Insurance Companies and Advice

Along with many others who know the industry, David Rossmiller is upset about a Bloomberg story. He protests:

It's not up to your insurance company to make sure you have enough liability insurance to protect your assets if you hit someone with your car, or to make sure you buy enough property coverage to replace your jewelry, or to sit down at your table and make sure you understand you are not covered for earthquakes or floods. First, the law presumes that you the consumer know how much insurance you need, and if you don't get it, that responsibility is yours. Second, this is the theory of a standard-form contract -- the market eliminates the transaction costs of having to negotiate with every person in the world. In return for these savings, it is legally presumed you have read and understood the contract, whether you did or not.... So what's the problem ? The contract said what they would get, they just didn't read it.

Well, I can think of a number of problems with those protests:

• The process of dis-intermediation is now so advanced that, arguably, insurers cannot pretend that the policyholder is not in fact relying on them to do what the broker used to do i.e. advise on levels of cover;
• The insurer's duty of good faith arguably bolsters the latter argument;
• As lawyers, we often forget how arcane is even the simplest standard-form contract of insurance. Interpretation by an expert is the only reliable one;
• In theory, standard-form contracts and dis-intermediation benefit the consumer as well as the provider. In practice, the distribution of the benefits is very uneven, and the only casualties are found among consumers.

Are You Sure That You Don't Have Cancer ?

"Life is a congenital condition", someone once said,"and it is terminal". If this were taken to a logical extreme, health and life insurance would become impossible. Sometimes, though, insurers like to test the logic.

Imagine it: you are in good health as far as you know, confirmed by the recent opinion of your own GP, and someone persuades you, as they do, that you need to buy some life insurance. So, you fill in the forms as diligently and honestly as you can, and the insurance company asks you to undergo a medical examination, which turns up nothing adverse. The policy is issued, but within weeks you have abdominal pains and before long you die of advanced pancreatic cancer.

"Wow, here is a great insurance coverage story" says Boston lawyer Stephen D. Rosenberg(from whom I learned of this case), and who would disagree ?

The life insurance policy contained a term - described as a condition precedent - under which the coverage only applied if the policyholder was in good health at the time of issuance. It was not in dispute that a)the policyholder did not know of his cancer and b) the cancer must have been present at the time of issuance. The life insurer sought to deny the claim, after his death, for the life insurance proceeds on the ground that the good health requirement was not met.

Mr Rosenberg hits it right on the head:

... what applicant would buy coverage, after being examined and having his medical records reviewed by the insurer prior to coverage being approved, if the coverage would vanish if, contrary to the knowledge of both the insurer and the insured, he was thereafter found to be terminally ill ?

The Massachusetts court agreed, but apparently had to discard precedent to do so, which is strange. It apparently invoked the "legitimate expectations of the insured" to do so, which is stranger still to a common-lawyer on this side of the Atlantic: over here, "legitimate expectations" has no place in contract law.

I doubt if the insurer would have succeeded over here, either, but to get the legal analysis right might pose problems.

Suggestions welcome !

Norwich Union Initiative

I am not quite sure what to make of this.

Money Marketing reported last week that Norwich Union was writing to 5,000 holders of critical illness policies inviting them to rectify any failures of disclosure that they may have made when proposing for the policies.

On the one hand, as the insurer's spokesman said, those who deliberately with-held material information probably do not have any valid cover, and it has to be seen as a kindly gesture to offer them an opportunity to retrieve the situation.

On the other hand, some perfectly upright policyholders may be needlessly upset. Also - forgive my cynicism - I wonder how many will respond by volunteering information which was not with-held as a result of a failure of utmost good faith, but because the proposal form did not ask a clear enough question. Even more cynically, I suggest that some may give information which they did not have when they were proposing for the policy.

Insurance law resources

I have today opened here a page for links to websites that regularly provide new and useful material on insurance law.