The Ombud for Short-term Insurance (OSTI) recently published its quarterly newsletter: The Ombudsman’s Briefcase Issue 3 of 2019, which contains news and events from OSTI, a few case studies and consumer tips.
The case studies are intended to provide guidance and insight into the way the OSTI deals with complaints. In this issue, the case studies focus on whether a change in the use of a residential property was material to the loss, an insured’s duty to disclose material information when the policy is taken out, exercising a duty of care in respect of cell phone devices and selecting a repairer in the event of a vehicle claim. There are some important lessons which advisors can take from these cases to avoid similar issues arising when a client has a claim.
We take a closer look at the case study relating to disclosing material information.
In this case Ms. A was involved in a motor vehicle accident and the claim was rejected by the insurer on the grounds that Ms. A had failed to disclose a cancellation of a previous policy due to fraud and dishonesty.
The case sets out that Ms. A had a previous insurance policy cancelled, in January 2007, due to fraud and dishonesty by a previous insurer. The cancellation was based on the previous insurer’s investigation into an incident in which Ms. A admitted to having willfully supplied incorrect information relating to items claimed for.
When Ms. A took out a new policy, it was underwritten on information contained in the proposal form and the previous cancellation was never disclosed by Ms. A. However, the insurer (of the new policy) learnt of the previous cancellation during the validation of a claim by Ms. A and subsequently rejected the current claim.
The insurer submitted that had there been disclosure of the previous cancellation, it would not have accepted the risk. Ms. A’s argument against the decision to reject the claim was that the proposal form did not specifically require her to disclose this information and that she truthfully answered what was asked of her. She further added that she did not disclose the cancellation because she assumed that, if it was critical enough to the insurer, it would have asked the question in the application form. She also disputed the materiality of the previous cancellation as it related to a different risk.
OSTI noted that although the proposal form did not specifically request the disclosure of previous cancellations, it did contain a section titled “General Details” which stated that the insurer is dependent on the insured providing correct and complete information whether asked or not. In addition, the proposal form contained a warranty signed by Ms. A regarding the accuracy of information and that it contained all information known to her affecting the risks under the sections to be insured. Further the policy wording itself also cautioned against any incomplete or incorrect information and that the insurer may cancel the policy and the insured may lose the right to claim.
The OSTI’s view was that such wording created a clear duty on Ms. A to disclose the information relating to the previous cancellation. The OSTI also found that the information which Ms. A withheld related to the acceptability of the entire risk and not only the single risk of a motor vehicle and that an insurer is within its rights to determine the underwriting criteria it will use to decide whether to accept a risk or not. The OSTI found that a reasonable person in Ms. A’s position would have considered this information to be material and would have disclosed it at the start of the contract, whether the question was specifically asked or not.
Accordingly, the OSTI upheld the insurer’s decision as it found that there was a material nondisclosure by Ms. A which entitled the insurer to reject the claim and void the policy. The insurer refunded the premiums paid since the start of cover, less any claims that were paid during the subsistence of the policy.
Advisors must encourage their clients to always be transparent and make full disclosure and let the insurer decide whether such information should be taken into consideration when underwriting the policy. Full disclosure should not only be considered at the inception stage of a policy but whenever there are any changes in circumstances. Full disclosure can prevent the possibility of a claim being rejected based on misrepresentation or non-disclosure and causing undue delay with the finalisation of a claim. Advisors are also encouraged to go through the policy document with their clients and ensure that the client understands and is alerted to any special clauses or provisions.