Blurred vision: the need for clear definitions of own occupation TPD

Total and permanent disability (TPD) insurance possibly receives more criticism than any other in the suite of risk insurance products.

‘It’s a waste of money.’

‘The insurance company never pays claims and even if they do, it is only after many months of endless requirements and arguments.’

‘It is simply too dangerous to recommend.’

However, some years ago with the advent of so-called own occupation TPD, many advisers started to breathe a sigh of relief. At last, here was a TPD product that was easy to understand, was likely to pay out and, thus, could be safely represented to clients.

The irony is that because of the way in which the definition of TPD was drafted by the different insurers, it was arguable that while it is theoretically more likely that an own occupation TPD claim will be paid, it is also more likely that misunderstandings and disputes will arise.

As advisers know only too well, the value or otherwise of a recommendation becomes apparent at the time of a claim. If the claim process does not proceed in line with the client’s reasonable expectations, the position of the adviser is put at risk.

What are some of the issues associated with own occupation TPD?

Own occupation

The most fundamental issue of own occupation TPD is what constitutes the ‘own occupation’ of the insured?

In the recent court case of Baneth v Asteron, Supremem, the basis of the dispute was this precise question.

The insured described his occupation as: “An accountant engaged in the conduct of a one-man practice with 900 or so clients. Duties are preparing taxation returns (95 per cent) and performing audit work (5 per cent). Dealing with clients on a face-to-face basis or by telephone, normally working 50 hours or more per week.”

The insurer wanted to assess the claim on the basis of: “An accountant principally (95 per cent) preparing taxation returns and also performing some audit work (5 per cent).”

The court ruled that: “The description suggested by the plaintiffs is too broad and that [of] the defendant too narrow.

“Bearing in mind the … definition, the number of clients and the hours of work per week should not normally be included … In addition, I have come to the conclusion that the methods employed in conducting the usual occupation, which may be capable of variation, should also not normally be part of the description.

“It seems to me, however, that it is part of [the plaintiff’s] usual occupation that he was engaged in conducting a one-man practice.

“Accordingly, I am inclined to the view that his ‘usual occupation’ should be described as that of an accountant engaged in the conduct of a one-man practice preparing tax returns (95 per cent) and performing audit work (5 per cent).”

It is unlikely that many advisers, product developers and claims assessors have been made aware of the circumstances of this case.

This is unfortunate, as knowing the background would enable the adviser to better position the information provided in an application such that the chance of misunderstandings and disputes arising in the future would diminish.

At the same time, while the facts surrounding this case might provide some useful guidance, there is always the chance that a future court dispute could lead to a different outcome if the facts were seen to be materially different.

A possible solution would be for the insurer to provide details of the basis upon which own occupation will be assessed. In this way, all parties could enter into the contract with a clearer understanding of what is and is not covered.

Occupation vs profession

Some TPD definitions draw a distinction between the ‘occupation’ and the ‘profession’ of the insured. For example: “… has become incapacitated to such an extent as to render him or her unlikely ever to be able to engage in his or her own occupation or profession.”

Occupation is defined by the Concise Oxford Dictionary as “… temporary or regular employment, business, calling, [and] pursuit …”.

Profession is defined as “…vocation, calling, especially one that involves some branch of learning or science …”.

The general belief seems to be that this distinction becomes applicable if the insured has a specialist qualification within professions such as medicine, law or accounting.

Is this the intent of the insurer and, if so, is it clear to the adviser and the insured?

If this is the intent of the insurer, is this actually a positive or a negative in regards to the likelihood of a claim payment (that is, is it necessary for the insured to be unable to work as a neurosurgeon and also unable to work within the medical profession in any other capacity)?

Grammatically, the inclusion of the word “or” in the phrase “to engage in his or her own occupation or profession” could be interpreted to mean that the insured must be unable to engage in both rather than either. What is the insurer’s intention and will this be clear to the adviser and the insured?

Length of time in occupation

Is there a set period of time in which the insured must be working in their occupation before it is considered their ‘own occupation’?

The insured graduates as a medical practitioner and the next day suffers an illness or injury that may make them eligible for a claim payment. Most people would want the claim assessment to be based on the ability or otherwise to work as a medical practitioner.

The insured works as a medical practitioner for a number of years and then decides to assist their marriage partner in setting up a bread outlet and starts working as a baker. The next day the insured suffers an illness or injury that may make them eligible for a claim payment. Would the assessment be based on the ability or otherwise to work as a medical practitioner or a baker?

If the suggestion was made that this would be based on the ‘intent’ of the insured to return or otherwise to medical work, how would this intent be assessed, by whom and when?

If a position is agreed upon in regards to own occupation TPD, would this then flow over to the related product of income protection insurance (for example, the insured is totally disabled as a medical practitioner, but undertakes rehabilitation and starts work as a teacher)? The next day, the insured suffers a further illness or injury. Is their ‘own occupation’ now that of medical practitioner or teacher?

Initial any occupation vs fully own occupation

The definition of TPD in part requires the insured to be unable to work for a period of usually six months, and subsequent to that to be deemed to be unable to ever work again.

While for own occupation TPD the basis of assessment of TPD subsequent to the six-month qualification period will be against the insured’s own occupation, the basis of the assessment in the initial six months can differ between insurers.

Some company’s definitions state, “… results in the insured person being disabled and unable to work in any employed capacity for at least six consecutive months …”.

While other definitions state, “… has wholly prevented the person insured from performing the principal duties of his or her usual occupation for a continuous period of at least six months …”.

In essence, the former is initially an any occupation definition, which subsequently reverts to an own occupation definition. The second definition is fully an own occupation one.

One would be more difficult to satisfy at the time of a claim than the other.

Full-time vs part-time

If the life insured is working part-time when the illness or injury occurs (for example, 30 hours per week), is this considered ‘usual occupation’? What about five hours a week?

Does the position alter and, if so, at what point?

What if the insured has more than one occupation at the time of claim?

If one was for 40 hours a week and the other for 10 hours a week, the answer may appear clear.

Would the position be as clear if both were for 25 hours a week?

Paid vs unpaid

If the insured moved into unpaid work (for example, charity or volunteer work), and then suffered a sickness or injury, would this be considered a ‘usual’ occupation?

What about a housewife or househusband?

Changes in occupation

What if the insured changes their occupation or the status of their occupation (for example, from employed to self-employed)?

In this regard, there are a variety of different criteria available within the market:

~ four insurers assess on the basis of the occupation at time of application;

~ one insurer assesses on the basis of the occupation at the time of application, unless the insured has been in their current occupation for longer than 18 months;

~ four insurers assess on the basis of the last occupation engaged in prior to the claim;

~ one insurer assesses on the basis of the occupation engaged in for at least 12 months prior to the claim; and

~ one insurer provides a choice of the occupation at the time of application and the last occupation engaged in prior to the claim.

Are advisers and the insured aware of these differences?

Is there a trigger for the adviser to become aware of a change in the insured’s occupation at the time of a review so the adviser can research the impact this will have on the insured’s ability to claim and advise the client accordingly?

If the insured changes occupations, must they advise the insurer and must the insurer agree to cover applying to the new occupation? What if the insurer does not agree; would the benefit be cancelled or in any other way be affected (for example, cover would only apply in regards to a non-current occupation)?

Employed vs unemployed

If the insured is unemployed at the time of the sickness or injury, what would be their ‘own occupation’?

Would the period of unemployment affect the answer to this question?

How would sabbatical, long-service and maternity/paternity leave be treated?

Some policies state “this cover will cease and we will retain all monies paid for it if you retire from your occupation for any reason other than TPD”.

Does retirement have to be permanent and if so, who will assess ‘permanent’? When? On what basis?

If the insured stopped work because of total and temporary disablement, would their cover be cancelled?

If the insured ceased work, lodged a claim for TPD but the claim was denied, would the contract be cancelled if the insured did not return to work?

If the insured ceased work due to involuntary redundancy, would the contract be cancelled?

Possible solution

Clearly, for the sake of the insured, the adviser and the insurer, there needs to be clarity of intent and coverage, with ideally the two being the same.

Without this, the risk of misunderstandings leading to disputes and dissatisfaction is greatly increased.

A simple solution to these types of problems would be a clear and concise definition of ‘own’ or ‘usual’ occupation within the policy document.

While a definition of this nature would not necessarily provide the desired outcome in all situations it would provide consistency and clarity so that all parties would know what the position is.

If a particular client’s situation is not appropriately covered, the adviser is more likely to be aware of this and thus much better placed to approach the insurer on behalf of the client to have the matter acknowledged and confirmed prior to a claim occurring.

An example, but not necessarily the only one, of a definition of ‘own occupation’ would be: “Own occupation means all ‘gainful’ occupations in which the life insured has been working immediately prior to the date of the sickness or injury causing disability.

“For the purposes of this definition only, ‘gainful occupation’ is any occupation in which the life insured was working:

~ for at least 10 hours a week; and

~ for at least three months.

“If the life insured was working in more than one occupation that meets these criteria, ‘own occupation’ will include all of those occupations.

“If the life insured, immediately prior to the sickness or injury causing disability:

~ was not in a gainful occupation as defined above;

~ was unemployed for at least three months; or

~ was on sabbatical or long service leave, maternity or paternity leave for 12 months or more;

‘own occupation’ will be any occupation for which the life insured is reasonably suited by training, education or experience.”

These timeframes are only examples and are not intended as a recommendation.

It is of course possible to come up with situations where the above, or any definition for that matter, will not provide the outcome the insured seeks, but at least the client and the adviser are more likely to identify this prior to a claim occurring and have the matter clarified with the insurer.

The main difference, and it is a critical one, is that by defining ‘own occupation’ uncertainty and inconsistency is replaced with certainty and consistency.

As mentioned at the start of this article, the questions raised above are only some examples of areas where clarity is lacking in the coverage provided.

These and other questions that may arise should not simply be brushed off with a “they are unlikely to happen”. While some are more likely to happen than others, they all can happen and thus the position needs to be clarified for all parties involved so appropriate protection is put in place.

However, potential problems can only be resolved when those drafting and signing off on policy wording and pricing ensure both are correct.

Licensees and advisers need to be aware of potential problems and ensure insurers are encouraged to provide products that have addressed these issues.

Only by doing this can the hidden traps involved with products such as own occupation TPD be removed.

Col Fullagar is a risk manager at Genesys Wealth Advisers .