The Ombud for Short-term Insurance (OSTI) recently published a media release directed at policyholders listing “five ways in which your conduct could invalidate your insurance policy”. The media release is based on common things that consumers do which may result in the insurer cancelling cover or refusing to pay out a claim. While the media release is aimed at advising policyholders, financial advisors should be aware of these common mistakes made by policyholders in order to better advise clients.
Five common mistakes – What advisors can do to avoid these mistakes
1. Providing incorrect details about the regular driver under a motor vehicle insurance policy.
Advisors must stress the importance of full and proper disclosure with their clients. Ask relevant questions to ascertain all necessary information relating to the regular driver such as the age, insurance and claims history, occupation, how long they have a valid driver’s licence, etc. Insurers are entitled to deny a claim where there is misrepresentation such as information being withheld or non-disclosure with the aim of receiving a lower premium.
2. Failing to update the risk address.
Where a policyholder has moved to a new house, moved to a different city or even changed their work address – this should be communicated to the insurer. Insurers determine premiums based on risk. Some of the risks associated with a change of address are likelihood of flooding or fire, whether the area is densely populated, crime statistics, level of security, etc. Advisors should discuss with clients, the dangers of not communicating a change in risk to the insurer. A change of risk such as the change of address must be disclosed to the insurer whenever relevant during the currency of the policy.
3. Using the insured property to conduct business when this was not declared to the insurer.
Where a client makes use of their vehicle or home for business, then their insurance risk is considered significantly higher. An example of a personal lines policy being invalidated is the regular use of a vehicle to attend client meetings and site visits as the insurer may consider this business use. If the property is insured under a personal lines policy, the cover may be invalidated by virtue of not disclosing this material fact. Proper disclosure is essential. Advisors should discuss the difference between personal and business use with their clients and ask the relevant questions to ascertain whether the client requires personal or business cover.
4. Motor and home improvements
Poor design and faulty workmanship on a house may result in damage not being covered by an insurance policy. It is best to advise clients that should they renovate, they should get an expert opinion for all major building work to avoid invalidating cover for certain losses. Most insurance policies specifically mention that vehicles which have been enhanced to improve performance are not covered. Advise clients that this should be discussed with the insurer before the purchase of such a vehicle or effecting any upgrade.
5. Exaggerating loss
Exaggerating the value of loss or claiming for an item that the client either did not own or lose is the most common type of insurance fraud. Some insurance policies contain a forfeiture clause which entitles the insurer to reject the entire claim where there is any evidence of fraud or dishonesty. Advisors should engage with their clients in an open and transparent manner and advise them of the consequences of exaggerating loss.
Advisors must impress upon their clients the importance of transparency and making full disclosures. This should be considered not just 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.
Section 7(1)(c)(vii) of the General Code of Conduct obliges advisors to provide “full and appropriate information” to clients about any “special terms or conditions, exclusions of liability, waiting periods, loadings, penalties, excesses, restrictions or circumstances in which benefits will not be provided.” Although this information is generally included in the quotation, advisors should record their discussions with their clients, ideally in the record of advice, highlighting that this important information was explained to the client. This is also the type of information which advisors should remind their clients of on a regular basis, for example during the annual review of the client’s portfolio or policy. This will make it easy for the advisor to demonstrate that the client was well informed and avoid disputes in the future.
Read the OSTI Media Release: Five ways in which your conduct could invalidate your insurance policy.