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The following is taken directly from the Financial Ombudsman Service News (http://www.financial-ombudsman.org.uk/publications/ombudsman-news/48/insurance-non-disclosure.htm)
Insurance case studies: Non-disclosure
In issue 46 of ombudsman news (May/June 2005) we outlined our position on non-disclosure in insurance complaints (the situation where a customer fails to reveal a relevant fact when applying for – or renewing – an insurance contract).
In this issue we set out some of the cases we have recently seen involving alleged non-disclosure of information by those applying for insurance.
life assurance – inadvertent non-disclosure
In December 2002 Mrs D applied to the firm for life assurance cover of £100,000 and for £35,000 critical illness cover. Two years later she was diagnosed with breast cancer. The firm refused to meet her claim. It said this was because she had not disclosed that for most of the early 1990s she had been suffering from, and received treatment for, back pain following childbirth. It considered the fact that she had not revealed this information to be reckless non-disclosure.
Mrs D told the firm that she had not thought she needed to disclose this information. She had thought the question on the firm’s application form referred only to illnesses that had resulted in her taking time off work during the previous five years. It was more than five years since she had suffered from the back pain and she had never needed to take time off work because of it.
In response, the firm pointed out that it had asked whether she had ‘ever suffered’ from ‘back or spinal trouble’. Mrs D said she did not believe that back pain due to childbirth was ‘back or spinal trouble’. Unable to reach agreement with the firm, Mrs D came to us.
After studying the questions that the firm put to Mrs D when she applied for insurance, we noted that – in answer to most of the questions – Mrs D needed to give information only about any medical consultations that had occurred during the previous five years.
However, the firm’s question about ‘back or spinal trouble’ was not limited to that five-year period. We felt that the wording of this question was potentially misleading. We accepted that Mrs D had genuinely misunderstood the question and that any non-disclosure was inadvertent.
However, we thought that that a careful reading should have made it clear that the firm wanted to know about all back and spinal trouble, regardless of how it occurred or when she had sought treatment for it. We took the view that Mrs D had been slightly careless in completing the application.
Slightly careless or inadvertent non-disclosure entitles an insurer to rewrite the insurance policy. It should do this on the terms that it would have offered originally, if it had been fully aware of the applicant’s medical history. In this case, the firm would have offered full cover except for back and spinal problems.
We required the firm to reinstate Mrs D’s policy – adding the exclusion for back and spinal problems – and to deal with the claim on those terms. There was no connection between Mrs D’s breast cancer and the exclusion clause so the firm had to meet her claim in full, together with interest.
motor insurance – deliberate non-disclosure
Mrs G took out motor insurance by telephone. In answer to one of the firm’s questions she said that she was the owner and keeper of the car. Mrs G asked for her son, A, to be added to the policy as a named driver.
The firm sent Mrs G details of all the information she had given and that it had relied on when deciding the terms of her insurance policy, asking her to let it know if anything was incorrect. Mrs G did not make any changes.
A few months later, after A was involved in a road traffic accident, the firm discovered that the car was registered in his name, not his mother’s. The firm also found that the receipt for the car named A as the purchaser.
When the firm declined to meet the claim, Mrs G insisted that she was indeed the real purchaser and owner of the car. She said that the registration documents had been issued in her son’s name by mistake. The firm told her it would not have insured the car at all if it had known that A was the owner. Unable to reach an agreement, Mrs G came to us.
In our view, the questions that the firm had asked Mrs G when she applied for insurance were clear and unlikely to be misunderstood. And the firm had specifically drawn Mrs G’s attention to the importance of accurate information and records.
Her failure to reveal that the car was registered in A’s name had induced the firm to offer insurance. As it would not have insured the vehicle if it had been aware of the true position, the firm was entitled to avoid the policy (treat it as though it had never existed). We rejected the complaint.
life and critical illness insurance – innocent non-disclosure
In January 2005, Mr E was diagnosed with lung cancer and put in a claim to the firm. Over six years earlier, in November 1998, he had taken out life and critical illness insurance cover worth £150,000.
After carrying out enquiries, the firm found that in September 1997 Mr E’s GP had recorded that Mr E was consuming approximately 80 units of alcohol a week (21 units is the recommended maximum weekly amount for men). In February 1998 Mr E’s alcohol consumption was up to 84 units a week but by July of the next year it had gone down to a more moderate 40+ units a week.
The firm said this differed greatly from the declaration Mr E made when applying for insurance. He had said then that his average alcohol consumption was five units a day (35 per week). The firm told him that if it had been aware of his drinking habits, it would have increased his premium by 200-300%. It refused to pay the claim and it returned his premium, avoiding the policy from its start date.
Mr E was extremely angry with the firm’s response. He said that when he applied for the insurance he had answered all the firm’s questions accurately. He pointed out that he had, at that time, been the sole carer for his newly-born daughter and could not have handled his responsibilities if he had been drinking as heavily as before. The firm still maintained that he was likely to have been drinking more than he had claimed.
When the complaint was referred to us we found no evidence concerning Mr E’s drinking habits at the time he applied for the insurance. The amount he had said he was drinking (five units a day or 35 units a week) was close to the 40+ units a week that his GP had recorded eight months later. Mr E had given a plausible explanation for his answer and the firm had no justification for disregarding it.
As there was no evidence of non-disclosure or misrepresentation, we required the firm to reinstate the policy and meet the claim. The firm agreed to pay the full sum of £150,000, plus interest.
household insurance – deliberate non-disclosure
Mr A applied for household insurance. After receiving his completed questionnaire, the firm agreed to put the policy into effect from 28 June 2002. They also sent him a statement of facts, setting out the information he had given. In response to a question asking whether he had any ‘non-motoring convictions’ he had replied ‘none’.
The following day, Mr A contacted the firm to say that his house had been burgled. However, the firm was unable to get any response when it tried to arrange for its investigator to visit him at home. It heard nothing more until January 2003, when it was informed that Mr A was in jail.
In the course of the firm’s subsequent investigations, it discovered that – at the time Mr A took out his policy – he had a criminal record for possession of drugs and resisting arrest. After making the burglary claim, Mr A had again been found in possession of drugs and was fined for resisting arrest. Finally, three months after the burglary, he was remanded in custody on a murder charge.
The firm told Mr A that it would not have insured him if it had been aware of his criminal record. It said it would avoid his policy and refund the premium. Mr A complained to the firm, saying he had not been asked about his criminal record. When the firm rejected his complaint he came to us.
Unfortunately the firm was unable to produce the questionnaire that Mr A had completed when he applied for the insurance. It had only kept a copy of the statement of facts. This established that the firm was likely to have asked Mr A whether he had any non-motoring convictions.
Mr A admitted that he had kept a copy of the application form. However, he would not let us see it.
We concluded that although the firm was remiss in not keeping all the original paperwork, it had still been entitled to decide that Mr A had not answered its questions accurately, and to avoid his policy for deliberate non-disclosure.
household insurance – deliberate non-disclosure
Mr M’s home was broken into in October 2002. The burglars had kicked in a panel in his back door and stolen many of his possessions. After accepting his claim for the stolen contents, the firm arranged for one of its approved contractors to replace the back door, even though the council owned the property and was responsible for repairing the damage.
Early the following year, shortly before Mr M’s policy was due to expire, the firm sent him a renewal questionnaire. This asked for details of his current security arrangements. Mr M completed the form, confirming that his external doors had ‘a mortise deadlock and security bolts or a key-operated locking system’.
The firm renewed the policy, but within a month Mr M’s property was broken into a second time. Again, the thieves had kicked in the rear door panel. When the firm discovered that the back door did not, in fact, have security bolts or a key-operated locking system, it refused to meet Mr M’s claim. After complaining unsuccessfully to the firm, Mr M came to us.
We accepted Mr M’s explanation that he had assumed the firm’s contractors had installed a door that met the firm’s own security requirements. It was careless of him not to have double-checked this. However, given that his other answers were accurate, we were satisfied that he had not deliberately or recklessly supplied an incorrect answer.
We also took two further factors into account. First, even if Mr M had realised that he needed to fit bolts, we did not believe they would have impeded the burglary. This was because the burglars had entered the house by kicking in the door panel. Second, even if Mr M had answered the question correctly, the firm would still have allowed him a reasonable period of time in which to change the locks. The burglary occurred within this timescale.
We upheld the claim. We did not think Mr M’s failure to comply with the security condition was connected with the loss and we pointed out to the firm that it was good insurance practice to meet claims in such circumstances.
term life assurance and critical illness insurance – reckless non-disclosure
In December 2001, Mr and Mrs W applied for term life assurance and critical illness insurance. This included own occupation cover, which paid benefits if either of them was unable to continue with their own occupation because of permanent total disablement.
In response to the firm’s questions they both stated that they were not ‘currently receiving any medical treatment or attention or awaiting any medical or surgical consultation, test or investigation’ and had ‘never had any medical or surgical treatment, including investigations, tests, scan or X-rays for any … mental or nervous illness (including depression) lasting for more than 3 months and/or requiring more than 10 consecutive days off work’.
The firm accepted the application on the condition that, since signing the application, Mr and Mrs W had not ‘suffered any illness or required any medical attention or changed occupation’.
Two years later, Mrs W submitted a claim for rheumatoid arthritis but the firm refused to meet it. It said her medical records showed that she had been consulting a doctor for carpal tunnel syndrome and depression for about eight years before the date when she applied for the policy. She had not disclosed this.
In addition, she had never disclosed that – after she had submitted her application but a few days before it was accepted – she had seen her doctor for pain and swelling in her ankle. And she had failed to tell the firm that, before she received the firm’s offer of acceptance, she had changed her occupation.
The firm said that although it was entitled to treat the whole policy as void from the start, it would not do this. However, it would exclude claims for Mrs W’s previous health problems and would no longer provide the own occupation cover. Unhappy with this, Mr and Mrs W referred the complaint to us.
We did not consider there to be any basis for requiring the firm to pay the sum insured for Mrs W’s rheumatoid arthritis. We accepted that there was no link between her carpal tunnel syndrome and depression and the onset of her rheumatoid arthritis. However, this did not change the fact that, in response to clear questions, she had failed to disclose information about her health.
In our opinion it was fair and reasonable of the firm to offer to rewrite the policy on the terms it would have offered originally — if it had been given the correct information. Mr and Mrs W appeared to have given very little thought to the accuracy of their answers, and their non-disclosure appeared to be at least reckless, which would have entitled the firm to void the policy.
commercial insurance – non-disclosure
In January 2001, there was a serious fire at Mrs Y’s shop, which was insured with the firm under a commercial policy. The fire brigade thought the fire might have been caused by an electrical fault.
The firm made an interim payment to Mrs Y of £10,000 and appointed loss adjusters. In the course of their investigations the loss adjusters discovered that Mrs Y’s business owed its suppliers £70,000. Mrs Y had borrowed almost £100,000 from her bank over the previous two years and had made incorrect statements when applying for the bank loans. The loss adjusters also discovered that, in her original insurance application, Mrs Y had failed to disclose that the ground floor of her shop unit was unoccupied and was not properly secured.
The firm told Mrs Y that it was treating her policy as void. This was because she had failed to disclose that the building was not secure and that her business was in difficulty, even though it had questioned her directly about these matters. The firm also believed that Mrs Y had committed a criminal offence in misrepresenting the purpose of the loans. Unhappy with the firm’s actions, Mrs Y referred her complaint to us.
Mrs Y denied that her business was in difficulty. She said the money she had borrowed from the bank had originally been intended for home improvements, but she had later changed her mind.
We noted that Mrs Y had run her business for several years and claimed to have run a previous business overseas. So the firm was entitled to treat her as a commercial customer and not a consumer. This meant that the firm was entitled to rely on the strict legal position. In the circumstances of this case and because of the fraud allegations, we concluded that the dispute was not suitable for our informal procedures and would better be dealt with in a court.