Toolbox: Proof of earnings for income protection

The issue of whether or not an insurance company can call for proof of earnings at the time of an income protection claim has become a highly emotive and somewhat cloudy issue.

Statements such as, ‘We underwrite at new business time not at claim time’ and ‘We have an agreed value policy and therefore do not require proof of earnings’, are typically made by the marketing people within life companies in order to gain a strategic advantage.

Unfortunately, these statements can be somewhat misleading.

In respect of the first statement, every company underwrites at the time of claim. Underwriting is simply the facility to assess a situation.

For example:

n all companies look at the medical position of the claimant and assess the degree of disability;

n all companies look at the claim in line with any exclusions that exist;

n companies look at offsets;

n many companies have the right to look at residence — for example, is the claimant living outside Australia — and employment — was the claimant working full-time prior to being disabled; and

n companies have the contractual right to call for proof of earnings at the time of claim.

Also simply because a policy is an agreed value contract, does not mean proof of earnings cannot be required.

It is becoming increasingly frequent for claims managers to request proof of earnings during a claim.

This is an appropriate claims management tool which should be provided for within the policy conditions and understood and respected by the adviser and claimant alike.

At the same time, claims managers should only request proof of earnings that would be considered ‘contractually reasonable’.

These proofs fall into three categories:

1. Earnings on the application form

Policies are issued on the basis that the questions in the application form have been answered fully and truthfully. This is encapsulated in the duty of disclosure with which the insured must comply.

As part of a prudent claims management protocol, a claims manager can seek validation of any information provided on the application form, not just earnings.

Again, this is a right that all companies have and exercise. To waive it would leave the insurer vulnerable to problems arising from anti-selection.

In line with this right of investigation, for example, financial evidence may be requested from the claimant. The criteria for what might be considered ‘reasonable’ is dictated by the information requested and disclosed at the time of application.

If on the application form, the life insured was required to disclose earnings for the two years prior to the date of application, it would be reasonable for the claims manager to seek confirmation of these two years’ earnings.

An exception would be if this proof of earnings was provided with the application itself.

It would generally not be considered reasonable, however, in this situation for the claims manager to ask for proof of earnings for, say, the three or more years prior to the date of application.

2. Definition of pre-disability earnings

A claims manager can seek validation of the pre-disability earnings that the life insured wants to be used in calculating policy benefits.

If the definition of pre-disability earnings was “the highest average monthly earnings of the life insured for the 12 consecutive months in the three years immediately prior to disability”, the claims manager can appropriately seek proof of the 12 months’ earnings that the life insured wishes to be used under the definition.

The choice of which is the ‘highest’ is up to the life insured; thus it would not be reasonable for the claims manager to require that the life insured provide proof of earnings for all three years.

3. Fraud or misrepresentation

If the claims manager has reasonable grounds for suspecting there is fraud or misrepresentation in regards to proof of earnings during a claim, proofs in addition to the above may be requested.

The key words here are ‘reasonable grounds’.

In these situations, the claims manager should be prepared to discuss the situation with the adviser and/or the client even if the claims manager is unable to give specific details. Keeping people in the dark will not engender understanding and co-operation.

The claims manager must also respect the authority they have in this area and not use it indiscriminately. To do so will not only potentially inconvenience the claimant but could expose the claims manager and the insurer to, at best, criticism and at worst, litigation.

On the other hand, it is not untoward for the adviser and claimant to appreciate that this is a normal part of the claims management process that in effect protects all policy owners, irrespective of whether they are claiming or not.

For this reason, communication and co-operation between the claims manager, the claimant and the adviser is always the preferred option.

The overriding principle here is that all parties to the contract have a duty of good faith and it is necessary for them to operate in line with this.

Col Fullagar is risk marketing manager for Associated Planners Financial Services .