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Clause for thought

Insurance law The industry should produce its own solution to problems arising from non-disclosure rather than have an inflexible and inappropriate non-contestability clause imposed on policies, says Aegon Scottish Equitable head of underwriting Matt Rann.

The Law Commission has produced a series of papers on a variety of insurance-related issues with a view to bringing the somewhat old fashioned insurance law in line with current thinking and practice. The topic covered in its first paper was misrepresentation and non-disclosure. Within its many pages were proposals on the introduction of a non-contestability clause.

The news that the Law Commission is debating whether to recommend the introduction of a statutory non-contestability clause has caused considerable debate among protection providers. A period of informal consultation has taken place, with the formal consultation paper due out this month.

Insurers base their remedies for non-disclosure on published guidelines from the Financial Ombudsman Service. If it can be seen that a life assured was clearly reckless in the way they answered questions on a proposal form, the remedy to the insurer has been to avoid paying the claim. The proposed clause is designed to make all providers pay claims, unless fraud can be proven, after a given period of time following completion of the policy. The Law Commission has proposed a period of three years, which could be read as being across life insurance, critical-illness cover and income protection.

It is worth reflecting on why the Law Commission feels that a debate on this approach is beneficial. Bad publicity from the national media has played a large part. In particular, handling of cases where non-disclosure was completely unrelated to the cause of claim is an area that needs particular debate. Surely, if these issues are addressed, the consumer will benefit. Or will they?

The failure of product providers to effectively promote and publicise the high percentage of claims they pay has not helped their cause. It is also sad that while some sectors of the media are happy to highlight instances of insurers turning down claims, many will not provide coverage of claims that are paid with the beneficial impact that a cash payout can bring in a time of crisis. I wonder if this skewed reporting helps consumers make informed choices when it comes to protecting themselves and their loved ones.

It is worth considering two principles that providers should consider regarding non-disclosure strategies.

– There needs to be an incentive for applicants to fully disclose.

– Somebody who does not full disclose should not benefit at the expense of someone who has fully disclosed up front. Treating customers fairly should apply to non-disclosure.

We need to ensure that we are protecting the honest applicant from higher premiums by fairly and actively pursuing instances of non-disclosure.

If these two principles were put to all consumers, I believe they would agree overwhelmingly with them but would the introduction of a non-contestability clause aid these core principles or would it conflict with them?

The Law Commission paper recommends implementing a non-contestability clause three years after completion of a policy but this will undoubtedly increase what is known as behavioural risk, where an applicant fails to disclose a medical condition and takes a chance that they will not need to make a claim in the three-year period. This is likely to increase premiums and potentially make some product lines too expensive for many to buy. In some cases, it will make products financially unviable.

A key reason for the clause is to increase consumer confidence but I am sure there will still be cases in the three-year period that will be turned down, with the consequence of the same old negative news stories. It is therefore fair to question whether the clause will meet one of its core objectives in the first place.

An alternative is to stay largely with the current framework as published by the Financial Ombudsman Service and subsequently adopted by the industry. I have no doubt this needs to be updated in the area of unrelated non-disclosure and the greyer end of where reckless non-disclosure blurs into where information was non-disclosed inadvertently. But to bin the current model seems to be throwing out the baby out with the bathwater.

This work can be put in place without the need for statutory intervention which can be inflexible. It does not mean the industry should not make change but let us focus on looking after the interests of the honest consumer.

Among the areas to consider is the root cause of non-disclosure. Are the questions too technical? Is the form too long? Does the sales process lend itself to thoughtful and full disclosure of material information? A potential avenue for helping in this area is tele-underwriting. Perhaps we will see a concerted push to this process in the coming years.

The Law Commission’s paper has created considerable debate and the issue of non-contestability is just one topic. I believe the debate has been positive and healthy for the industry. Whether the Law Commission will push ahead to introduce a clause will be interesting to see.


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