Summary
If you do not disclose everything you should when applying for insurance, you are asking for trouble. This particularly applies to life and critical illness insurance. This article illustrates the situation with reference to a real case.
Life Insurance - remember to disclose everything when you apply
Recently a widow's was successful in forcing a major UK high street bank to pay out on a life-insurance claim which had previously been rejected on the grounds of 'non-disclosure. This should give hope to the thousands of policyholders facing similar disputes.
The widow and mother-of-two was forced to sell her home after her husband died of cancer and the insurer refused to pay out on his £85,000 life insurance policy. It was revealed that the couple were persuaded by their bank to cancell an existing policy and buy a new cheaper policy, but whilst applying for the new policy it was claimed that they did not disclose that the husband had had a mole removed before applying for the insurance policy.
The case was taken to the Financial Ombudsman Service (FOS), which decided in her favour. Now three years after her husbands death, the case has been settled with a payout of £91,000, which includes £2,500 compensation and interest charged on the mortgage as a result of the insurers initial refusal of the claim.
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The couple then received through the post the medical declaration and a form to confirm the accuracy of the information provided, but no copy of the completed application form. So they signed the forms and returned them to the insurance company. Had they seen the completed application form, they would have seen that the tele-sales person had entered 'No' to the question whether her husband had received treatment for cancer.
A few months later her husband was diagnosed with skin cancer, and died six months later. To compound the widows' suffering, the insurer refused to pay out on the policy because there was no record of his mole removal on the application. Unfortunately, the conversation with the tele-sales had been inaccurately recorded.
The widow had no success with either the high street bank through which the policy had been bought or the insurance company. As often happens in these situations the two companies simply passed the buck from one to another. Eventually the widow had to instruct a solicitor who directed her to the ombudsman.
The ombudsman noted that the husband had not completed the application himself and concluded that it is possible that if the husband had been asked, and had answered, the questions himself, he would have mentioned the mole which subsequently turned out to be a malignant melanoma. In those circumstances, the second insurer would have refused cover and the existing insurance would have remained in place. The first policy would then have paid out following his death.
This case makes the point that you should not accept an insurer's repudiation, and to query it without delay. Around 20 per cent of life and critical illness claims are rejected, with about half of them being rejected because of omissions on the application form which would have affected the risk assessment had the insurer been aware of them. A spokesperson from the FOS commented, "Around two-thirds of health insurance disputes result from non disclosure, and in 40 per cent of these cases we rule in favour of the claimant - usually where the omission is accidental."
To a certain extent complex application forms have been part of the problem, but it is still the policyholders responsibility to complete them accurately. There have also been appeals for an overhaul of the current rules so that insurance companies cannot make unrealistic demands of applicants to remember every detail of their medical history.
New guidelines are now in force on the wording of forms for critical illness and other medical policies. These guidelines have stopped the use of what are called 'open-ended memory test questions', which ask applicants to list all occasions they have been to the doctor in the last five years.
Currently, insurers are expected to pay out on a claim where there has been 'inadvertent non-disclosure', resulting from 'an understandable oversight or moment of carelessness'. However, there is a wide diversity in how insurers interpret what is 'inadvertent', as opposed to 'reckless' non-disclosure. It is reckless if the individual must have been aware of the omission at the point of application, in which case the insurance company will not pay the claim - but this is inevitably down to somebody's opinion.