Non-contestability

On an e-mail discussion list to which I belong, the question of whether insurance policies should have a "non-contestability clause" is the subject of lively discussion at present. If adopted, such a clause would require the insurance company to pay a claim immediately without question, with two provisos:

1.the insurer would have two years after acceptance of a proposal to confirm e.g. by investigating medical records, that full disclosure had been made

2. If evidence of fraud did emerge after payment had been made, the insurer could sue for return of the money

The context is that of insurance contracts where the policyholder's medical condition at inception is crucial to the terms of the contract. Such contracts would be health related in the main - critical illness and death (or life, as we prefer to say) policies.

The inclusion of a clause such as that discussed is attractive because of what occasionally happens.

Shortly after the policy is issued, the policyholder dies of a congenital problem, or visits the surgery and a cancerous lump is found. Naturally, the insurer is dismayed and suspects fraudulent non-disclosure of material information. Sometimes there has indeed been non-disclosure. Less often the non-disclosure is material and less often again the non-disclosure is wilfully fraudulent.

(I have no idea what the relative frequencies are. A contributor to the discussion, who is involved with claims, alleges that it is widespread in the UK, but in my experience just as central bankers are said to have forecast 7 out of the last 5 recessions, insurers "detect" 7 out of every 5 frauds).

Understandably, in such circumstances insurers feel it necessary to subject a claim to severe scrutiny. In practice, their stance is often, effectively and illegitimately, to oblige the claimant to prove that there is no fraud. This, of course, is impossible (proving a negative). Very often, payment is deferred for a long time, which causes immense distress to innocent claimants. Remembering that insurance contracts are supposed to bring about peace of mind, this is not satisfactory.

I have not made my mind up on where I stand on the issue of the proposed new term in these contracts. However, loth though I am to take the side of the insurance industry, it does seem to me to be a proposal that is likely to increase thier costs, both on the underwriting side and on the false claims side. I am yet to be persuaded that the gains for policholders are in reasonable proportion.

If you wish to join the discussion, you will have to persuade the list-owner that you are involved in the UK financial services industry in some way (journalists qualify, for example).For more information click here .

In accordance with the requirement of full disclosure of material facts, it is my unfortunate duty to tell you that the list has neither an archive nor (at present) a digest option. Also, list discipline is poor.