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Alan Lakey: Time for change on CI cover

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For 20 years I have avoided using claim criteria such as activities of daily living or similar terms for income protection. My reasoning is simple: the level of disability needed to meet the claim requirements is substantial and far beyond what I believe to be reasonable.

This problem also rears its head when considering total and permanent disability within critical illness plans. Is it worthwhile including TPD if only activity-based cover is available?

This issue was recently highlighted within a Financial Ombudsman Service final decision notice. A lady suffered serious injuries in an accident and claimed she was paraplegic. Because evidence suggested she had not lost all feeling in her legs the insurer declined her claim under the paralysis heading.

It also declined her claim under TPD arguing that, with the use of various aids, she could perform the relevant activities of daily living that determined success of her claim.

The ombudsman determination provides a number of lessons.

Firstly, it suggested that while the policy document stated “paralysis of two or more limbs is sometimes referred to as paraplegia… I do not interpret the policy terms to mean paraplegia is always covered”.

Secondly, it accepted that while she was seriously injured she could perform the various tasks with supportive aids.

Two points emanate from this decision. Firstly, the FOS interpretation of policy wordings leaves much to be desired. This is not the first time they have sought to meaning and therefore the claims-paying potential of CIC wordings. Secondly, it highlights how difficult it is to successfully claim for any activity-based TPD wording.

Another ombudsman decision highlighting the pitfalls of critical illness design involved a lady diagnosed with a rare neurological condition not dissimilar to multiple sclerosis. As the condition was not actually multiple sclerosis the insurer was able to decline the claim.

The ombudsman agreed that, as the policy expressly stated a “definite diagnosis of multiple sclerosis”, the claim should fail. The plan also contained TPD on an activity-basis but the ombudsman commented: “Mrs X will need regular treatment for the rest of her life but I have seen nothing to show she is unable to carry out the tasks of daily life needed to maintain a basic independent existence”.

These two cases highlight issues advisers would be well advised to consider when recommending plans for their clients.

Is TPD a worthwhile option if “own occupation” cover is unavailable?  Being unable to perform three of six everyday tasks requires an extremely high degree of permanent deficit few standalone conditions are likely to meet.

Clients need to be aware their policy cover is explicit and finite and merely having a bad outcome is insufficient. Plan design is such that generally it is only named conditions that trigger claims. Having a rare neurological condition which mirrors the outcome of Parkinson’s Disease or Multiple Sclerosis is not enough.

Until such time as the industry designs CIC plans based on the outcome then there will continue to be declined claims and understandable policyholder outrage.

Alan Lakey is director of CIExpert

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Comments

There are 5 comments at the moment, we would love to hear your opinion too.

  1. This is why severity with definite policy wording should be fully adopted across all illness products

  2. Sascha Klauß 20th May 2015 at 3:08 pm

    “Well Reverend, I’m afraid you plumped for our “Never pay” policy, which of course if you never make a claim is very worthwhile, but you had to claim, and, well, there it is…”

  3. @Tony Oneill
    Not sure it’s as simple as that.

  4. Recalling the massive to-ing and fro-ing of the ABI/OFT 2009-2011 attempt at finding a better way to deal with overhauling the TPD definitions bases, I’m sure no solution is a simple one.

    Some pay-out is always better than none, so I think that while Tony’s severity based route (including a staging via an initial payment to mitigate hardship) is the only way to spread the net wider for more of a reasonable link to the extent of disability outcomes.

    But I agree with all the points Alan makes in his article. (I’m sure he’ll be gratified!) If all this had been sorted some time ago, we wouldn’t have had some of the head-line grabbing bad press cases on claims or the creation of the Angry Policyholder Campaigning website.

  5. There is no easy answer here Alan. I sat on several ABI working parties looking at this issue and have considered it many times for my employers. No single set of activities will do the job – it requires a multifaceted solution that will just add complication to an already complicated product. The hurdle to meet Activity based TPD is very onerous and imho should not be recommended to clients unless they are made fully aware of the chances of claiming.

    I am not sure that I agree with your position on the MS claim. CI covers “specified illnesses” not “every illness of specified severity”. That product is called IP. There is little margin in rates to cover ex gratia claims – the drive to commodity pricing and near 100% reinsurance deals have seen to that.

    The people making the difficult claims decisions are generally not working for the companies whose names are on the packaging. The companies whose names are on the packaging are also often loath to dip their hands into their own pockets to pay EG claims…

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