By Andrew Hooker

Why is it that an insurance company can refuse to pay a claim for a heart condition because eight years ago the applicant forgot to disclose a rugby injury?  They are totally unrelated. 

The insurance company would still have insured the applicant, albeit with an exclusion relating to the rugby injury.  So the applicant would still have been covered.

There was a great deal of healthy feedback from the last article on the duty of disclosure and this is no doubt because this somewhat arcane concept is both controversial and complex.

For very good reasons the average insurance consumer just does not understand why an insurance company should be allowed to refuse a claim simply because of an innocent error on application that was unrelated to the claim. 

This is by far the most common tactic used by insurers to avoid paying claims. 

The answer is that centuries old concept called “utmost good faith”. 

Insurance companies live in an almost uniquely privileged position not enjoyed by any other industry. 

Feedback to the previous article (clearly from an insurance company or lawyer) that “It is a fundamental principle of insurance law that the parties to a contract of insurance act with the “utmost good faith” in their dealings with each other” basically sums it up.  The industry, like King Canute still clings desperately to this old mantra. 

So how does all this work? 

It goes something like this:

• When you apply for, renew or amend an insurance policy, you must tell the insurance company anything that might be material to your application or insurance policy;
• How do you know what is material? 
     You try to figure it out and don’t find out if you got it right till claim time.
• How does an insurance company know what is material? 
     Put simply, it is material if the insurance industry says it is.
• Who gets to say what is material? 
     The insurance industry of course.
• What if you forget to tell them something. 
     Sorry, they can refuse your claim even if it was a genuine oversight.
• But what if the claim is unrelated to the oversight? 
     Again, it doesn’t matter.  As long as it is “material” the insurance company can refuse the claim and treat you as uninsured.

In a nutshell, you have to disclose what is material even if you don’t know what is material and the definition of materiality depends on what the insurance industry thinks it should be.

Imagine trying to conduct business in any other area with rules like that.  I want to buy your car, but if I do, and later you decide that I didn’t tell you something you didn’t ask about that only you would know mattered, you could demand a full refund.  Business would grind to a halt.

However on current law, that is how insurance works. 

No wonder the Government is considering law reform to rectify this imbalance.  There is a Bill before Parliament that should help even the balance.  But it’s stalled at the moment as insurance law reform legislation isn’t exactly “cool”.  

Meantime it’s up to consumers to do their best to weave a way through this minefield. 

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Andrew Hooker is a partner in the North Shore law firm Turner Hopkins and a director of Claims Information Specialists Ltd, running an insurance information web site www.claimsinformationspecialists.co.nz

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