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Insurers should pay more non-disclosure claims, says Law Commission

New laws proposed by the Law Commission could see insurers pay out claims even if policyholders non-disclose on their application form.

In a joint report with the Scottish Law Commission, the LC says new laws are needed to ensure consumers are not prejudiced by current insurance laws, which date back to the early 1900s.

Currently insurers can decline claims whereby the policyholder has non-disclosed on their application form. However, the LC says such laws could act as a “trap” for consumers and are “overly harsh”.

It is therefore proposing that those consumers who take reasonable care to answer insurers’ questions fully and accurately can expect a full payout.

It says insurers must ask the right questions and where a consumer makes a careless mistake when answering a question they might still be entitled to have some of the claim paid.

Insurers, the Financial Services Authority and the Financial Ombudsman Service will abide by the new rules if implemented.

LC law commissioner David Hertzell says: “Our reforms would improve consumer protection, increase consumer confidence and enhance the reputation of the insurance industry. They have the backing of consumer groups and the insurance industry.”

To date, the Association of British Insurers has been working closely with the FOS to reduce the number of declined claims due to non-disclosure. They have so far drafted a code of conduct its members must follow when claim handling.

ABI director of general insurance Nick Starling says: “We are pleased that the Law Commissions’ proposals to reform the law are very similar to recent codes and best practice which ensure that customers are treated fairly.”


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There are 11 comments at the moment, we would love to hear your opinion too.

  1. Its nice to see a step in the right direction for once! A well thought out and investigated plan is always going to be better than the knee jerk reactions we’ve seen coming out of Canary wharf of late!!!!

  2. I disagree totally. How can an insurer underwrite a risk in the knowledge they may be required to pay out for an undisclosed pre-existing condition? This is ridiculous. It’s like requiring a general insurer to pay out for your fifth burglary in five years when you never told said insurer about the previous four.

    TCF = total madness.

  3. This has always been a difficult area and many insurers have used their discretion where they can – and there’s the rub.
    Insurers have been able to rely on / hide behind the need for strict disclosure to avoid claims. It is no surprise then, that in an era of Treating Customers Fairly, that the Law Commission should seek to reverse the balance of power. On the one hand, there is an opportuntiy to clarify materiality and on the other a risk that the principle of Moral Hazard is undermined.
    Given that most personal lines policies (where presumably the bulk of the risk lies) are underwritten “remotely” and there are an increasing range of tools available to insurers to check facts presented to them electronically, the onus must be on insurers to take extra care to invest in the best technology and training to combat any potential increase in claims cost.

  4. If you read further... 15th December 2009 at 12:16 pm

    you might see that it is not a blank cheque for the consumer but aims to level the playing field between the insurer and the insured.
    As some claims are being rejected under non disclosure rules where in fact the undisclosed had no baring upon the illness or the claim.

  5. Many years ago while working for a Life Assurer I had my first death of a client. On reporting the ‘event’ to H.O. I was informed that the company would require various bits of paper to ‘see if the company was prepared to admit liability!’
    I was shocked (I was more naive in those days) as the client was extremely fit prior to his death in an industrial accident. Until then I had assumed that death was rather black or white situation. You were after all either dead or alive!

    This led me to view the medical history questions in a completely different light, the result which reappraisal was that, except for a tiny minority of cases, I subsequently advised clients not to disclose their medical history and request that my employer write to my applicants GP for a full medical report. This made it my employers responsibility to obtain all the information needed to underwrite the application and the applicant could not then be held responsible for ‘omissions’. This resulted in additional costs for the company, discovery of totally unsuspected ‘impairments’ that the questions on the app. form would not have exposed but, most importantly, greater clarity and honesty all round. After all if a life assured has been paying premiums for 20/30 years and the surviving partner only finds out that the policy is nullified on death its, a bit late then!

  6. We do not get involved too much in areas where non disclosure is a problem but it has always seemed to me that an insurer has a right to avoid a claim if the non disclosure was relevant to the claim that has arisen. If not, they should pay up anyway and if they consider the moral hazard to be a significant factor they should act at renewal – the ultimate sanction obviously would be to decline to offer renewal terms.

    The whole industry suffers if for example (and an authentic incident I can vouch for) a claim is rejected because it was reported to an insurer ten days after it happened instead of the seven stipulated in the small print.In the absence of any genuine disadvantage to the insurer such avoidances identify the really embarrassing members of our industry.

  7. This needs to be very carefully balanced, else we get a new generation of FOS claimant that states that their non-disclosure was due to the fact that they did not understand the medical questions or somesuch nonsense.

    Great news for the claimants

    Bad news for the disclosing consumer as premiums will have to rise to allow for this contingency

    More bad news for the intermediary as no doubt they will be blamed for not ensuring that the client had the appropriate medical knowledge and experience to have answered those confusing questions!

  8. If you read further... 15th December 2009 at 2:11 pm

    you might see that it is not a blank cheque for the consumer but aims to level the playing field between the insurer and the insured.
    As some claims are being rejected under non disclosure rules where in fact the undisclosed had no baring upon the illness or the claim.

  9. Julian, wake up and smell the Coffee! Insurers will try and get out of it if they can. I had a client who was DYING of Cancer, the insurer asked if his bowel had cancer on both sides of the bowel, (was the bowel perforated) or they may not have paid out. the letter from the hospital stated he was going to die, but the insurer kept asking the question. They eventually paid out, but what a hassle for me and the clients family…shocking! NEVER trust any provider.

  10. Let’s get some sense of perspective here. When I talk to my colleagues in claims I know that they are very keen to ensure people are treated fairly. Unfortunately, some people who take out insurance do so in the knowledge that they have a high risk of claiming and decide not to tell their insurer. These customers are the ones who will not and should not be paid benefits. The people who act in a reasonable way and disclose all material facts when they apply for cover do not generally encounter problems. If someone is unsure about whether something is relevent to the risk they are insuring then there are plenty of advisors that will help them, or they can simply disclose it. Of course, there are situations where an insurer makes the wrong call in their assessment and it is right that there are many professional bodies in our industry who will help them when things go wrong.

  11. Julian is right. There has to be a duty of good faith on the part of the insured as well. Otherwise the end result will be higher premiums for everyone.

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