Damaging allegations of mis-selling occur frequently in the critical illness and income protection markets. Rona Doyle explains how to avoid the pitfalls
Lawyers acting for insurers and reinsurers in the disability market come across allegations of mis-selling too often, especially when a claim has been declined for non-disclosure.
The majority of allegations of mis-selling are spurious, but all need investigation. Most policies concerning these allegations were sold many years ago - in many cases, lawyers are investigating the selling of protection insurance up to 20 years ago, which is difficult for the insurers and most of all for the person that sold the policy, assuming they can be found. Often, they cannot remember the sale or the claimants, nor can they remember how such cover was sold.
As a result of regulation through the Financial Services Authority and complaints handling by the Financial Ombudsman Service (FOS), practices are improving, especially record-keeping, making investigation more coherent, quicker and cheaper.
The need for protection cover is increasing and sales are not keeping pace. The difference is caused by the increasing debt burden society apparently feels comfortable with. Major analysts refer to the income protection (IP) 'gap' and Swiss Re Life & Health recently stated that the difference between what consumers have in IP insurance and what they actually need has risen to £150bn. So from the adviser's point of view there is £150bn worth of potential sales waiting to be snapped up.
Sold properly, IP and critical illness (CI) cover are very worthwhile for the consumer. Sold incorrectly, with mismanagement of claimants' expectations of what the insurance actually covers, it costs all those involved when a problem arises. Often, consumers fail to understand the insurance they have bought and the consequent bad press within the consumer market continues relatively unabated; bad news always travels faster than good. The adviser is the first point of contact with consumers; if he or she sells IP and CI coherently, there will be less on which to report, and therefore less negative publicity. That can only help increase sales and give the industry a chance of closing the IP gap.
Likely problems
There are four major areas where disputes can arise:
1. The increasing sales of total and permanent disability cover as an alternative to IP cover is the issue causing most frustration. There are few illnesses or injuries that cause a 'total' and 'permanent' disability, but most definitions insist disability has to be total and permanent. If sold as an alternative to IP, the claimant's expectations are mismanaged and the claimant, when they claim for stress or various musculo-skeletal disabilities, will fail to meet the definition. Stress, depression and/or anxiety and most musculo-skeletal conditions do not constitute a 'total' disability, or indeed a 'permanent' one, as recovery does actually occur. Various types of claim became fashionable in the early 1990s, when the vast majority of people had an upper limb, or musculo-skeletal problem. In the late 90s, stress, depression and anxiety claims rose and there is now a huge increase in these claims. From this mismanagement of claimants' expectations, allegations of mis-selling ensue, which must be investigated. All claimants will state it was sold to them as an alternative to IP cover and that it would cover the same type of eventualities. At the very least, the insurer has incurred further costs, which ultimately ensures the cost of their cover increases rather than decreases.
2. It is easier to sell CI cover than IP, because it is easier for consumers to comprehend a lump-sum benefit for a heart attack, diagnosis of cancer or multiple sclerosis. But understanding the various definitions is very difficult. In most circumstances, one can have a diagnosis, but unless one also suffers symptoms for a specified period of time continuously, the definition is not satisfied and the benefit will not be paid. The cover only really pays out when the diagnosis and the prognosis is very serious. With the advancement of treatment for many cancers and cardiac conditions, the definitions for these conditions are becoming much more stringent and this trend will continue.
Claimants with these conditions expect payment on diagnosis, as that is what they were told when they bought cover. Claimants and their advisers have to be told what the definition means and why they cannot claim benefit on that specific diagnosis. Very often, if they did have an IP policy, they might have qualified for payment of benefit while they recovered or adjusted their lifestyle to minimise the effects of their condition on their capability.
3. Another problem with CI cover is the pre-existing conditions (PEC) clause and whether the applicant has had such clauses properly explained. Even if the person merely had symptoms that were investigated but not diagnosed, the PEC clause will usually bite, depending on any subscribed time limits, and the claim will be declined. The problem is even more acute for group CI, where there is a free cover limit and consequently no underwriting questions have been asked. These types of clauses must exist as a means of cut-off to ensure the cover is affordable, but again, a full explanation must be given - one which can be proved, in order to decrease mis-selling allegations.
4. By far the largest cause of mis-selling allegations is when a claim is declined due to the non-disclosure of medical or financial information by the claimant on the application form. The allegations almost come automatically. Many of the questions on the applications could be worded more succinctly and the benefit of hindsight is also a wonderful thing. It is impossible to perfect the wording of these questions and the application must not be too long, otherwise the job of selling is more difficult. There is a psychological limit on the amount of personal details an applicant wants to disclose to an adviser who might be unknown to them.
The adviser must emphasise the duty of full and proper disclosure to the applicant of all medical issues and the fact that it is a continuing duty, especially between the time of completing the application and the time the cover is confirmed. It is then that most instances of non-disclosure occur. Furthermore, the adviser should make sure the applicant understood that, whatever financial information on IP applications is disclosed, it is the actual financial situation immediately before the commencement of the disability that sets the amount of benefit to be paid.
Next steps
One of the major complaints against insurers is that individual IP claimants, especially those who are self-employed, receive less benefit per month on a successful claim than they thought they would. It is the classic example of 'over-selling'. Advisers selling individual IP contracts to self-employed applicants must ensure 'income' is not confused with 'turnover' and that 'gross' and 'net' income is properly understood. More emphasis needs to be given to the question 'how much does one need to live when disabled?' rather than 'how much does one earn?'.
Too often, customers have no understanding of limitation of benefit clauses in IP policies and the reason for their inclusion. The more such clauses are explained at the point of sale, the more the claimant's expectations are managed at the point of claim. It is also helpful if advisers have some means of demonstrating that such explanations were clearly given at the point of sale.
In conclusion, the more explanation of how the cover works at the point of sale, the fewer allegations of mis-selling there will be at the point of claim. The more emphasis there is on the duty of disclosure of both medical and financial information at the time of sale, the fewer instances of non-disclosure and mismanagement of the customer's expectations will occur. The industry will never eradicate non-disclosure altogether - unfortunately, there will always be people who see these types of policies as a means to claim, irrespective of the veracity of the information given. If, however, every adviser selling these types of cover highlighted as strongly as possible the fact that an early claim within months of the cover being confirmed will always be treated with the utmost suspicion by any insurer, it might reduce the instances of fraudulent claims. The more thorough records advisers keep of what was said to the claimant, and the more declarations of understanding the applicant signs, the better.
Finally, with more sales being achieved using laptops and computers, it is crucial to ensure every applicant has been given the opportunity of reading their answers to all questions before signing declarations, and you must be able to prove this was done. This is especially relevant when answers have been given verbally to the adviser who then completes computer-generated application forms. If the FOS sees this has been achieved, the less likely it is to decide that the non-disclosure was inadvertent or simply not the claimant's fault, and so the less likely it is to find against the insurer in such circumstances.
Rona Doyle is principal at Rona Doyle & Co. Solicitors
COVER notes
• With increasing regulation through the Financial Services Authority and complaints handling by the Financial Ombudsman Service (FOS), practices are improving, especially record keeping, making investigation more coherent, quicker and cheaper.
• Sold properly, IP and critical illness (CI) cover is very worthwhile for the consumer. Sold incorrectly, with mismanagement of claimants' expectations of what the insurance actually covers, it costs all those involved when a problem arises.
• The more emphasis there is on the duty of disclosure of both medical and financial information at the time of sale, the fewer instances of non-disclosure and mismanagement of the customer's expectations will occur.
