The ABI code of practice on non-disclosure for long-term protection policies

Out-Law Guide | 21 Mar 2008 | 5:08 pm | 6 min. read

This guide is based on the law of England and Wales. It was last updated on 22nd January 2009. The Association of British Insurers (ABI) has upgraded its guidance on the fair treatment of claims...

This guide is based on the law of England and Wales. It was last updated on 22nd January 2009.

The Association of British Insurers (ABI) has upgraded its guidance on the fair treatment of claims for long-term protection policies to the status of a code of practice.

The guidance, which applies to life, critical illness, income protection and other long-term protection insurance products, has proved so successful that the number of complaints referred to the Financial Services Ombudsman (FOS) has halved since its introduction in January 2008.

By promoting the guidance to a code of practice, the ABI hopes to make it clear that all ABI members must follow the same approach when handling claims where the policyholder has failed to disclose relevant information.

The new code has also been extended to apply to non-disclosures made by individual members of group protection schemes, such as employer group life and group income protection schemes, but not to non-disclosures by group scheme owners, such as employers or trustees.

Announcing the changes, Stephen Haddrill, Director General of the ABI said:

”As always, it remains essential for people to answer all questions carefully, to the best of their knowledge and belief, when they take out any protection insurance cover. However, the code means that no-one should ever be worse off as a result of a genuine mistake".

The code of practice, which came into force on 19th January 2009, has been developed in the light of evolving industry practice, current regulations and the Financial Services Authority's TCF (treating customers fairly) initiative.

Like the previous guidance, it goes beyond the strict legal position in many respects. It also shadows some of the proposals for law reform for consumer insurance put forward by the English and Scottish Law Commissions.

Categories

The code categorises breaches of the customer's duty to disclose information as innocent, negligent, or deliberate or without any care.

In each case, the information omitted or misrepresented must be material, in that it would have induced the insurer to make a different underwriting decision. Notes on the typical characteristics of each category are provided as well as some illustrative examples.

An innocent non-disclosure is where the customer acted honestly and reasonably in all the circumstances, including any individual circumstances known to the insurer. In such cases, the insurer should pay the claim in full.

A non-disclosure is negligent if the customer failed to exercise reasonable care. This can range from mere oversight to serious negligence. The test is whether a reasonable person in the circumstances would have known the information was incorrect and was relevant to the insurer. If so, the insurer will apply a proportionate remedy based on what would have happened had the information been disclosed.

In cases where the non-disclosure is deliberate or made without any care, the insurer must be able to show on the balance of probabilities that the customer knew or must have known that the information was incorrect and relevant to the insurer, or that the customer did not care whether it was or not. In such cases, the insurer is entitled to "avoid" the policy - decline the claim and cancel the policy from inception, as if it had never existed.

But if the customer has a credible explanation (and/or there are other credible mitigating circumstances), or if the information omitted was relatively unimportant, the claim should not be categorised as deliberate and a proportionate remedy will apply.

Assessing claims

Before making any judgment on the category of the non-disclosure, the insurer should first ask the customer why the information was incomplete or incorrect.

A customer taking out critical illness cover, for example, who failed to disclose he was taking medication for hypertension and then suffered a heart attack, might genuinely not have considered himself as suffering from high blood pressure because the pills were controlling it and his GP told him the treatment was routine and "nothing to worry about".

A credible explanation might persuade the insurer that the customer was not acting deliberately or without any care. In the above example, the non-disclosure was still negligent because a reasonable person ought to have known the information was relevant to the insurer.

Various other factors also need to be taken into account, such as whether the questions the customer was asked were sufficiently clear and concise. Was an intermediary involved? If so, what was the intermediary's role? Was the customer given a chance to check the answers? Were adequate warnings given about the duty to disclose and the consequences of non-disclosure?

An insurer is fully entitled to ask for any medical or other information needed to assess the claim properly. But it should have legitimate reasons for doing so. The code reminds insurers that the Financial Ombudsman Service will take a dim view of medical evidence clearly obtained without an appropriate reason.

An insurer should, therefore, carefully consider whether it can limit its request to information about specific conditions or to a time period appropriate to the medical condition it has reason to believe may have existed. And it should maintain an audit trail of what it has requested and its reasons for doing so.

Proportionate remedies

The code provides that, when there has been negligent non-disclosure, the insurer's remedy should aim to put the customer in the same position he would have been in had he disclosed the information correctly. The customer should not be left better off than any other customer who disclosed all the relevant information.

This means the insurer must work out as far as possible what its underwriting decision would have been had the information been disclosed at the time the policy was taken out.

If the premium would have been rated and a higher premium charged, the insurer will calculate how much cover the actual premium would have bought and pay that amount.

If the insurer would have applied an exclusion, it will handle the claim as if the policy included that exclusion. Whether or not the claim is affected will then depend on whether the circumstances fall within the exclusion. Even if the claim is payable, it may still be less than the full amount if a premium rating would also have applied.

If the application for cover would have been declined altogether, no policy would have been issued and so the insurer will not pay the claim. In such circumstances, the code requires the insurer to return the premium.

In some cases, the insurer may conclude that the underwriting decision would have been deferred, perhaps until the results of a pending test were known or further investigations were carried out. If so, the underwriter should determine as far as possible what the final underwriting decision would have been and then apply the appropriate remedy.

One of the examples given is of a customer making a cancer claim under a critical illness policy who failed to disclose when he applied for the cover that he was awaiting the result of a test for malignancy of a mole.

Had it known about the test, the insurer would have deferred its underwriting decision until the result was available. But since the test result showed that the mole was perfectly normal, the insurer would have accepted the application and so must now pay the claim in full.

In cases where the insurer would have deferred its underwriting decision indefinitely, or the customer would have been required to reapply for cover at a future date, the insurer will be entitled to decline the claim.

Avoidance

Only where the customer acted deliberately or without any care is the insurer entitled to avoid (cancel) the policy from the outset. But the code confines this remedy to only "the most serious cases of non-disclosure". 

If the customer has failed to disclose medical information, for instance, the insurer must take into account that he may not have fully understood his medical history. Deliberate non-disclosure is more likely to be proved if it is something most consumers would realise was important to the risk (such as a diagnosis of cancer or heart disease) or involves recent or ongoing treatment for something most consumers would recognise as important.

The implications of certain lifestyle choices (such as smoking) are, however, more widely understood. A customer who fails to disclose that he is a heavy smoker "will need to give a particularly credible and convincing explanation" if the non-disclosure is not to be classed as deliberate or made without any care.

If the insurer avoids the policy, the code provides that it should normally return the premium unless there is clear evidence of fraud or a court has found the non-disclosure was fraudulent.

Group schemes

Group protection insurance schemes frequently offer members a certain amount of free cover, for which members are not required to provide any details about their lifestyle or medical history when they join. 

But individuals joining the scheme whose benefits exceed the level of free cover, or who were absent from work through illness when the scheme started, will still need to provide medical and other details.

The new code extends to the treatment of non-disclosures made by such individuals. It also confirms that any non-disclosure by a scheme member should not affect that member's entitlement to benefits up to the limit of applicable free cover. Nor should it affect any other member's benefits under the scheme.

Contact: Bruno Geiringer ([email protected] / 020 7418 7306)

See: ABI code of practice: Managing claims for individual and group life, critical illness and income protection insurance products

See also: Proposals for reform: pre-contract information and warranties, an OUT-LAW Guide