Adviser obligations on non-disclosure

A fundamental part of the life insurance application process is ensuring correct disclosure has been made to facilitate a successful claims process and a positive client experience.

It is critical that good disclosure is addressed upfront with all policyholders, to avoid a situation where clients may find themselves uninsured because they did not fully understand or meet their disclosure obligations.

This can unfortunately be amplified further in situations where a client may have previously had insurance cover which would have paid a benefit, however after changing providers, find themselves in a situation where they are no longer eligible for a payment because of disclosure issues.

The best way to avoid this situation arising is to be well prepared, and understand what the law requires in relation to disclosure and the consequences if proper disclosures are not made.

There has been a lot of focus on recent changes to the law in this area. While there has been no change to the ‘duty of disclosure’ itself for life insurance policies, there are now more extensive remedies available to insurers, including changes so the three year limitation period for applying remedies is no longer as relevant.

Where disclosure issues arise with policies written from now, insurers will need to unbundle each type of cover provided and look at whether, with proper disclosure, they would have declined cover or applied loadings, exclusions or other special conditions. For death cover, remedies can be applied within three years of the policy being issued.

For other types of benefits, if the cover would have been on different terms had proper disclosures been made, insurers could potentially cancel the cover within three years of issuing it, or will be able to vary or reduce the cover at any time. Of course, additional remedies continue to apply in the event of fraudulent non-disclosure.

Underwritten policies, which do not have a general pre-existing condition exclusion, are the most frequent business written by professional advisers. For these policies the underwriting is important, and at times lengthy. The information that must be disclosed is in practice driven by the questions an insurer asks and the questions need to be answered accurately and completely.

Issues often arise around how much detail on an individuals’ health needs to be provided a in the application process, including how far back in time a person should go when detailing their health and whether less severe medical complaints should be included. The simple answer is that most insurers will be expecting a detailed history.

An area where disputes commonly arise is in the non-disclosure of joint issues and back problems. Clients may not think they have an ongoing problem or a diagnosed illness, but they are still required to answer questions accurately and with proper consideration as to their past medical history.

A similar and growing area of non-disclosure relates to mental health. Often clients don’t disclose counselling, medications or sleeping issues, maybe because they regard those as simply responses to a difficult period they experienced at a point in time. However, it’s important to know that if an insurer asks about mental health issues, counselling or similar, these disclosures need to be made or the policy may be impacted.

While health information is the major source of policy avoidance, providing correct employment and financial information is also an important part of disclosure. This is particularly critical for disability income insurance, where income is frequently overstated. If this is not properly disclosed for indemnity style contracts, it could result in unnecessarily high premiums and disappointed clients at claim time. For any policies, it can result in reduced cover or even the avoidance of contracts.

Similarly, insurers will assess risk based on a client’s occupation, occupational duties and employment status. The amount of manual labour performed is obviously a material issue, however it is also relevant to understand variances between employment statuses, such as those who are employed, contracting or operating a business.

While the policy holder may not be required to obtain medical records, they do need to give full and proper consideration to every question asked in the underwriting process. In many cases, advisers will make disclosures on behalf of clients, making their own declarations that they have explained the duty to the client and also confirming that the client has provided the answers to any questions asked. This can implicate an adviser in any non-disclosure issues that arise.

Insurers have different processes for disclosures, and Macquarie Life has several options for the collection of personal information such as health and financial details. While the application for cover is usually completed online by an adviser as the client’s agent, the personal statement can be dealt with separately, and advisers can elect for that part of the application to be completed by Macquarie through a telephone interview by a qualified nurse to the client or through a secure questionnaire sent directly to the client.

These collection processes enable the adviser to be less exposed to risks, with the disclosures being made directly by the insured to the insurer. They also provide greater efficiency, enabling information to be clarified and additional questions addressed without delay, which ultimately results in better disclosure.

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Megan Inwood is a lawyer for Macquarie Life