Hazardous insurance clauses explained

Col Fullagar takes a look at insurance clauses and explains why insurers need to offer greater clarity to customers.

The catch-cry of too many an insurance client is “the big print giveth and the small print taketh away”.

The reference being made, of course, is to the perceived attitude of insurers to happily take a client’s premium, but when it comes to the paying of a claim the insurer will hold up a well-hidden clause — much like the pulling of the proverbial rabbit out of a hat.

The insurer will feel totally justified because the client was supplied with a policy document, and it is not the insurers fault if the policy was not read — but that is a subject for another article.

The client will feel angry and no doubt will proceed to perpetuate the popular perception as set out above; and so it goes on, with the adviser caught in the middle.

The reality is that even if the client had read the policy document, in some cases the various clauses are so well camouflaged and poorly drafted that the full implications are difficult to appreciate until it is too late — sometimes, it even appears that the insurer does not appreciate the full implications.

These clauses are what could be termed as SANTA Clauses because they Sure Ain’t Nice To A Client. This article will discuss a few examples.

Total disability definitions

Within income protection insurance policies there will invariably be a definition of total disability that is supposed to set out the criteria that must be met in order for the claimant to be deemed totally disabled by the insurer.

The insured would be forgiven for thinking that, net of the claim requirements such as medical and financial information, all the criteria to be satisfied are in the definition.

Generally the definition has three components:

• The insured must be unable to perform certain duties, work a set number of hours, etc;
• The insured must not be working; and
• The insured must be following the advice of their medical practitioner.

But in some cases, SANTA clauses set out other criteria that may well cut across the definition; and to make it even more confusing, the clauses are usually found elsewhere in the policy. For example, there may be wording such as:

“We stop paying (the claim) as soon as the person insured fails to take all steps to return to full-time work if he or she has the capacity to do so.”

In other words, the insured may satisfy the requirements to be “unable to perform one important duty” and “have stopped work” but the eligibility to be paid a total disability benefit might be over-ridden if the insurer does not believe the insured was making every effort to get back to work full time.

The practical application of “taking all steps” is unclear, but it may be that the insured would effectively be forced to return to part-time work as this might assist a gradual return to full-time work. Also, could the insured be forced to return to full-time work in an occupation other than their own occupation?

Another clause:

“We stop paying (the claim) as soon as the person insured refuses to undertake treatment and/or rehabilitation which could be expected to assist his or her return to full-time work.”

Related issues may be somewhat mitigated, but not necessarily fully removed, if “rehabilitation” and “treatment” are defined in the policy.

However, the definition of treatment appears to include that which may be recommended by the insurer’s chief medical officer or so-called “independent medical examiner” — so the treatment recommended may differ from the advice of the insured’s own medical practitioner.

Also, the definition of disability already includes a requirement that the insured is following the advice of their medical practitioner. This calls into question which additional requirements are being added by the inclusion of wording surrounding the “refusal to undertake treatment.”

A TPD claim was recently reviewed after being deferred for 12 months by the insurer.

At the time of the deferral the insurer indicated that the insured was not receiving appropriate treatment even though treatment was being regularly received from the insured’s own registered medical practitioner and psychiatrist. At best, it is doubtful that the policy document supported this action by the insurer.

Care needs to be taken when contractually insisting that treatment be undertaken. There may be situations where treatment has inherent risks and the insured decides they do not want to take the risk, and thus refuses treatment.

There may also be religious or ethical issues and if the insured is forced to undergo rehabilitation there may be flow on implications in the area of “taking all steps to return to full-time work” or the interpretation of “own occupation.”

And finally the following clause:

“You will still be eligible to submit a claim during a period of unemployment providing the person insured is actively seeking employment.”

The phrase “actively seeking employment” is not defined and thus it can be interpreted at the discretion of the insurer. Other insurers avoid this type of subjectivity by, in a different context, stating the insured must be “registered with Centrelink or a recognised employment agency.”

Also, the cause or period of “unemployment” is not clear. Does it include involuntary as well as voluntary unemployment?

Does it include long-service, maternity or paternity leave?

In what context would “actively seeking employment” be interpreted, and what about unemployment caused by a sickness or injury which may or may not render the insured eligible for a benefit payment?

In brief, while the intent of these clauses certainly has merit (ie, the avoidance of malingering) the practical implications are heavily dependent on the way in which the policy is drafted and also the discretion of the insurer and the various claims assessors.

If these things do not appropriately come together, advisers may well be compromised in their ability to provide reasonable advice.

Rights to terminate

The phrase non-cancellable is often used when describing income protection insurance. It is believed to mean that, provided the insured pays the premium within the grace period, policy terms and conditions cannot be altered and policy renewal cannot be refused.

Notwithstanding a policy being non-cancellable, within the policy wording will be set out the basis upon which the insurer has the right to terminate a policy before the normal expiry date.

Standard rights include when the premium is not paid and when the policy owner makes a written request, etc.

There are, however, other rights of termination that should be carefully considered — for example:

“This plan will end when the person insured permanently retires.”

No one would object to a situation where the person insured makes a conscious decision to retire permanently and as a result cancels their policy, but what if:

• The insurer is reviewing a claim and notes that the person insured has not worked for a period of time (a month, six months, a year, longer)? Might this be misinterpreted as having been a permanent retirement, particularly if the person had been self-employed and had sold their business?;
• The insured stops work but has not yet decided whether or not their retirement is permanent?;
• The insured has retired from full-time work but does some casual, part-time or voluntary work?; or
• The insured announces they have retired permanently but things do not work out financially and they decide to return to work but disability arises in the meantime?

Once again, there is a risk of too much generic, interpretative discretion resting with the insurer — which might hinder an adviser from providing appropriate advice.

A better result could well be achieved if the initiative rested with the client and their adviser. They are the only people who can act on an informed basis. If during an insurance review the client expresses a desire to retire, the adviser can counsel them on the pros and cons of retaining or cancelling their insurances now or at some time in the future.

Offsets

Here are a couple of examples of SANTA offset clauses. Firstly in regards to the recovery of offset amounts:

“We may also require you to sign a written undertaking on such terms as we require, enabling us to recover any offset amounts.”

The phrase “on such terms as we require” is unlikely to be reassuring to either the adviser or the client.

Secondly:

“We will agree an offset amount with you. If we cannot agree, we will determine the amount.”

An interesting negotiation! These are hardly words that will comfort the insured.

And finally:

“The insurer will reduce the monthly benefit under this policy if the life insured continues to receive, or is entitled to receive, income or profit from their current or former business whilst on claim.”

Here are some of the issues:

• An offset can be made based on an entitlement. Notwithstanding, there may be a lengthy delay before the entitlement is received and subsequent events may even result in the entitlement not being realised;
• The offset is taking into account income or profit from not only the current but also any former business which may well have been disclosed to, and accepted by, the insurer at the time of application;
• Complications may arise if the adviser had allowed for the potential of ongoing business revenue when calculating the insured benefit amount; and
• There is a real potential for delays in claim payment while necessary proofs are obtained and calculations and possible endless enquiries of clarification are made.

Wording is crucial

Each of the areas of total disability definition, rights to terminate and offsets are core components of all income protection insurance policies.

The presence of clauses such as those set out above certainly calls into question the popular perception that insurance policies are all much the same.

As indicated, the intent of some of these clauses is clear and potentially not unreasonable. Insurers, for the sake of all parties, should be given reasonable contractual powers to mitigate their risk and, in the process, protect the rights of all insured clients.

The problem, however, is that if great care is not taken in how the policy wording is drafted, the full implications of the wording may be unclear and/or too much discretionary power may rest with the insurer and the individual claims assessor.

Of course, if the client disagrees with the way in which an interpretation is made they can always refer the matter to the insurer’s internal complaints resolution group, and then to the Financial Ombudsman or their solicitor.

However, the unfortunate outcome of poorly drafted policy wording may in fact be to double-guess the advice process and even supplant the reasonable rights of the insured. The questions that arise are:

• Should the insurer be able to dictate the type of treatment or simply that appropriate medical advice be followed?;
• Should the insurer be allowed to offer potentially overly generous one-duty definitions of disability that simply require the insured to stop work, but then counter them by insisting that the insured undergoes rehabilitation?; and
• Should the insurer be the one to decide whether or not someone has retired permanently?

If the adviser is acting in a professional and competent way, they will help the client make appropriate choices in regards to ongoing business income and the retention or otherwise of insurance after retirement.

If the adviser is not acting in a professional and competent way, the audit process of the licensee should identify that and take appropriate action.

The complexity of the design of risk insurance policies can make it difficult for an adviser to provide clear and appropriate recommendations. The inclusion of the clauses such as those set out above may make the advice process even more challenging.

This article contains a small sample of SANTA Clauses. There are many more.

Col Fullagar is the national manager of RI Advice.