The devil is in the disclosure: making insurance pay

It may seem like teaching your proverbial grandmother to suck eggs, but something as seemingly simple as assisting your client to complete an application for risk insurance could in itself court disaster — for you and your client.

As advisers, you must fully appreciate just how important accurate completion of the application is and what role you can play to ensure that full disclosure is made.

Basically, your role as the adviser boils down to six key steps:

* identify the need for protection;

* ask the client if they can afford not to insure;

* persuade the client they need the protection;

* convince the client they can afford it;

* assist them to make full disclosure; and

* obtain mutually acceptable underwriting.

The first four steps are a simplistic view of the adviser’s role. The fifth step is not so widely recognised. Unless you assist the client in completing the application correctly then the whole exercise, from the time you began prospecting for a sale, may turn out to be a complete waste of time.

The last step — obtaining mutually acceptable underwriting — is also important. Only a small proportion of cases are not accepted at standard rates. Even then, you may still get cover with some modification, either in the form of loading, exclusion or a variation to cover. Selling a compromise to the client is better than no cover.

Financial services companies have no doubt they are in this business to pay claims, but they must be genuine and on legitimate policies.

Firstly, the event must have occurred. Obviously, no one pays out on fraudulent or exaggerated claims.

Secondly, it is no good a client trying to claim on a term life insurance when they’ve had a heart attack. It’s not a genuine claim if it, fairly, does not meet the policy conditions.

Thirdly, the policy must be valid. That is, proper disclosure was made and premiums are paid up to date.

If the adviser ensures full and correct disclosure, then when a claim arises it is more likely to be paid — and everybody wins — the client, their adviser and the insurance company.

Ask yourself how much value a client could add to your business if they are grateful for the insurance you arranged and they refer more people to you because of their story.

Alternatively, how much harder can a client make it for you to obtain leads if their claim is not successful due to a problem when the application was completed?

It has often been said that “any insurance is better than no insurance”. But is it?

All of us have heard or known of someone who lost everything they owned in a house fire or had their car written off, and was uninsured. Is there anything more financially devastating? The answer is ‘yes’ — having insurance that doesn’t pay!

It’s very hard to get into a dispute over the policy definition on a term life claim — you’re either dead or you’re not. However, if anything is going to cause a problem it will be something not disclosed in the application. The same principle often applies with income protection and trauma: a dispute is more likely to be about non-disclosure than about the policy definition.

A client whose claim is rejected looks for someone to blame — and the finger is often pointed at the adviser. In a society that is becoming increasingly litigious, don’t be surprised if the client’s solicitor targets your professional indemnity insurance if their client’s claim is rejected because of something that did or didn’t happen when the application was completed.

So what can you do to reduce the chance of a problem at claim time? The most important thing to remember is that you are a field underwriter, not the chief underwriter.

It’s fairly clear cut that having your appendix removed at age six in 1963 doesn’t need to be disclosed for a term life application. But if you have any doubt about whether a piece of information is relevant, PUT IT IN. No underwriter complains about receiving too much information.

Another practical piece of advice is to get the client to complete the application. They don’t have to complete the whole application; just the questions in the personal statement. That prevents any allegation that you made the mistake of ticking the wrong box.

When gathering information, avoid using leading questions like ‘You’re in good health aren’t you?’. Is the client likely to respond with ‘Well, actually I’m not.’? Instead, use open questions like ‘Tell me about your health’.

If you are going to complete the personal statement for them, ask the questions exactly as they are written. Failure to do so leaves you open to attack from the client’s solicitor that you didn’t ask about that condition.

Answers about income are just as relevant as medical history. Ask the client how they arrived at the income they have just told you. Better still, ask to see pay slips, tax returns, or profit and loss statements, and submit them to the underwriter.

Don’t overlook sports and hazardous pursuits when it comes to income replacement. They can affect the risk and the terms offered.

Be prepared to ask the more personal questions. Women may feel uncomfortable talking about gynaecological problems and men talking about anxiety or depression, but you need to get ALL relevant information.

Nobody should sign any contract without reading it. Give the client time to do this.

Finally, comprehensive file notes are crucial and should be made every time you talk to the client. If there is a dispute later on, accurate and reliable file notes may just save you.

We all know that taking the risk of having no or inadequate insurance can lead to financial disaster for an individual, their family or their business. This is a bitter pill to swallow for those affected. That bitterness is magnified when people think they have made the right plans, only for them to fall apart at the time they need them most.

They will look for someone to blame and it’s not likely to be themselves. It’s most likely going to be you.

Very simply, you have to treat completion of the application as a serious matter.

Michael Richardson is Life Protection Claims Manager atZurich Financial Services Australia .