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“Non-disclosure” in life insurance

Last night on TV3’s Campbell Live, the host got stuck into Sovereign Insurance over their refusal to pay out a claim. You can also read about this story on Good Returns and on the Chatswood Consulting Blog.

In brief, this is what happened…

A man in his late 40’s who had taken out a life insurance policy with AMP when aged just 18, decided around two years ago to switch his policy to Sovereign. In doing so, he was asked several questions about his health in Sovereign’s application form to which the man apparently did not reply with all the facts. Based on this information, Sovereign replaced his AMP policy with a Sovereign policy. Two short years later and… Houston… we have a problem. The man contracts Cancer and claims on his insurance.

On looking into the circumstance of the claim (as Sovereign is obliged to do when a policy holder claims so soon after taking out the policy) Sovereign discovered that the man did not disclose certain key facts regarding his medical history, in relation to specific questions that were asked.

So Sovereign cancelled the policy and refused to pay the claim.

This is a tragic situation. The man is terminally ill and is not expected to see out Christmas. To make matters worse, he and his partner are destitute (according to the reports) and the bottom has now fallen out of their life insurance cover.

The media have taken a perspective on this story that Sovereign are at fault. They're saying Sovereign should have looked into the man’s medical history before offering the policy. They are also saying that because the omissions that the man made relate to medical history unrelated to Cancer, there is no reason not to pay.

As depressing as this story is, and based on the facts that have been reported, Sovereign have acted correctly in regard to this case. And at the same time, there is a massive learning point that should be highlighted for people buying life insurance. Let me explain…

Why the claim was declined.

A life insurance policy is not a right, or a guarantee. It's a contract between parties.In this case, had the man disclosed his medical history, Sovereign are unlikely to have offered to replace his policy and the man would have remained covered with AMP. By all accounts, the man misled the insurance company in order to get the policy. My understanding is that Sovereign voided the man's policy. This doesn't mean Sovereign have declined to pay the claim... it means they are treating the policy as if it had never existed, because in their view it should not have existed.

What do we learn from this?

People buying life insurance are entering into a good faith contract. It's their responsibility to answer all questions correctly on their insurance application so the underwriter can assess the risk and make a fair offer. It's not the insurer’s responsibility to dig out information and double check all the facts when you make a declaration. The insurance company takes you at your word and then makes you an offer in good faith. If you've disclosed fully on your application, you have nothing to be concerned about, your claim will be honoured.

When in doubt… disclose…

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