insurance complaints involving non-disclosure

Following on from the insurance case studies involving non-disclosure featured in the February 2003 edition of ombudsman news, this article summarises our approach when dealing with such cases.

It is widely recognised that applying the strict legal position in non-disclosure cases can result in unduly harsh outcomes. The Association of British Insurers (ABI) has sought to address this in its statements of practice, which provide important safeguards for policyholders. The ABI’s ‘General’ and ‘Long-Term’ statements of practice give us a helpful starting point when we consider what is fair and reasonable in individual non-disclosure cases.

In our experience, these disputes span a wide spectrum of circumstances, from deliberate attempts to mislead through to genuine misunderstandings. The position at either end of this spectrum is clear.

fraudulent or deliberate non-disclosure
If we consider that a policyholder’s non-disclosure (or misrepresentation) involved a material fact, induced the firm to offer the policy (on the relevant terms), and was fraudulent or clearly deliberate, then the firm can decline to meet the claim, as well as ‘voiding’ the policy ‘from inception’ (cancelling it from its starting point). It can also decline to return the premiums and seek to recover money it has paid out to the policyholder in relation to previous claims under that policy.

innocent non-disclosure
Conversely, if the policyholder’s non-disclosure is innocent, then the firm should meet the claim in full, regardless of whether, if it had known of the matter that was not disclosed, it would have increased the premium or refused to offer cover.

We are likely to conclude that non-disclosure is innocent if the questions posed by the firm were not clear (or did not clearly apply to the fact(s) in question). We are also likely to conclude this if we consider it was reasonable for the policyholder to have overlooked the fact(s) that he or she failed to disclose. This could be the case, for example, with minor childhood ailments or minor motoring offences that occurred more than four years earlier.

Of course, policyholders have no duty to disclose information that they are not, in fact, aware of.
Inevitably, most of the disputes we see lie somewhere between these two extremes. In dealing with them we try to distinguish between those cases where the policyholder seems to have been reckless, and those where the non-disclosure seems more the result of a genuine oversight or inadvertent error.

inadvertent non-disclosure
We are likely to conclude that non-disclosure was ‘inadvertent’ if it seems to have resulted from an understandable oversight or moment of carelessness, rather than from any deliberate act. In such cases, the matters that the policyholder failed to disclose are likely to be minor, distant in time or otherwise easy to have been overlooked.

We try to take a reasonable approach to the degree of care that policyholders should exercise, taking account the nature of the product and the circumstances of the transaction.

In making this assessment, much depends on the details of each individual case. We look, for example, at the circumstances surrounding the giving of information (including the stage at which the information was provided and whether an adviser transcribed the information).

The fact that an adviser or other intermediary completed a form incorrectly is not, in itself, reason for upholding a case against an insurer (although it may give rise to a justified complaint against the intermediary) but it is a factor we can take into account here.

We will look, too, at how clear and concise the firm’s questions were (bearing in mind the issue that is the subject of the alleged non-disclosure). We are unlikely to give much weight to ‘catch-all’ questions or to questions that require significant and wide-ranging disclosure of minor matters that the firm knows will not, in practice, be relevant to its assessment. If, for example, it asks medical questions requiring details of all the policyholder’s visits to a doctor over the past five years, then it is probably impractical to expect the policyholder to provide a fully accurate response.

We may consider whether the firm gave any warning about the consequences of giving false or incomplete information, and how clear such a warning was.

We may also look at the degree to which the policyholder should have been aware of the information he or she was asked to provide, and whether the policyholder was likely to have recognised the significance of this information to the firm. For health-related insurance, for example, we would expect policyholders to be aware of the firm’s likely interest in recent major illnesses, while for car insurance, we would expect the policyholder to be aware of the need to disclose significant convictions like dangerous driving or drink-driving.

So, the more recent and significant an event is, the less likely we are to conclude that any non-disclosure or misrepresentation was simply an oversight. Even here, however, we would expect the firm to ask clear questions designed to obtain the information it requires.

If we conclude that the policyholder’s non-disclosure was inadvertent, then we will look at whether a decision by the firm to cancel the policy, decline the claim and return the premiums would produce an outcome that is manifestly unfair.

	the firm would have offered cover (albeit on somewhat different terms) if it had known of the matter that the policyholder failed to disclose; and
	the loss/claim is not associated with that matter.

In such cases we may adopt a ‘proportional’ approach, where we calculate the proportion of the premium that was paid and base the settlement on that proportion. If the firm would have added an exclusion or amended a term, then we calculate the settlement as if that exclusion or term was in place. Normally, we would not require the firm to reinstate the policy, and we would permit it to deduct any refund of premiums from the settlement.

‘clearly reckless’ non-disclosure
We are likely to conclude that non-disclosure is ‘clearly reckless’ if a policyholder appears not to have had any regard for accuracy when completing the proposal form. Typically, in such cases, the matters the policyholder failed to disclose will be of significance, and will have been well-known by the policyholder. We will probably have found it difficult to believe that the policyholder could simply have overlooked these matters. But we will not have found sufficient grounds to conclude that the non-disclosure was deliberate.

In such cases, we consider that the firm can decline to meet the claim and can cancel the policy from its start date. The firm should normally return the premiums paid. It can also seek to recover whatever it may have paid the policyholder in relation to previous claims made under the policy.