After he had a heart attack aged 40, the day after a weekend in Milan with me and a few mates, he got a £100,000 payout from his insurer. The money means that while he continues to work and provide for his family, my friend can afford to take things a little bit easier now that a big chunk of his mortgage is paid off.
My mate’s experience, and one or two others that I have come across in my time as a journalist, means that I am not a “hater” of CI cover.
But it is hard to ignore the fact that, for every good payout story, the media is able to come up with just as many instances where insurers have used dubious methods in order to reject claims from very sick people.
A few months ago, I had extensive correspondence on this issue with someone who, although he declined to tell me his job, must have been an adviser or someone working in the financial services industry.
His take on the sales of CI cover was that “people are put off taking out protection insurance because of scare stories”.
I argued that some insurers appeared to be using the small print in their policies to deny people payouts. Also, many advisers do not do enough to ensure that policyholders understand the requirement of “utmost good faith” and the need to tell the insurer about all pre-existing conditions, hence the high refusal rate on claims.
He replied that CI cover “is a perfectly valid product and that if people simply filled out the forms accurately and truthfully, there would not be a problem. A lot is made of declined claims but these are very much the exception rather than the norm.”
The problem is that when claims are turned down, it looks very bad for the industry, especially when the complainant takes the issue to the Financial Ombudsman and it becomes blatantly obvious that the insurer did not have a leg to stand on.
An example is the case of a policyholder diagnosed with breast cancer but turned down because she had treatment for back pain more than five years earlier following the birth of a child. This was back pain that was treated and for which she had never needed to take a day off work between then and her subsequent diagnosis of breast cancer. The FOS found in her favour.
Or the insurer who turned down a CI claim for a woman diagnosed with leukaemia (who subsequently died from it) on the grounds that she had treatment for ear infections years earlier and wore a hearing aid. The FOS website has plenty of similar examples.
So, what are we to make of the new guidance issued by the ABI, in which it has revamped non-disclosure rules for CI, income protection and life insurance?
At first sight, this is a welcome development. Newspaper and web-based reports that have commented on this issue, including Money Marketing’s own story last week, suggest that it is far more likely to lead to payouts on claims.
If claimants mistakenly withheld medical information when applying for a policy, they will be “virtually guaranteed a payout”, according to one report. When I read that, I nearly choked on my coffee.
Leaving aside that optimism, the key elements in the new guidelines is that previously the categories of customer non-disclosure included “innocent”, “inadvertent”, “reckless” and “deliberate”.
Claims were usually paid for innocent non-disclosure and denied for deliberate non-disclosure. But the two middle categories of inadvertent and reckless created a potential opportunity for insurers to avoid proportional payouts, with inadvertent claims being pushed into the reckless category in order not to make any offer to claimants.
The ABI will now use “innocent”, “negligent” and “deliberate or without due care”. Will it work? It might but not quite in the way that the ABI is expecting it to. Almost certainly, more compensation payments will be made but that may simply reflect a continuing trend that has been manifesting itself for a couple of years now, ever since biting criticism from the FSA and the consumer press started to seriously damage the credibility of many types of cover in general and PPI in particular.
What is also far more likely to happen is that, faced with a claim that five or 10 years ago would have been rejected by a gung-ho insurer but in the more “enlightened” recent period might be paid, the industry may well try to use the negligent category in order to make more partial offers.
Assuming that such offers are accepted, the overall payment/rejection figures will look much nicer for the industry but will they be fair to consumers? I have my doubts.
What is also certain to happen is that the FOS will be called upon to make far more judgements about percentages rather than principles. Yet partial justice will never be the same as full justice.
Nic Cicutti can be contacted at firstname.lastname@example.org