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The devils in the detail

10 September 2019 Jonathan Faurie

Non-disclosure has always been an issue in the insurance industry. Many a claim has been rejected on the basis that clients did not enter into a contract in good faith or were not honest at claims stage. On the other side of the coin, non-disclosure can be a divisive issue. In the case of Momentum and Nathan Ganas, while the circumstances surrounding Ganas’ death were not material to the non-disclosure that Momentum pointed towards, the insurer rightly rejected the claim on the basis that Ganas presented a risk that the company would have rated differently, or not even written at all, had they known about his health status at policy inception.

Non-disclosure is not only an industry bugbear, but it also opens the door for fraud and abuse if the right questions are not asked at policy inception which would guide clients towards making the necessary disclosures. This will only get worse with the Administrative Adjudication of Road Traffic Offences (AARTO) Bill which was recently signed into law. 

Clear as mud

On the surface, taking out an insurance policy should be easy. A client has a specific set of risks, or assets, that they want to insure so that if a loss event occurs, they do not suffer dire financial consequences. 

But it is not as easy as it seems. Education around the financial services industry is not as high as it should be, and policyholders can often become very confused when industry jargon is used with them at policy inception stage and at claims stage. This is a problem even among certain clients who have a broker. 

At a recently held workshop which was hosted by the Ombudsman for Short Term Insurance (OSTI), Darpana Harkison – Senior Assistant Ombudsman – pointed out that when an agent of the insurer engages with a client, be it at policy inception stage or at claims stage, that agent needs to create a duty of disclosure on the client by asking a very specific set of questions. 

“We often deal with cases where a complaint is lodged with the OSTI about the insurer rejecting the claim because of non-disclosure. When we investigate this, the insurer needs to demonstrate that they asked clear and concise questions to the client that led them to make necessary disclosures. They then have to prove that the client either responded in an untruthful way or failed to respond to the question at all,” said Harkison. 

The questions asked by the agents of insurers are problematic as clients don’t answer them in a way where proper disclosures are made. “Often, agents of the insurer do not ask the right questions at policy inception or are they asking the right questions but the wording of the question can be left open to interpretation. The value of the broker in this instance is immense as clients become sitting ducks if they have to deal with this on their own,” said Harkison. 

This is where the nature of the questions becomes tricky. At sales stage, a frequently asked question is whether the client has submitted any claims over a three-year period. Does this include claims for the replacement of a windscreen? Do windscreen replacements or claiming for damage to vehicles that were caused by potholes constitute as an accident? 

How detailed do customers need to be when they meet with brokers at their initial meeting? 

Material risk

Typically, insurers can only reject a claim based on non-disclosure if the risk that was not disclosed was material to the loss. This was the debateable point in the Ganas case and hopefully opened the eyes of the public to how the insurance industry works. 

With AARTO this can become tricky. In a recently published newsletter, Danny Joffe, Head of Legal at Hollard, pointed out that for an insurer to consider previous AARTO infringements when writing a policy, they must either rely on the client’s good faith at policy inception or they must access their AARTO information. But AARTO information cannot be accessed without the client’s permission. 

Depending on the nature of the AARTO infringement, this may be difficult. A client who is guilty of a few speeding fines may openly give the insurer permission to access this information. However, if a client is guilty of driving under the influence, this openness may not be so forthcoming. 

A driver has their licence revoked under AARTO because it has been suspended three times. The law states that they need to retake their learners and driver’s licence if they want to legally use the roads as a driver. When taking out insurance, does the insurer write this risk as a new risk (as if they are taking their licence as a first time driver without the AARTO history) or do they take AARTO history into account provided they can access it? 

Materiality may become hard to prove in future because of a client’s right to privacy. Brokers are presented with a difficult decision because they become the gatekeepers in these situations. If a red flag is presented during the initial meeting, do they present the risk to the insurer knowing their concerns? 

A time for honesty

It needs to be pointed out that just because a client has a specific risk, it does not mean that the insurer will refuse to touch that client. It means that the client’s risk will get priced, and probably underwritten, differently than other policies. While this may be more expensive or be underwritten in a stricter manner, the client has cover at least. 

“In harsh economic times, policy premiums are a huge consideration, but they are not the only consideration. An insurer rejecting the claim based on non-disclosure can be more financially devastating than paying a high premium,” said Harkison. 

A lot has been said lately about the state of corruption and dishonesty in the country and the need to deal with it in a harsh manner. But is this duty of care only limited to politicians and civil leaders or is there a need for honesty on a national level? 

Editor’s Thoughts:
Will we ever be able to win the battle against non-disclosure? Please comment below, interact with us on Twitter at @fanews_online or email me your thoughts



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