Defining a problem is the first step

Complacency has always been the great leveller. If an organisation is performing well and becomes complacent, before long they are back with the rest again.

However, of greater concern is where a general complacency potentially exists within an industry.

Evidence of this is when we are not continually questioning and challenging what we do and how we do it, even in areas that appear so obvious as to be beyond questioning and challenging.

A good example of this may be some aspects of our attitude to, and understanding of, mental illness within the insurance industry.

Advisers are well aware of the challenges they face when trying to obtain appropriate risk insurance for clients with a past or present history of, so-called, mental illness.

Sometimes, however, the problems do not stop when insurance has been put in place.

Policies may contain clauses excluding or limiting payment if a claim results from a mental illness.

Sometimes, when a claim is being assessed, an undisclosed history of a mental illness may be revealed such that the claim is contested. Even if the claim event itself is totally unrelated, this may result in the claim being declined or the claim payment being reduced.

Unfortunately, not only is this article unlikely to reduce the problems associated with the above, it may even add to them, but at least on this occasion the pendulum may swing in the client’s favour.

A case that went before the American courts several years ago has largely slipped between the cracks, notwithstanding the possibly far-reaching implications of the judgement for the insurance industry.

Background

Jane Fitts, who suffered from bipolar disorder, worked as a solicitor for 13 years with the American firm, Fannie Mae.

Eventually her bipolar disorder was such that she was no longer able to work.

Under Fannie Mae’s disability plan, claimants with a physical disability receive benefits through to age 65. However, shortly after going on claim, Fitts’ insurer, Unum, advised her that benefit payments would end after 24 months because bipolar was a mental disorder and, as such, the claim was subject to a 24-month limitation on benefit payments.

Fitts protested the termination of benefit payments, but the insurer declined to reclassify her condition as a physical disability.

This decision left Fitts with only her social security income on which to survive and, with prescription bills totalling $800 to $900 a month, her financial position was so dire she decided to take the insurance company to court.

Legal proceedings

There were numerous parts to the proceedings, however, the key one which is relevant to this article surrounded the argument about whether bipolar disorder was a mental or physical disorder.

Eventually, on appeal, Fitts had a breakthrough.

The judge noted:

• scientific research has shown that, in some instances, bipolar disorder has a genetic nature, leading to the possibility it could be inherited — that is, it therefore has a physical basis, and in Fitts’ case, her father and brother displayed symptoms of bipolar disorder;

• the disorder may manifest as an abnormal brain scan, in Fitts’ case there was excessive age-controlled atrophy of the left parietal lobe and abnormal wave activity on the left side of her brain; and

• bipolar disorder is a neurobiological disorder characterised by chemical imbalances in the brain, in Fitts’ case she suffered from physical symptoms such as headaches, chest pains and insomnia that were attributed to bipolar disorder.

Supporting Fitts’ position was a professor from the George Washington School of Medicine who stated “bipolar disorder is a physical illness because it is a neurobiological disorder that affects the physical and chemical structure of the brain”.

He also made the point that susceptibility to pharmacological therapy suggested a physical cause.

Finally, Fitts’ psychiatrist maintained that while the clinical features of the disorder are mainly behavioural and emotional, they are due to physical changes in the brain.

Meanwhile, lawyers for the insurer argued that because bipolar is listed on the Diagnostic and Statistical Manual of Mental Disorders (DSM — IV) it must be a mental illness.

However, the judge pointed out that DSM — IV itself suggested that “the distinction between mental and physical disorder is a false one”.

Following on from this, the judge found that bipolar disorder did not clearly fall within the definition of mental illness in the policy document, thus the court was bound by the doctrine of contra preferentum — that is, ambiguous terms should be read against the party drafting those terms; in this case, the insurer.

Implications

While the above ruling was made in the US, and, as such, does not have a direct bearing in Australia, there clearly are indirect implications.

(i) Exclusion clauses

Numerous insurance policies, primarily income protection and business expenses, over the years have been issued with a special provision, not dissimilar to that in Fitts’ policy, limiting benefit payments if the insured is suffering from a “mental or nervous disorder”.

These clauses may now become problematic if claimants mount a challenge similar to that in the Fitts case.

Going further, the problems may not simply be limited to bipolar disorders because other so-called mental disorders may be similarly found to have a physical basis and so be challenged.

(ii) Application questions

The vast majority of applications ask a question along the lines of, “Have you ever suffered from a mental illness or disorder?”

If an applicant suffering from bipolar disorder answered “no” to this question and a claim was subsequently lodged, the insurer would naturally challenge the validity of the policy acceptance either on the basis of materiality or fraud.

What should be a clear-cut position may become blurred. However, if the applicant counter-challenged by saying that, as bipolar was a physical disorder rather than a mental one, in the circumstances their answer was accurate.

Which side would win the debate would depend on many factors, but the point is, the debate should be avoided and the best way to avoid the debate is to appreciate that with advances in medicine and technology, we need to continually look at the questions asked within application forms to ensure they are still appropriate.

(iii) Clarity of wording

When it all comes down to it, clarity of wording is a key element of protection for all parties — the insured, the insurer and the adviser.

Most people, when putting insurance in place, will accept a known position, otherwise they would not enter into the policy. What is aggravating is when an unpleasant surprise descends at the time of a claim.

The Fitts case demonstrates that, in this day and age, insurers cannot afford to take things for granted and become complacent. Even the so-called obvious must be questioned.

Irrespective of whether it is the policy document, the PDS or even the application, the position should be made clear.

For example, if an insurer wants disclosure of mental disorders, and the insurer believes that DSM — IV evidences the full field of what they require to be disclosed, why not ask the question: “Have you ever suffered from a mental illness or disorder, including any disorders listed on DSM — IV?”

Col Fullagar is head of life risk at Genesys Wealth Advisers.