Col Fullagar considers the matters surrounding insurance policy start dates, and explains what financial advisers need to know to ensure their clients are protected.
How many sheriffs in the Wild West bellowed ‘I got you covered’ only to find out later, to their physical detriment, that the cover was not quite in place?
How many financial advisers similarly tell their clients “I got you covered” only to find out later, to their financial detriment, that the cover was not quite in place?
There have been numerous court cases and formal complaints that have arisen because an adviser assured the client that their insurance was in place and fully operative when, in fact, it was not.
The question of when cover starts is fundamental to risk insurance.
The legal position
For an insurance contract to exist, five things are needed:
1. Offer
The offer is represented by the applicant completing and submitting an application form to the insurer, either in a paper-based format or online by way of an e-application.
There have been occasions where an application was completed and the applicant suffered an insured event before acceptance or even receipt of the application and a payment was made.
Liability may apply to:
- the adviser, if they are found to be at fault in delaying submission of the application; and
- the insurer, if the application was in transit to them or was partway through the assessment process and there was no apparent impediment to the application being accepted had the insured event not occurred.
Strictly speaking, the completion and submission of the application does not mean that cover has started.
2. Acceptance
Under the general principles of contract law, a contract is normally not concluded until the offer has been accepted and acceptance has been communicated to the party making the offer.
Insurance acceptance is the domain of the underwriter or the insurer’s online underwriting system. For ‘clean-skin’ cases, the acceptance process is quickly completed; but on occasions additional information is needed before acceptance occurs.
If the application cannot be accepted on the basis submitted, revised terms may be offered, for example, a higher premium or an exclusion clause.
The revised terms may be in the form of a counter offer, which the client can either accept or reject — or it may be in the form of revised terms, which requires the client to reapply on the alternative basis offered by the insurer.
Either way, the duty of disclosure continues, which means that if there has been a material change in the insured’s circumstances since the application was completed, this must be communicated to the insurer.
Any unnecessary delays during the acceptance process caused by the insurer or the adviser can potentially lead to a liability being created if the client is disadvantaged as a result of the delay.
3. Consideration
A contract must be entered into for valuable consideration. In other words, it is not sufficient to just have offer and acceptance only.
Consideration can take several forms:
- the payment of the initial instalment or full yearly premium; or
- the provision of an authority under which the client gives express authorisation to the insurer to have premiums automatically deducted from a particular account or taken by way of a periodic salary deduction or sacrifice.
The provision of a deduction authority would normally suffice as consideration, even if an actual deduction had not been made — as long as there was no apparent impediment to the deduction being made (eg, there were sufficient funds in the account).
4. Intent
This aspect of a contract is not often considered, but it is important nonetheless. When a dispute arises about the formation and the terms of the contract, intent is one of the issues both parties look into closely. The importance of intent is perhaps best illustrated by an example.
An insurer receives an application. It is assessed and the risk is deemed unsatisfactory, so the underwriter declines the application.
The person responsible for advising the client of the application being declined makes a mistake and actually issues a policy document.
By law, there was no intent on the part of the insurer to enter into a contract. The issuing of the policy document simply represented an administrative error and therefore, theoretically, no contract exists. While this may be the strict legal position, this does not preclude the client from contesting it. Influencing factors may be:
- whether there was an extended delay by the insurer in becoming aware of the error and taking corrective action;
- whether the insurer accepted instalment premiums subsequent to the error occurring; and
- whether the client was disadvantaged in any way by the error (eg, were they precluded from obtaining insurance cover elsewhere?).
Complications of intent can arise if an adviser lodges multiple applications with different insurers on behalf of a client, particularly if these applications do not include a premium deposit.
In the vast majority of situations, however, the issue of intent will not be in doubt.
5. Notification
The judge in a court case in 1999 (Summerton and Others v SCIG Life Ltd SASC 121) indicated that a binding contract of insurance would not exist until the insurer advised the applicant in writing of its acceptance of the application.
In that case, the court held that the earliest point in time for the applicant to argue that a contract of insurance has been formed was when written notice of the insurer’s acceptance of cover had been prepared and was ready for dispatch.
The Judge commented: “It is only by that stage that all of the final checks have been carried out to ensure that it is in fact appropriate to issue a policy.”
It is possible, however, that statements made within the policy disclosure statement issued by the insurer or past conduct may cause the insurer to be bound before written notification of acceptance has been prepared.
The policy document
The policy document reflects the terms of the contract and may influence when cover starts. The policy schedule will generally refer to a “policy start date” or a “risk commencement date”.
But there may be no clarification, either in the policy schedule or in the policy itself, about what the date represents.
Is it, for example, the date the application was entered into the insurer’s system, the date underwriting was completed, the date the new business process was finalised or the date the policy was issued?
To the extent there is a time difference between any of the above dates, there will potentially be a difference between the policy start date shown in the policy schedule and the legal date upon which cover will start.
These time differences could be accentuated by public holidays, or by a manual change to the policy start date (to enable a particular premium calculation age to be used or to enable a premium lodgement date to be standardised).
A further complication could be the use of the date of the original underwriting decision rather than the subsequent acceptance date by the underwriter when terms are revised and taken up by the client.
Summary
There are clearly a number of matters that advisers and insurers need to consider that are related to when cover starts under an insurance policy.
The legal position in regards to when cover starts may be complicated by inconsistencies between the start date and the policy document issued by the insurer.
A future article will look at the complications that can arise for the adviser as a result of these inconsistencies, and will suggest some ways to mitigate the associated risks.
Col Fullagar is national manager, risk insurance, at RI Advice.
