Truth or Consequences

Are you telling the truth on your insurance application?

The whole truth and nothing but the truth and can it be independently verified?

If not, you are putting into jeopardy your coverage and creating a false sense of security for you and your family. A recent Ontario court ruling brings home the point. There are two separate and distinct parts of insurance law related to non-disclosure. Both are cause to set aside an insurance contract and deem it null and void from inception. (Null and Void – means never existed).

Underwriting is the process of assessing insurability factors and matching them to the pricing parameters set by the pricing actuary. If they match, then the contract is issued based on the published price. If not the price may need to be adjusted or in some cases the application needs to be rejected. This process relies heavily on the answers an applicant gives the insurer to questions on the application. The law and contract terms provide remedies to insurers for inadvertent but significant omissions or misstatements in answering these questions.

One is fraud, which is to make a deliberate misstatement or omission when applying, knowing that to do so benefits the applicant at the expense of the insurer producing a contract which they otherwise would not have done. The other is material misrepresentation. The latter is similar to fraud but without the malicious intent. In other words, the omission or misstatement was made but if was accidental. Fraud is without time limit and can void the contract at the option of the insurer without regard as to when it was discovered. Material misrepresentation has a time limit of 2 years from the date of issue, after which the insurer needs to prove that the misrepresentation or omission on the application was material to the contract being issued in the first place and second that it was made fraudulently.

A 2009 court case in Ontario K. Cheetam vs TD Life Insurance clearly makes this point. The upshot of the case, which will surprise many Canadians, it that the court ruled that material misrepresentation occurred when the life insured applicant, applied for life insurance to cover a line of credit, misstated facts about his health on the application and because of that misstatement, the policy was null and void. This void contract was in spite that the insured died from an unrelated cause. Specifically the misstatement had to do with asthma and cholesterol, while the death was due to brain cancer. The court also noted that if the death had occurred a month later, the 24 month limit would have expired on the material misrepresentation part of the contract and statute, and since there was no clear evidence of fraud, the claim would have stood and be paid.

In my 47 years in the business and having designed a number of the application forms and reviewed thousands of completed insurance applications, many of them completed myself with my clients, I can speak with some authority about the process.

The vast majority of the general public are not fraudsters. The public in general, view their medical history through the clinician’s glasses. Their doctor will couch any diagnosis or treatment discussion to minimize patient anxiety and when symptoms abate, the patient naturally believes either the problem has gone away or never existed. Often, the advisor walking through the questions with an insurance applicant, who brings a bias to the table. After all they are on commission and it is in their best interest to see the insurance issued. Any of the questions may be asked with or without coaching. The coaching doesn’t have to be overt. Body language and tone of voice are often sufficient to elicit the “correct” answer. For example; in eliciting an answer about elevated blood pressure, an advisor may put the question to the applicant this way. “You haven’t had any history of hypertension, have you?” All the while shaking his head sideways. What is the client to say? In other instances, applicants genuinely forget an event, or did not associate a condition with the question.

Other times, a current condition is dismissed as insignificant or non –existent as there are no current symptoms. Seniors are famous for that, especially in buying travel insurance. The omitted something one year and got the insurance, so they assume the insurance company is OK with that. What they don’t realize is that the insurer never even looked at his application with any degree of scrutiny. Travel insurance is processed practicing post claim underwriting. What that means is that they look at the veracity of answers on the application only when there is a claim. If the answers were not accurately stated, the claim is denied.

This is called post claim underwriting. It is valuable for consumers to understand this concept and to have an idea of when it is applied. When you are applying for an individual life, disability, critical illness or long term care insurance, almost always with the benefit of an agent or advisor, the underwriting is done, up front, at the time of the application and the insurer has satisfied themselves that the risk and premium are in harmony. That is not to say that material misrepresentation doesn’t occur and contracts haven’t been rescinded for omissions or errors, but it is less likely that in a post claim underwriting situation. Some of the common products where post underwriting is used are travel health, bank mortgage insurance, simplified or guaranteed issue products where few insurability questions are asked. The chief reason post claim underwriting is utilized is convenience and cost. The application process is less onerous, can be handled with less experienced point of sale personnel. Secondly, there are fewer claims than applications, usually by far, so in post claim underwriting practices you only expend underwriting cost when there is a claim.

So for a best case scenario, when applying for insurance keep these factors in mind.

  • Purchase insurance through an advisor who can guide you through the process.
  • Take your time in considering the insurability questions before answering, and
  • Be specific in your answer, and if you cannot be specific, supply the source for specificity, like you family doctor.
  • Don’t let you advisor sway you from full and accurate disclosure. Don’t be pressured into a quick answer. Lastly.
  • Make certain that your family physician has your medical records up to date and reports from referring physicians are in your family doctor’s files; medication lists are up to date. You have to understand that many agencies may be relying on your doctor’s files when dealing with you. Insurers are but one. The ministry issuing your driver’s license; pilot’s license, health care insurers like the provincial health plans employers in considering you for specific jobs and insurance companies that you apply to for insurance protection. Rightly or wrongly, these agencies rely on the reports on an as is basis, and if it doesn’t match with what you have declared, negative consequences result. So make certain your doctor has all the facts and they are current and up to date.

Remember, it is your life. You are an open book to society whether you like it or not. You have issues a library card to access your book to many people directly or indirectly. Some can get a library card with or without your direct permission. So you need to fully understand, what’s in your book, is it all there and accurate, who has a copy, who has a library card to access your book. This way, good or bad, in referring to yourself, in any context can be verified by looking into your book. We can thank computerization for this open book policy.~


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