Insurance lawyer Andrew Hooker on how to make sure your insurance broker or financial adviser doesn't pocket more of your money than they should

Insurance lawyer Andrew Hooker on how to make sure your insurance broker or financial adviser doesn't pocket more of your money than they should

*By Andrew Hooker 

The insurance industry enjoys an extremely privileged position when it comes to walking away from a binding contract. This is because, despite recommendations by the Law Commission to the contrary, insurance companies can still “avoid” – or treat as if it never existed – an insurance policy if the customer fails to tell the insurance company something the insurance company thinks it should know. 

As crazy as this sounds, that is what we know as the duty of disclosure. 

If an insurance company decides for whatever reason that its client has not disclosed what the insurance company deems to be a material fact when applying for or renewing a policy, the insurance company can treat the policy as if it never existed. The problem with this old legal right bestowed upon insurance companies in the 18th century is that:

  1. The insurance company can avoid the policy even if the non-disclosure is completely innocent because the insurance company gets to decide what facts are material; and
  2. There is no requirement for a connection between the allegedly non-disclosed material facts in the circumstances of the claim that usually gives rise to the attempt to avoid the policy by the insurance company. In other words, if you had an income protection policy that provided a payment of a benefit should you be unable to work, but failed to disclose bout of, say, depression, the insurance company could avoid the policy and get out of paying if your claim related to an unrelated broken neck.

This old English legal privilege arose from the early days of insurance in the 18th century, largely relating to large marine and commercial insurance policies. But the law always required that if the insurance company decided to “avoid” the policy, it would have to refund the premium. That of course is common sense because it is treating the policy as if it never existed and therefore cannot keep the premium for a policy that never existed. So the consolation prize was that at least you got your premium back if the insurance company avoided the policy.

This old fossil of insurance law still exists today. The Law Commission recommended years ago that it be severely diluted, because it is grossly unfair, particularly in consumer insurance. But Parliament has not taken steps to implement the changes recommended by the Law Commission. 

It gets worse. The life insurance industry often pays gigantic up front commissions to insurance brokers. Often the commission paid to an insurance broker can be as high as 200% of the premium. Did you know that if you bought an income protection policy or a disability policy with a premium of $3,000, that your financial advisor or insurance broker may be getting paid as much as $6,000 up front by the insurance company for putting the insurance with that company? 

But here’s the catch. Recently, some insurance companies have started including in their policies a clause by which they reserve the right to deduct what they call “costs and expenses incurred in connection with the policy or the claim” from any refund of premium you might be entitled to. If, therefore, after two years you go to make a claim and the insurance company decides to avoid the policy based upon some alleged non-disclosure, you should be entitled to have your premium refunded. The insurance company may, in reliance of this piece of fine print, retain a few dollars to cover its administrative costs. But no. The insurance companies are treating these gigantic commissions as “costs and expenses incurred in connection with the policy or the claim” and deducting them from any refund of the premium. 

So if the up-front commission paid to the insurance broker is 200% of the initial premium, you are never going to get a refund because it’s always going to be gobbled up by the alleged "costs and expenses incurred in connection with the policy or the claim”. 

That creates a somewhat unusual and disturbing situation. The insurance advisor who is meant to be representing your interests, gets paid a gigantic commission by the insurance company. But when your policy is avoided a year or so later, you lose all of your premium and he or she gets to keep the commission for the policy that was useless anyway.

This practice is a recent development and not all insurance companies follow it.  But it seems to be grossly unfair that if you are going to be penalised by the avoidance of your policy, the person who was paid to advise you on that policy gets to keep his or her commission when you don’t get your premium back.

It would seem fair that if your policy is “avoided”, the broker should pay back his or her commission for a policy that was essentially useless.

People who are arranging insurance through an advisor need to check with the advisor about this point. Then, you need to consider whether you want to enter into a contract with an insurance company that pays its advisor a gigantic commission and then, when it hangs you out to dry at claim time, looks after the advisor but not the customer.


*Andrew Hooker is the Managing Director of Shine Lawyers NZ Limited practices as a specialist insurance lawyer in Albany on Auckland's North Shore. He also runs an insurance information website - www.claimshelp.co.nz

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The statement about the adviser retaining commission after a policy is voided is untrue. To the best of my knowledge, the insurer claws back the commission if and when a policy is voided.

There are claw back arrangements in insurance policies if the client lets the policy lapse, switches to another provider or the policy is cancelled. If this happens within the first 2 years of the policy being enforced there are clawback provisions and many advisers are billing their clients for the amount of the clawback claimed if the client instigates the switch or does not keep up to date with premium payments.

Anectdotal evidence suggests mortgage brokers do the same thing if the mortgage loan is paid back early and the loan provider claws back commission paid.

 

@ Craig Simpson. Mortgage brokers/advisers receive a brokerage which can be clawed back by the lender if the loan is partly or entirely repaid within 27 months of settlement. The clawback is 100% if the loan is repaid - either partly or entirely - within the first 6 months of settling. With some lenders the entire commission is clawed back if the loan is repaid in part or entirely within the first 12 months.The claw back is then staggered over the next 21 months. Yes - brokers do bill clients for the loss of commission in the event of a claw back and this is discussed with clients at the very outset. Clients are aware of the level of commission earned by a mortgage adviser and are also aware of the potential for claw back if they move their loan within the 27 month period.

Banks are giving a cash contribution to their customers when new mortgage business is written. The bank claws back the cash contribution - either entirely or a part of it - if the loan is repaid within 24 months, in some cases 36 months. An agreement is signed between the bank and borrower either prior to OR at the time of settlement. If the cash contribution is a smaller sum - banks may -at it's discretion- not insist on a cash contribution agreement. In any event, if the customer moves the loan away - the banks ensure their interest is protected at all time. The mortgage broker community too has to protect it's interest - especially in the face of claw backs that banks ruthlessly enforce.

Sorry to burst your bubble but it is true. These are actual cases and i choose not to name the underwriters involved. However it is a practice that I have come across in recent times. I have no idea whether the insurer claws back the commission, but they have certainly relied on the commission paid as a reason not to refund a premium. If the insurer had clawed back the commission (which I doubt) then it is obviously more sinister because the insurer would be double dipping.

Is Mr Hooker really suggesting that, somehow, it is always the broker's fault that the client did not disclose whatever it was that caused the policy to be avoided - and that the insurer is allowed not to refund premiums if it so chooses? As a broker I find that both insulting and objectionable. And as with so many who take great delight in belittling insurance brokers and besmirching our reputation, without any justification, he overlooks the fact that we often do hours of work for people that does not result in any sale. We do not have the luxury of charging an exorbitant hourly rate for every minute we interact with a client, nor does he have to refund his fee if the client changes their mind (for whatever reason) within 2 years of receiving his advice. I could go on but my point is made.

Thanks all for the feedback.

I am not suggesting for one minute that it is always the broker's fault when a policy is avoided. I have work referred to me all the time from hardworking brokers who go the extra mile for their clients and by far the majority of brokers are hardworking and passionate about their clients.

The article is about insurers not brokers the majority of whom do an amazing job for their clients

I have agents disclose to me that they get commission. Never had them disclose to me the actual dollar amount. That should be compulsory..

Agree KH it should be compulsory. The percentages or dollar amounts are only disclosed via a disclosure statement if the adviser is an AFA. The RFA disclosures are totally unsatisfactory from a consumer perspective - can't wait for the next review of the legislation.

It is not often I say this, but I think Andrew has a point, if the insurer is going to void the policy, then all charges should be remitted back to the (now) non policy holder. The fees and brokerage etc should be the matter for the commercial arrangements between the broker and the underwriter.

I guess where it comes unstuck is where the broker is net rating, and effectively the underwriter does not know what the premium was charged. In that case the broker has to refund.

The suggestion that insurance companies have unfettered power to declare any non disclosed information to be material, is incorrect. Insurers cannot ‘ for whatever reason’ arbitrarily decide whether a fact is material or void the policy simply because they have not been told something they ’think they ought to know’. Instead, they must objectively demonstrate that had the information been disclosed to any reasonable insurance underwriter, cover would not have been offered. The inference they can at a whim void a policy, is nonsense.

The area of non disclosure is always tricky as this story back in 2012 shows

http://www.stuff.co.nz/national/health/7914768/Last-days-spent-battling-insurer

The insurance industry has a total monopoly on what is material. There is no test of what a reasonable person would think is material. That is why the Law Commission recommended reform. So sorry to burst another bubble but what is and what is not material is decided solely by insurers. And my experience is that they stick together.

I work in the insurance industry and I agree that the current law is unfair. The in impact when a claim is declined and policy voided can be huge. Fraud is one thing, but innocent non-disclosure is another.
The law should have been changed years ago as in other countries. In the UK there in new legislation that places the onus on the insurer to seek all the information they need before going on risk. This is something insurers here have not had to do, knowing they can review it at claim time.
I also find the comments about retaining fees as interesting, surely if the policy is voided it is treated as having never existed. They are relying on insurance law rather than contract terms to void the policy from inception, so retaining fees merely confirms that a policy exists?
If clients knew what commissions and fees (some) brokers earned they would be horrified; this law needs changing as well. They should test this by seeking an alternative net + fee alternative.

The number of claims lawyers are appointed to is comparatively small and tend to have various contentious elements so I doubt the legal profession's perspective is representative or proves a significant problem exists. Sure, insurers have got it wrong in a tiny minority of claims I’ve negotiated but my experience is they are always open to being put straight. They have internal review processes where you can by pass the person who made the decision and can have the claim reviewed higher up the chain. The ISO scheme will also review these cases at no cost, if you still believe the insurer is mistaken. My experience of the ISO is that they are fiercely independent and I would not accept any inference they are influenced by insurers when making their decisions. The present material disclosure process is not perfect but the alternatives are equally challenging.

Is there any maximum length of time that cannot be exceeded between an event and making a claim?
E.g. Damage to a car/home, then reporting/making a claim 1 year or so later.
This does not seem to be spelt out to the customer in most information packs etc.