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 Do Not 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.

Dangerous Medical Records

The April/May issue of Ombudsman News, the bulletin from the UK's Financial Ombudsman Service ("FOS"), contains a case summary (ref. 61/04) of particular interest to me.

A claimant ("Mr L") under a critical illness policy was accused of reckless non-disclosure. Among other things, he had declared that he had not smoked in the 12 months prior to proposing for the policy (although he had been an occasional smoker of cigars just prior to that), whereas the insurer alleged that its investigations showed that he regularly smoked one cigar a day at the start of the 12-month period in question.

It turned out that the insurer's information came from Mr L's own medical records. However, his GP revealed to the FOS

that the computer system on which he entered details of patients' tobacco consumption was unable to record a minimum consumption of less than one cigar or cigarette per day

(emphasis added)

Before going any further, let me send my congratulations to the anonymous FOS case officer who got to the bottom of that story. More than one of his or her colleagues would have assumed that the medical records were more reliable than the policyholder, and would have quickly closed the case by rejecting the complaint.

By coincidence, a case in which I am currently advising raises similar concerns. The policyholder is accused of non-disclosure and I have just received copies of the evidence on which the insurer relies. All of that evidence consists of extracts from the "policyholder's own" medical records. (I put those words in quotation marks because, as is almost invariably the case, the policyholder had never seen these records before.) Some of the most crucial material is contained in a letter written by a specialist to the GP. The letter purports to briefly summarise the policyholder's recent history before going on to record the medical findings. It's unclear where the "history" is supposed to have come from, as it is inconsistent with other records. Despite that, it is what the insurer has chosen to "hang its hat on".

One wonders how often this happens without being discovered.

Drinking Problem ? Tell your Insurance Company

This is what utmost good faith requires, at least in British Columbia.

Michael Thomas of Vancouver firm Harper Grey summarises the factual background thus:

The Insured was a 52 year-old woman who had a long-standing problem with alcohol, but had never been diagnosed as being an alcoholic. She purchased a policy of travel insurance from the Insurer prior to travelling from her home in Vancouver to Denver, USA. At the time she purchased the policy, the Insured made a declaration that she was "in good health" and knew of "no reason to seek medical attention…".

The evidence adduced by the Insurer at trial showed that the Insured had been hospitalised the night prior to making the declaration after she had taken a prescription narcotic while in a state of a gross intoxication. The Insurer denied the Insured’s claim on the basis that she had failed to properly disclose the state of her health at the time the policy was purchased.

On those facts, the decision that the policyholder had failed to make full disclosure is understandable, even if not necessarily immune to criticism.

Note: Michael Thomas's RSS feed is accessible here

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.

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