Complying with terms in ‘utmost good faith’

FAnews read an article ‘Discount for an alarm’ that was published in the December Short-Term Ombud’s Briefcase based on the issue of complying with the terms and conditions of an insurance policy and non-disclosure.

We thought this article would be interesting to share with you, our readers. We also approached a few insurers to get their perspective on this type of claim.

Some background

The issue is that the client had an alarm but it was not active and he received a discount on his insurance premium for this alarm. The alarm got cancelled without the broker or insurer being informed. Contents got stolen from his home during a burglary and then he submitted a claim. It is important to note that the alarm was not a requirement for cover to be in place, although the client had the alarm and received a discount for it.

The insurer rejected the claim because the alarm did not work. The client went to the Ombud and the Ombud told the insurer to pay.

Principles of insurance

“It is integral for a client to comply with the terms and conditions of an insurance policy to ensure he or she is compensated in the event of a loss. Cancelling an alarm system may jeopardise the client’s position when it comes to claims stage,” said Marius Neethling, Personal Lines Underwriting Manager at Santam.

Looking at the case above, Neethling said it is an issue of material change in risk, non-disclosure, misrepresentation and non-compliance of terms and conditions.

“In the majority of cases likes these, an alarm system would be an underwriting requirement by insurers for the risk to be accepted. An alarm warranty would then be applicable and if the client did not adhere to the requirement in these circumstances the insurer would reject the claim,” he said.

“In a case like this, Santam would initiate an internal process whereby our Internal Arbitrator (IA) would evaluate the decision by the Ombudsman. If the IA agreed with the decision, the claim would be paid. However, if he did not agree with the decision he would raise a dispute and we would enter into negotiations with the Ombudsman,” continued Neethling.

Neethling said it is not a case of bending the rules for one individual client, but rather a decision made in the interests of fairness and equity, based on specific facts and merits.

“In the claim under discussion, other underwriting factors were also argued by the insurer in this matter, but because it was raised after the original rejection it was not accepted by the Ombudsman. However, if it were raised with the initial rejection of the claim, the claim probably would not have been paid,” said Neethling.

“The Ombudsman’s decisions, according to Neethling, are based on fairness and equity after taking the specific facts and merits of a case into consideration,” he concluded.

Could clients try their luck?

Drew Schnehage, General Manager for Sales and Distribution at Hollard Personal Lines said, “In this specific instance it is my opinion that it is an issue of a material change in risk and the client should have taken it upon him or herself to notify the insurer of the change. Non-compliance is also a factor, the alarm warranty clearly states the terms and conditions of compliance irrespective as to if it was a policy requirement or not.”

“The client confirmed having an alarm that is linked and that it would be armed when unoccupied. The insurer endorsed the policy accordingly and applied the necessary discount and believed in good faith that the client would notify them if the circumstances changed,” she continued.

“If the circumstances change, the client should take the necessary steps to inform the insurer that there is a change in risk. The insurer then has the opportunity to re-underwrite by removing the discount or adding a specific condition to the policy. At this point the Ombudsman insists that the insurer must operate in utmost good faith and pay the claim. Not taking into account that if the alarm was in good working order the incident potentially could have been averted,” said Schnehage.

Schnehage said, “We would not settle this claim for the same reasons mentioned above.”
She mentions that it does raise a question though; if clients get wind of these rulings, would they not try their luck? “The Ombudsman might have good intentions to treat customers fairly but it is a fine line as to when the burglar alarm warranty would be applied and when not.”

Schnehage strongly believes that by bending the rules for one client, you are not treating the rest fairly. “If an alarm has not been working or not set as per the terms and conditions of the alarm warranty and full disclosure has been evident of the alarm warranty, it should be a rejection. We need to revert back to the basic principles of insurance; you cannot make decisions on different nuances or circumstances,” she concluded.

More to lose with dishonesty

Antonia Oakes, Head of Customer Experience at Mutual & Federal said, “In a case like this, Mutual & Federal applies the following rules; if the client has an alarm, he or she can decide whether he or she would like to take the discount. If the client chooses the discount, the alarm warranty applies. If at claims stage it is found that the alarm was not working or was not installed, there will be an additional excess applied of 10% of the claim.”

“We would pay for a claim like this, but only proportionally. We would calculate how much premium we collect had the correct disclosure been made, or alternatively, had we been informed that the alarm is not working then we would pay the portion of the claim for which premiums were received,” continued Oakes.

“The client has more to lose by being dishonest. Applying the additional 10% excess on a large claim can result in serious losses to the client. It is in their best interest to be honest and upfront. The right approach would be to make the correct disclosures so that there are no issues at claims stage,” said Oakes.

Oakes also agrees that it is not a matter of bending the rules for one individual client but rather considering how an insurer would have provided cover had the true facts being known. “If the insurer would not have covered the risk had the alarm not been active then the outcome could have been very different. It is therefore fair to all the parties concerned.”

In conclusion Oakes said, “It would appear in this case that the Ombudsman made the correct decision as the alarm was disclosed as some additional security and not a requirement.”