How fair is Insurance Law when it comes to non-disclosure at sales stage

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Voided Life Insurance policy causes public outcry in South Africa

The public media in South Africa has exploded with fury and emotion this month when a Life Insurance Company voided a policy and declined a claim on the basis of a non-disclosure of a material fact when the Insured took out the policy. This fact had nothing to do with the claim event and it appeared the Insurance Company was looking for a technical point to avoid paying the claim. This is a common accusation which is levied against insurance companies.

The facts of this case were as follows: The Insured wanted to buy life insurance which would provide a benefit to his family on the event of his death. He had diabetes and when asked the question of any existing health ailments, he didn’t disclose to the insurers that he had high blood sugar levels. He was quoted a premium which he accepted and took out the policy. However, had the Insurers known of his high blood sugar issue, they would still have been issued him a policy but at a higher premium.

Subsequently the Insured was shot in a crime incident and died. His distraught wife submitted the claim and in the course of investigating the claim, the Insurer asked for the medical records of the deceased which revealed his high blood sugar. The Insurers advised they would void his policy (effectively they make a decision the policy actually never existed given that he was not honest at the time the policy was taken out) and all premiums would be refunded. Insurance law on this is consistent throughout the English speaking world, stating if the insured lies to the insurer or withholds information which would have been material to the risk, the insurer, when they find out about this are entitled to void the policy and any claim could be declined. It also does not matter that the non-disclosure or misrepresentation has no relevance to the claim (as his high blood sugar had nothing to do with the fact that he died from being shot).

However, this appears to be unjust to the non-insurance public and in a case like this where the crime rate is high in South Africa and he left a widow and children without a pay out, the public outcry was huge.

The radio stations were demanding answers from the management of the Insurance Company as was the Insurance Regulator in South Africa. In law the Insurer acted correctly as the contract would have been entered into at a higher premium rate, but in the court of public opinion, it was viewed very differently. In today’s world insurers are not exempt from the media and public opinion and subsequently due to these pressures, the Insurers gave in and paid the claim. However, it still left them with a double whammy – they received significant adverse publicity in the media and ended up paying the claim anyway. Insurers need to make sure their claims executives can judge at an early stage not just the validity of the claim, but also how the claim may impact the reputation of the company and therefore make commercial decision to protect this.

by Danny Joffe : Chairman of Klapton’s Ethics, Nominations & Remuneration Committee