Insurers have a responsibility to follow up on questionable information

Two weeks ago we covered the sensitive issue of non-disclosure and the potential effects it may have on the settlement or repudiation of a claim. It is clear that at all times, clients must be as open and honest as possible when sharing information with b

There is often a difficulty in non-disclosure cases if the insurer repudiates a claim where the applicant disclosed some but not all the material information. The lengthy process of appealing an insurers decision with the Ombud does not always guarantee that the appeal will be awarded to the client. Yet, there are many occasions where insurers are told that the responsibility rests solely with them.

Insurer’s measure of responsibility

In a recent Ombud newsletter, it was pointed out that one such case went on appeal and the appeal tribunal confirmed, despite the insurer's contention to the contrary, that the authors of Life Insurance in South Africa (at 23.22) and MacGillivray on Insurance Law (10th edition at 442) were correct. It was decided that an insurer is required to make its own additional enquiries if disclosed information raises alarm bells or needs further clarification. It was further decided that the insurer cannot take advantage of a failure to follow it up. If they shut their eyes to the light, it is their own fault.

The Life Ombud gives a practical example: an applicant responds no to the question on whether he suffers from diabetes. To the question whether he has sought medical advice for any on-going medical problems he responded yes and without giving the condition he mentions the name of a specialist and also stated that he is using Glucophage, which is medication used for problems with blood sugar.

At claim stage, the insurer discovers that the applicant had been diagnosed with Type 2 Diabetes Mellitus prior to inception of the policy and the Insurer proceeded to repudiate the claim.

Despite the negative answer to the question whether the applicant suffers from diabetes, the insurer should have followed up on the disclosed information regarding the medication and the specialist.

Insurers encouraged to scrutinise it

The Life Ombud pointed out that an insurer cannot disregard important information which is disclosed at application stage without making further enquiries to find out what the actual position is. This applies to all information whether medical, financial or otherwise also covers the manner in which it was collected, be it directly from the client or from other sources.

“Where the insurer has been negligent in not following up on disclosed information, the office will not uphold the insurer's right to repudiate the policy and cover will have to be reinstated,” says the Ombud.

However, you have to have sympathy for the insurer in this case. Even if only 20% of your client base do suffer from undisclosed conditions, following up on all new clients is a bit of a hassle especially when some of the medication is new on the market and some clients suffer from rare conditions. However, in the age of technology, access to information is fairly easy and insurers cannot use this as an excuse to repudiate claims.

The fine line between fraudulent non-disclosure and the insurers duty

The Ombud stated that if an insurer alleges that an applicant acted fraudulently it must however establish the fraud by proving:

• that the misrepresented or non-disclosed facts are material (normal test for non-disclosure), and

• that the applicant knew the facts were false, and

• the fraudulent non-disclosure / mis-disclosure was made with the intention of inducing the insurer to issue the cover.

The standard of proof that applies is a balance of probabilities. Fraudulent intent will often have to be established by inference rather than direct evidence. The Ombud explains its position with a practical example: an applicant applies for a policy of R3-million disclosing that he has a grade nine level of education, that he is earning R80 000 a month and that he is the GM of a company. His given house address is in a poor area in the city.

The broker gave an instruction that the applicant may not be contacted directly. The policy is issued and the applicant immediately ceded the policy to his employing company.

A short while later the applicant applied for a second policy for R15-million. The policy was issued and he again immediately ceded the policy to his employing company. The insurer made no enquiries into the applicant's financial or actual employment circumstances.

The insurer relied on non-disclosure of the following information at claim stage: that the life insured was a lodger in a back room of a house with another family, not living in the house he gave as his address. He was not in fact a GM but a casual labourer in the employing company.

“Despite the fact that the insurer in our view had closed its eyes to the light at application stage, we did not uphold the complainant's (the employing company's) claim,” said the Ombud.

Editor’s Thoughts:
It is a matter of due process as it is clear that responsibility lies on all sides. Non-disclosure remains a “mine field” and brokers must encourage their clients to rather state more than less. Please comment below, interact with us on Twitter at @fanews_online or email me your thoughtsjonathan@fanews.co.za.