Small insurance mistakes cost customers dearly
Wednesday, 25 July 2018
New Zealand's insurance laws are not working for consumers: Just ask one property investor whose tenants' alterations left him with no insurance for his fire-damaged house.
Submissions recently closed on the Insurance Contract Law Review issues paper, which is looking at the rules that underpin insurance in New Zealand. Some of the laws currently in place are more than 100 years old.
A big problem that has been highlighted through the review process is how the law treats non-disclosure - when the client does not tell the insurer something that they should have,
Sometimes that's intentional fraud, such as when a customer does not tell the insurer that they are already sick when they take out health cover.
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But other times it's when people forget a detail or don't realise a fact about their circumstances or medical history might be important.
If an insurer finds that a customer has not disclosed something that it considers material, it can avoid a policy retrospectively from the time it was issued, or the most recent renewal. That means it is allowed to act as if the policy never existed. In some cases, the premiums paid do not have to be refunded.
Insurance and Financial Services Ombudsman Karen Stevens said it was a significant problem.
Stevens said the consequences for consumers could be extremely harsh.
They would be left with no insurance, no realistic prospect of obtaining replacement insurance, and the possibility of having other insurance policies cancelled on notice.
She said, between 2000 and 2018, there were 750 complaints to her scheme about insurers' handling of non-disclosure issues. Of 24 non-disclosure complaints received this year, in only four cases insurers had opted to do anything other than avoid the policy.
But she said a big problem was that consumers often did not understand what they were expected to disclose.
In one case, an investor had tenants who, in 2010, made structural changes to a property. The policy then automatically renewed and the owner did not contact the insurer to tell it about the changes to the property. When the house caught fire in 2013 and the investor tried to claim, the insurer rejected the claim because it had not been informed of the work.
The investor was left with no insurance for the fire damage.
In another case, a woman claimed under her mortgage protection policy because she was diagnosed with bowel cancer. She was declined because she had previously had gastrointestinal symptoms, which her doctor had told her were related to her contraception.
In another, a man did not disclose counselling and self-harm as a teenager. When he died years later, as a father with young children, the insurer declined to pay because of his non-disclosure.
A woman who took out car insurance didn't tell the insurer that she'd had a contents claim declined by another insurer. When her car was stolen, the insurer didn't only decline the claim but avoided the policy completely.
'Non-disclosure means nothing to a consumer until he or she makes an insurance claim only to find the insurer will not pay it,' Stevens said.
'Strictly speaking, the law does not provide any remedy for a consumer who has failed to disclose (either intentionally or not), material information – materiality being determined on the basis of what would be material to a prudent underwriter in assessing the risk. The trouble with using the prudent underwriter test is that most consumers do not know what a prudent underwriter is and neither do they understand how risk is assessed, until it is too late.'
Consumers were meant to disclose any changes every year when their house, contents and car insurance ticked over, she said, but most did not know this.
It would be better to include a reasonableness standard in the law, she said. ' A consideration of what a reasonable person would have known to disclose in the circumstances would be a much fairer test and one that consumers could understand.'
In the UK, insurers can avoid the policy if there has been deliberate or reckless non-disclosure.
Katrina Shanks, chief executive of Financial Advice NZ, which represents financial advisers, said a UK-style approach would be better.
She agreed consumers did not understand material disclosure. They assumed if they answered questions when filling out their insurance applications, that would cover it. There was no legal differentiation between intentional and unintentional non-disclosure. 'That's a very high bar for consumers.'
Members of the Insurance Council have a Fair Insurance Code which requires insurers to act reasonably when faced with non-disclosure but these members are largely in fire and general insurance and membership is voluntary.