Are insurers winning the disclosure battle?

One of the biggest enemies of the insurance industry is fraud. While it is difficult to put an exact number to the cost of fraud in the industry, indications are that this number runs into billions of Rands. In an effort to resolve this, battle lines have been drawn by the industry, although the insurance industry remains a soft target for commercial crimes, especially when it comes to issues of disclosure.

Disclosure and non-disclosure have always been a bone of contention in the industry. The responsibility to encourage full disclosure is an important role brokers have to play. However, when full disclosure is given, and a claim is still rejected on the basis of non-disclosure, we need to ask if the right systems and processes are in place to collect relevant information.

Stating the facts

As pointed out by the recent Ombudsman’s Briefcase, the Ombudsman for Short-Term Insurance (OSTI) recently had to deal with a case of a doctor who made all of the relevant disclosures to his broker, but the claim was rejected by the insurer.

The insured, a medical doctor, submitted a claim for the theft of copper pipes which had been forcibly removed and stolen from his property, a month after he purchased the property.

He purchased the property in his private capacity and arranged insurance cover by adding the property to his personal insurance policy. The property was not occupied as he intended to renovate the property in order to use it as consulting rooms for his practice.

He advised his broker that the property would be unoccupied for a period of approximately three months while the property was being renovated and that the building would be used as consulting rooms in the near future.

The claim was initially approved by the insurer, but later rejected on the ground that the insurer would not have accepted the risk had the insurer known that the property had been purchased with the intention of being used for consulting rooms, as the risk for insuring consulting rooms was higher when compared to private residences.

The insured was not satisfied with the rejection of the claim as he was of the view that he had been honest with his broker by disclosing all the relevant information, as well as his future intentions.

The insurer’s point of view

At the time of the loss, the property was unoccupied and not yet in use as a consulting room. The property had been purchased and registered in the insured’s name and not under a business name. It was also located in a residential area.

Therefore, the broker advised that the risk had not been increased at the time that the loss occurred, and that the property should only be insured under a commercial policy once the property was being utilised as a consulting room.

The insurer was of the view that the property was purchased with the sole intention of converting it into a medical consulting room and that it should not have been added onto the insured’s personal insurance policy but rather covered under a commercial policy. The insurer also provided the definition of buildings as noted in the policy which referred to: the building of your private residence.

The insurer also stated that the insured had not disclosed at inception that the property would be unoccupied for three months and that it would be used as a business practice in the near future. Had the insurer been aware of these facts, it would not have accepted the risk.

The insurer voided the policy and refunded the premiums to the insured.

Be clear on disclosure

During its investigation into the complaint, the OSTI came across an agreement between the insurer and the broker that the broker could make any amendments to the policy online. However, this could only be done once all of the information regarding the policy has been collected, captured online, and compulsory questions had been answered.

When the property was loaded onto the policy schedule, it was noted that the property would not be occupied for 90 days. The system did not make any enquiries into any additional renovations being done to the house.

Due to this, the OSTI ruled that the insurer did not place the responsibility of disclosure on the insured at the time of the loss. It also ruled that at the time of the loss, the property was not being used as a consulting room. The insurer was therefore ordered to settle the claim.

Insurers obviously would like full disclosure when writing up a policy. This is critical for them to decide whether to accept the risk, and how to price the risk if they decide to accept it. However, they need to be clear at what stage in the claim stage certain disclosures needs to take place. The policyholder was open and honest with his broker at the inception of the policy, and the broker was not withholding information from the insurer.

Editor’s Thoughts:
The collection and processing of information seems to be a growing concern in the industry. Clients are willing to make full disclosure of information relating to a claim, and brokers are fulfilling their duty of passing this information onto insurers. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts jonathan@fanews.co.za.

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