Reasonableness on non-disclosure needed

New Zealand needs a “reasonableness test” in insurance law, to guide insurers when they are assessing cases of non-disclosure, the Insurance and Financial Services Ombudsman says.

Monday, July 30th 2018, 6:00AM

by Susan Edmunds

Karen Stevens made a submission on the issues paper for the Insurance Contract Law Review.

She said the existing laws needed an update and the consequences of non-disclosure on customers were often extremely harsh – even in cases where it was not deliberate.

Insurers would often avoid a policy, leaving clients with no insurance and little prospect of replacing it.

She called for the law to include a reasonableness standard to apply to insurers when they were faced with material non-disclosure.

In the meantime, advisers should help their clients understand early on about their duty of disclosure, she said, what information would be material, and what the consequences could be if they failed to disclose.

“We understand that non-disclosure is a common issue for financial advisers, and we know that financial advisers have an extremely important role to play in educating their clients and helping them to avoid the kinds of issues and complaints we see every day at the IFSO Scheme," she said.

"It’s so important for advisers themselves to understand what information should be disclosed, why it is important to disclose it, and the consequences of failing to disclose. At law, non-disclosure is likely to result in no insurance cover, and - if an insurance policy is avoided - it is likely to result in real difficulty obtaining future insurance cover.

"A review of the law on non-disclosure is long overdue. Currently, one way to make change without legislation is to keep encouraging advisers to remind their clients: if in doubt, disclose.”

In one case her office dealt with, a client made a claim for income protection cover because she was off work with Crohn's disease.

The insurer avoided the policy because she failed to disclose she had had a specialist referral for ongoing bowel issues. She never followed through on the referral.

The client said her adviser had only asked if she was currently unwell, and she though the insurer should have looked at her medical records.

IFSO talked to other underwriters, who indicated the failure to disclose was material.

As part of her submission, Stevens also told the review that consumers did not turn their minds to financial advisers' motivations or understand that one might operate differently from another.

Her office saw cases where clients replaced insurance policies and then found they had no cover for a pre-existing condition she said.

Katrina Shanks, chief executive of Financial Advice NZ, also made a submission and said the UK’s model would be a better fit. There, insurers can avoid if there is reckless or deliberate non-disclosure.

Shanks said people did not understand unless there was someone in the middle to help them.

Financial advisers could take people “on a journey of understanding” she said, to build trust in financial services.

Tags: health insurance Income Protection Life insurance non-disclosure