldn’t be covered in any event.” One wonders what the ombudsman’s comment on this was/is?
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Added by Etienne de Villiers, 01 Sep 2009
The insurers we deal with, when placing new business, ask whether we have the client's consent for a credit check to be done. That is all they require. No details of debts, judgments or liquidations. Only permission for THEM to do the check. Therefore when they accept a policy the implication is that they either did not do the check, or they did so and are satisfied with accepting the risk. The problem with the unnamed insurer in this article is therefore not possible with above-board, up-front insurers. In the case of the unnamed insurer in this article, checks on previous insurance, claims and now also bad debt are only checked at the claims stage which means that they were quite prepared to go on risk with unchecked details knowing that later checks could result in a ground for declining claims. The Ombud should tell these insurers: "Seeing as you have the means to do checks, and do checks, why leave it until there is a claim? This whole issue could have been avoided, as other insurers avoid it, by doing your checks when the risk was offered to you. By accepting unchecked details you have accepted the risk as is and you are therefore obliged to settle the claim."
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Added by Charlene, 01 Sep 2009
I don't agree with the ruling. Would answering the question correctly have prevented the loss? Did the driver have the accident because of her previous bad debt? I don't think so...
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Added by david, 31 Aug 2009
How does credit worthiness affect the contract of insurance? If you are able to pay, you receive cover for that one month....Credit worthiness cannot be a material term of the contract, and the ombudsman should not have held it to be so.
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Added by Johan, 31 Aug 2009
Are we not missing the point? This is not an issue of whether the assured was credit worthy or not. It is all about Ethics.... The insured blatently lied, something that is happening to often these days, full stop!
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Added by Nirvana, 31 Aug 2009
The client's credit history or lack thereof should have no effect on her obtaining short term insurance cover. She was granted finance with no problems and assuming her premiums were paid up to date the insurer was obliged to make payment on her claim. The insurer just used her credit history as an excuse, albeit a bad one, not to payout on a claim.
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Added by KEITH, 31 Aug 2009
If a client pays the premiums on the vehicle--what has a bad credit record got to do with it.?? The client is covering the article, and paying the premiums, and the insurance company accepts and covers the risk--they should pay. At the very least pay back the premiums. Short term sucks, and evertbody i know has had a bad experience--but we need the cover. Maybe i will start a new company--and do it properly.
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Added by Pet Beyer, 31 Aug 2009
Everyone get off the bus, the client lied what do we not understand, why is the insurance the bad dog here. We are bond to give the honest truth, so what gives the client the right not to. Who says she did not need more money and therefore a claim 3 months later? So I agree, no payment. We do not ask that question, but prehaps we should.
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Added by Pups, 31 Aug 2009
The credit worthiness of the insured was given too much relevance. As stated, if the insured missed a payment then she wouldn't have been insured. The insurer would not have even questioned her credit worthiness and cancelled her policy due to non-payment. Insurers gladly accept premiums and would normally only question when a claim is lodged. If the insurer wants to rely on credit worthiness then they too should have done their homework and perform a credit check. Since they did not, their reliance on credit worthiness is not acceptable and their acceptance of the insurance premiums is indicative of a "valid" contract and therefore should honour the claim.
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Added by Louise, 31 Aug 2009
Both parties are wrong in this instance - the client was not truthful but the insurer did not do their back ground check. It appears more often that the insurer will take the premiums every month without hesitance but will only find the reasons to not settle a claim when the damage is already done. There are so many tools available to insurers today to make sure that they're covered as well as for the insured to ensure compliance, yet insurers turn a blind eye until its too late. Its difficult times for all but maybe improved internal policies will be helpful for both the insurer as well as the insured.
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Added by elsie, 31 Aug 2009
Pet, I am not getting off the bus There must be something wrong with my logic. So what has short term insurance got to do with a person's bad credit record? How ,for the life of me does such a history influence the risk? the insured lied That I understand but why the question in the first place? Has it been placed there for a reason? (a good excuse not to pay a claim?) The insurace company must have done homework. It is a well known fact that people in SA lie about their credit record They are misusing the fact
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Added by NTK, 31 Aug 2009
I fail to see what a person's bad debt record has to do with their insurance, because it is a well known fact that when one misses a payment for that particular month the have no cover. If the clients credit record is such a significant issue why then did the insurer take on the risk without doing the check themselves before underwritting the client. This just sounds like another flimsy excuse that the insurance company will use in order to repudiate claims. So then what happens to the insured's premiums that she has already paid as she did not then have cover?
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Added by Cyril, 31 Aug 2009
The insurer's argument that the client has not disclosed her credit worthiness information to them, constitutes non-disclosure is not relavant to the risk taken in regards to the motor vehicle insured. I believe that the ombudsman has overlooked the fact that the client has disclosed the most important information regarding risk to the insurer. The insurer has a moral duty to underwrite properly at inception and in this instance the insurer could have requested info on the client before commencement of the policy. It is indicative that the ombudsman by virtue of his ruling are encouraging insurers in the first instance to underwrite on info that does not primarily form the basis of risk and secondly subject the public to underwiters that fail to underwrite at inception to risk even though they can access such information as part of their requirements, with the clients permission. I believe the insured may have different outlook, if she takes the matter to court.
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Added by Themba, 31 Aug 2009
See how it is necessary to get complete information and not lie
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Added by Andre, 31 Aug 2009
Wys jou net hoe belaglik die instansies en die owerhede geraak het. In plaas daarvan om almal te verplig om versekering, dis nou korttermyn, uit te neem, wys of word die wat dit wel wil uitneem, teen gediskrimineer. Ek kan geen rede sien hoekom dit n faktor moet wees vir die uitneem van korttermynversekering nie. Ek vermoed dis n direkte versekeringsmaatskappy wa die middelman uitgesk*kel het....
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