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The legal lowdown

Non-disclosure can have a serious impact on IFAs’ as well as insurers’, businesses.

Customers failing to reveal relevant facts when applying for an insurance contract can ultimately lead to damaged business reputations, lost commission and time lost to dealing with any resultant complaints.

There are some key points IFAs need to be clear about concerning non-disclosure to help ensure they minimise the risks it can pose to their businesses. The FSA recog-nises that ABI guidelines represent good practice on non-disclosure while a recent Financial Ombudsman Service newsletter highlighted how strict legalities ought to be used alongside industry good practice and went on to detail the FOS’s steer on handling the issue.

Historically, three types of non-disclosure were broadly recognised – fraudulent, negligent and innocent.

“Fraudulent” non-disclosure involved deliberately defrauding an insurer by withholding information or giving false information knowingly.

“Negligent” non-disclosure referred to cases where there had been a careless or reck-less failure to give due care and attention when applying for insurance, for instance, a client offered a poor explanation to a perfectly comprehensible question.

“Innocent” non-disclosure arises when a reasonable customer has fair grounds for believing they were com-municating the truth in what they did or did not say. For example, the customer responded to the best of their knowledge and ability to a vague or ambiguous question.

The FOS now breaks down non-disclosure into four categories – deliberate, reckless, innocent and inad-vertent – to aid its decisions on whether customers have breached their insurance contracts and the “utmost good faith” principle.

The four categories allow for deliberate non-disclo-sure to not necessarily be classed as fraud and also break down the previous “negligent” category into two.

“Deliberate” refers to when a customer has wilfully misled the insurer with untrue or incomplete information. If this dishon-esty is intended to deceive the insurer into giving them an advantage to which they are not entitled, such as favourable terms, then this is fraudulent and the insurer can refuse to pay out.

However, the ombudsman says it is possible to deliberately non-disclose without being fraudulent, say, if a customer did not intend to secure critical-illness cover on more favourable terms than their health warranted but was too embarrassed to record their history of alcoholism.

Broadly speaking, if there is clear evidence of fraud, the insurer can retain the premium, if not then premiums should be refunded, says the FOS.

“Reckless” cases are where customers offer answers without caring whether they are true or false such as where a customer signs a blank proposal form and leaves it to be filled out by someone else and the non-disclosed matters were significant and well-known to the policyholder.

“Innocent” non-disclosure continues to refer to when customers act in good faith if their non-disclosure is made naively. The FOS says in these cases, the insurer will not be able to avoid the contract and (subject to the policy terms and conditions) should pay the claim in full.

“Inadvertent” non-disclosure is where custo-mers may also have acted in good faith but uninten-tionally misleads the insurer by failing to read and check the questions and answers thoroughly enough or, perhaps, they genuinely forgot about previous stress or back problems, for example. When these cases occur, there is no breach of the duty of utmost good faith embodied in the contract.

Inadvertent non-disclo-sure brings into play the greyest areas – insurers are asked to separate careless-ness from recklessness (both are negligent). It is also the most commonly occurring category of non-disclosure as there are very low levels of both innocent and fraudulent non-disclosure cases.

The FOS says where there has been inadvertent non-disclosure or misrepresentation, insurers ought to rewrite the insurance on the terms they would originally have offered if they had been aware of all the information. This could result in a proportionate payment to the policyholder or no payment at all if the inadvertently-withheld information would have led to the firm declining the application altogether.

In the event of inadvertent non-disclosure, whether it is linked to the cause of claim or not, Scottish Equitable’s claim philosophy is to apply the underwriter’s terms retrospectively. If the terms would not have been any different, the customer can still expect a full payout while if the material fact which was not disclosed would have impacted upon the rate, the policyholder can expect a proportion of the full payout accordingly. If the underwriter’s decision was to decline to offer terms, the policy is considered void and no benefits are payable.

There are a number of ways IFAs can reduce the chances their businesses are affected by non-disclosing clients.

Traditionally, one of the more common situations has been custo-mers whose claims have been rejected as a result of non-disclosure claiming: “I told my adviser everything, it’s not my fault it wasn’t on the form”.

It is vital to ensure that clients read through their application forms. For electronic business applications clients must take notice when a policy declaration is posted, giving them 14 days to notify their insurer if there is any ambiguity or corrections.

IFAs must remind clients that the duty of disclosure does not end when the application form has been signed, it continues until the policy goes into force.

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