The matter of trust

Greg Einfeld

Australians think nothing of insuring their car and their home, but fail to consider the implications of not taking out insurance to cover their ability to generate an income.

One of the ways to encourage more Australians to take out income protection insurance is to have a trusted industry. An industry that people believe will take care of them if an unfortunate circumstance arises and they need to make a claim on their insurance policy, a policy that in many cases they will have been faithfully paying the premiums on for many years.

One of the easiest ways for customer trust to be broken is to fail to meet a customer’s expectations when they most need insurance — at claim time.

Income protection insurance has one objective for clients — to protect and maintain their lifestyle by helping to replace earnings if they become disabled and unable to work due to accident or sickness. Put simply, a regular monthly benefit is provided during total disability and a reduced benefit is provided during partial disability, calculated in proportion to an individual’s partial earnings.

Sounds straightforward, and it should be. However, some insurers in Australia have introduced policy wordings that give them a discretionary ability to reduce benefits if they believe a claimant is ‘capable’ of doing or earning more than they are. This practice is generally described as a ‘claims reduction clause’ or ‘capability clause’, and some insurers have had these in their policies for several years.

One of the problems with these clauses is that they are not standard practice across the industry, which means in some cases claimants who qualify as totally disabled under one policy may be deemed by other insurers to be only partially disabled and therefore receive only a portion of the benefit they expect to receive.

For example, under some policy wordings a claimant who is off work due to a back problem may be considered by some insurers to be ‘capable’ of working half days or at 50 per cent of normal capacity or earnings and can have their benefits cut in half regardless of whether or not they have actually returned to work. Essentially, these clauses enable claim assessors to force a reduction in benefit entitlements for disabled claimants at the discretion of the insurer.

This serious shortcoming in the income protection insurance provided by a number of companies has now been recognised by the main research houses in Australia that are currently downgrading the ratings of insurers that use such claims reduction devices. A body of legal advice supports their downgrading action.

Research house XPlan has recently released a document explaining its rationale behind downgrading insurers who use claims reduction clauses. XPlan’s paper outlines several problems with these clauses including that they:

~ introduce a significant degree of ambiguity and inconsistency into a policy contract;

~provide the insurer with too much discretion as to when they can reduce the claimant’s benefit entitlements based on the amount of income they are capable of earning, penalising claimants who want to return to work but cannot find work; and

~could result in legitimate claims never satisfying the disability requirements during the waiting period.

Overall, XPlan concluded, “There can be little doubt that ‘capability clauses’ are to the detriment of the policyholder”.

The concerning part of this story is that such clauses may have been unintentionally misunderstood by many financial advisers and, therefore, their clients, and in some cases perceived to be providing some sort of additional benefit, as opposed to the reality, which is that they are in fact a means to reduce benefits.

So, how can a ‘claims reduction clause’ be identified? While the wording may vary a little between insurers, product disclosure statements and policy documents should be checked for ‘capacity’ wordings such as or similar to “... if you are capable of working on a partial basis but you are not working then we will calculate monthly earnings based on what you could reasonably be expected to earn if you were working …”.

However, the best way to check is to ring the insurer.

The reality of these clauses is that there is no upside for the customer — they are simply a lever that insurance companies can pull to reduce claims payments.

Customer trust is essential to the future growth of our industry and it is critical that we deliver on our promises, take care of our customers when they need our assistance and ensure policy wordings are as clear as possible so there is no ambiguity about the benefits provided.

Greg Einfeld is general manager of MLC Insurance.