Andrew Hooker advocates it is high time insurers started following the same rules as the rest of us when we enter into contracts

Andrew Hooker advocates it is high time insurers started following the same rules as the rest of us when we enter into contracts

By Andrew Hooker*

Sometimes representing insured people against insurance companies can be like ground hog day. It is seldom that a new case raises issues that have not previously been considered. Unfortunately, there are a number of old favourites that arise repeatedly. 

A series of three articles will consider the three most common issues, how problems can be avoided, as well as considering actual cases.

There is little doubt that the three most common issues that customers of insurance companies face, leading to refusal of a claim or termination of a policy, fall into the following categories:

  1. The concept of “fraud” in an insurance policy and its consequences for customers.
  2. A breach of the duty of disclosure, and its consequences.
  3. Issues relating to the definition of disablement under income protection type policies.

A brief analysis of over ten years of case work of this type identifies that the above three categories (excluding Canterbury earthquake claims) far exceeds half of all claims considered. 

It is important to understand why the insurance companies are able to monopolise on these issues, given their strangely privileged position.

Utmost good faith

For centuries, the insurance industry has enjoyed a privileged position. Unlike almost all other contracts, insurance companies can treat their relationships with their customers in a special way. 

Whether these principles are right or wrong, it seems difficult to justify why they apply only to insurance contracts and not to other contracts. This disparity is best understood by way of examples. 

If someone sells their car to another person, and mislead the buyer about something that may have affected that person’s decision to buy the car, the buyer will be able to recover damages such as a reduction in the price or a cost of repairs. The buyer is unlikely to be able to cancel the entire contract and return the car. That is because the damages are enough to put the purchase back in the place he or she would have been if the seller was honest. 

These principles apply to most contracts whether they are commercial or otherwise. And it seems to be fair. If I enter into a contract to purchase something, and I am misled, I should be put in the position I would have been if I had not been misled. That will usually be damages to correct the error.

Not so lucky for the insurance company’s customer who purchases an insurance policy rather than a car. That person’s position can be summarised as follows:

  1. The insurance company’s customer must tell the insurance company everything that the insurance company would consider relevant (or in technical terms “material”) by the insurance company when considering the application.
  2. The insurance company has no obligation to assist its customer to ascertain what might be relevant. The customers have to work that out for themselves.

Then, after the insurance company has proven (based on its own evidence) that an innocently non-disclosed fact was relevant, it can treat the entire policy as if it never existed.  To continue the car analogy, it would work something like this:

  1. The person selling a car forgets to tell a purchaser that the car had recently been involved in a minor accident;
  2. The purchaser of the car considers that to be relevant because he would not have paid as much if he had known about the minor accident.
  3. Instead of just getting a reduction of price to the price that he would have paid with knowledge of the accident the purchaser gets to return the entire car and get a full refund.

Why is it that the insurance industry enjoys such a privileged position not available to almost all other contracting parties? This is because the insurance policy has for centuries been referred to as a contract of “utmost good faith”.

There has been significant debate about whether this privileged position should continue, particularly in relation to personal or consumer insurance in the 21st century. Indeed, in countries such as Australia, Parliament has legislated to significantly dilute the insurance company’s privileged position. But there has been little legislative intervention in New Zealand, notwithstanding strong recommendations by the Law Commission for reform legislation. 

Fraud

When most people think of fraud, they think of deliberate dishonesty or even theft. But in the insurance context, as a result of this duty of utmost good faith, fraud has a much wider meaning. No one could condone deliberately fabricating a claim such as in deliberate arson. And anyone who does so should be treated without sympathy. 

But what about the person who misstates the age of one item claimed among hundreds in a genuine claim, or says that he had not been drinking when he had in fact only had one glass of wine? Both of these situations would result in the complete refusal of the entire claim, even if it is otherwise genuine, and likely cancellation of all insurance policies. 

Why is it that unlike the person selling a car who misleads the purchaser about a minor accident, someone who makes a small but deliberate misstatement in the support of a claim loses everything? While any form of dishonesty cannot be condoned, the consequences significantly outweigh the offence. The insurance industry will say that there must be a deterrent too, for example, exaggerating claims. But it is the nature of the deterrent that seems unfair. If someone exaggerates the condition of their car when selling it, except in extreme cases, the purchaser will only be entitled to perhaps reduce the purchase price. 

The insurance company surely should not have any better remedy.

There are a number of actual cases that illustrate the significant unfairness. 

In one case, a middle aged woman with an impeccable claims and insurance history suffered a devastating burglary losing tens of thousands of dollars of jewellery. When being interviewed by an ex-police detective employed by the insurance company, she was asked whether her alarm was armed at the time. There was no requirement under the policy that her alarm be on. But fearing the consequences she stated that it was. In fact, the alarm was not on at the time of the burglary. Within half an hour of the investigator leaving, she realised the error of her ways, and telephoned the investigator to put him right. The insurance company received a report from the investigator and declined the entire claim. Under a contract of utmost good faith, a false statement entitles the insurer to decline the entire claim. This is so even if the true position would have had no effect on the claim. 

In another actual case, a customer had a car accident. He was driving home from a friend’s house after having a glass of wine. He was well under the limit. The insurance company appointed an investigator who interviewed him. Again, under fear of his claim being declined, he said that he had not consumed any alcohol. Investigations confirmed that he had drunk a glass of wine. The insurance company declined the entire claim. Even if he had disclosed the correct position, the insurance company would have had no right to decline.

Another true case was a claimant who suffered a total fire loss to his house and contents. He misstated the age of some of his contents, and got caught. The entire house and contents claims were declined, and he lost everything. Later the bank forced him to repay the mortgage and he was bankrupted. All because of about $100 worth of property.

The above three examples are real cases. They appear to be nothing less than opportunist by the insurance companies. It is not a case of gross exaggeration or deliberate arson.  It is a case of honest people making a stupid mistakes. But the law does not help them, and as the law currently stands, there would be no point in challenging these decisions through the Courts.

It must be clearly understood that there can be no justification or excuse for deliberate fraud. If someone burns their house down or claims to be unable to work when he or she is actually working, there must be no sympathy. 

This is a controversial topic, because most people are naturally honest and resent people who are not. The simple point, however, is why if misstatements should be punished, these principles only apply to insurance contracts and not all contracts. 

The law clearly states that misstatements (even deliberate) in most contracts will not result in total cancellation, and so it must be time for insurance companies to live by the same rules as every other contracting party.

------------------------------------------------------------------------------------------------

*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

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

17 Comments

Given these horror stories of parasitical insurance companies, maybe the best option is to not bother with insurance at all, pocket the premium, save it, be careful and cover ones own losses as best one can. Will work for most; except some house insurance, third party car insurance and health/accident insurance traveling internationally.

Lawyers, famous caped crusaders fighting the good fight for Joe Public. Give me a break.
Insurers should be held to account when they get it wrong, no doubt. But lets not make out like it's suddenly OK to be lying in all our other contract dealings. Try that in a professional business relationship and you'll be in court so fast your head will spin. And calling them innocent misstatements is emotive garbage. People lie every day and if we get caught lying, there are usually consequences. Insurers shouldn't be declining claims if those lies didn't make any difference to the policy but of course Insurers are going to be wary of what you're claiming for if you've literally just been busted telling porkies.

Totally agree. If you lie about something that would otherwise invalidate your claim then you go down. But the three examples above are nothing more than opportunist claim declining.

Didn't you watch Erin Brockovich?

Lawyers can be agents for change.

On the button Kiwislop. Members of the Insurance Council of New Zealand follow the Fair Insurance Code which now requires a reasonable response to non-disclosure by the insured with the test of reasonableness ultimately resting with external, independent dispute resolution services. This test acknowledges and reflects the statutory approach taken in UK and Australia.

Dear me, the article was about claim statements not non disclosure. I think you may have missed the point. But BTW, is that the same Fair Insurance Code that your members say in Court is not legally enforceable?

".. ultimately resting with external, independent dispute resolution services."

Is that code for not the courts?

So, what would prevent you from declining to answer any questions put by the investigator verbally and insist that all questions should be submitted in writing for your response in your own time?
This may allow you to check you response is correct or decline to answer on the basis that the query was not directed at a matter material to the contract. If you say nothing, you do not lie.

They have that covered too. If you refuse an interview they will decline for refusal to assist. T

One example I positively hate is the health question that begins with - Have you ever - the question is unfair on two levels firstly memory, at say 50 you are expected to accurately recall all previous health issues and secondly a relevant illness may have been at an age the insured was too young to understand - chicken pox at 2 or measles, perhaps an adequate answer would be please refer to my Doctor for all relevant information.Next is utmost faith - this is two sided and the Canterbury quakes have illustrated that insurers have not acted in good faith, the courts have failed to address the underlying issue of compensation were this has been apparent and no political remedy in legislation has even been mooted and of course the change in law of requiring EQC to deal with claims in 12 months was removed allowing the unreasonable delay in claims settlement. Most US states have legislation governing claims settlement especially the time aspect with Texas and Florida having fairly draconian laws requiring clean claims settled in a month with interest accruing thereafter and in some instances after a 90 period the insurer cannot dispute the claim and interest continues until payment including accrued interest. Despite such draconian law insurers still exhibit the bad behavior these laws were designed to stop which rather suggests that continuation is more profitable as many insured will give in. I suspect the real reason for delay in Canterbury has been the fact that insurers under estimated the quake risk and as a result premiums/re insurance was insufficient, but rather than accept their error insurers have chosen to be devious and ultimately the core issues will have to be resolved as insurance is the bedrock on which many financial and commercial contracts rely on - I don't want to address the issues of insured derivative contracts like Deutche Bank and doubtless other Banks who have exposure of 3 times the size of the German economy and what would happen if even a modest % of these went bad and insurers were asked to pay up - perhaps ignorance is bliss!!

Although for the time being I have life insurance otherwise known as "Mortgage Protection Insurance" I actually never renewed my house and contents insurance policy not long after the Christchurch Earthquake. Reason being My Monthly Premium was set to double. Maybe not a wise move, maybe my bank hasn't realised either, but I have saved thousands of dollars and have spent the excess money paying my mortgage off faster and maintenance around the house. With my first home, when we had any sudden damage occur such as water coming through the wall. We were told it was gradual damage. Then a water pipe started leaking through the ground also gradual damage. Then when a storm blew over a tree onto our roof breaking a pipe the excess was going to cost us far more than the repairs themselves. I have learnt that Insurance companies are only in it for the money. I am happily uninsured and can highly recommend it "Knock on wood"

I read somewhere that NZ insurance fraud makes up to 10% of claims or over $200m every year.
Imagine how much cheaper all our premiums would be if people didn't see padding out their claims as a victimless crime.
M - does your bank know your house is uninsured? Think you might be in breach of your mortgage requirements.

BTW Andrew - your article is indeed about non disclosure - it's the whole basis of your 'privileged position' argument. To use your own condescending language - Dear me!

Dear me not another insurer misunderstanding my article. I will try to use smaller words in the future. Sorry about that.

Gee Andrew, this is a complete turn around from the advocate of 20 years ago.

However are the cases (car & alcohol, house & client age) you have stated not subject to whether the misstatements are material to the claims? In the event of the glass of wine, would the accident been avoidable if he had not had anything to drink? And did the misstatement of age represent a material shift in the settlement value of the claim?

I agree that these are opportunistic reasons for declinature. It seems the industry has taken a quantum leap backwards in claims handling with most companies taking the stance to look for a way out instead of finding a way to pay.

AMI didn't tell the people of Christchurch when they insured their properties that AMI didn't have enough money to pay in the even of multiple claims by Christchurch people. They should have to pay on ALL these policies regardless due to their non-disclosure. The people of Christchurch could have chosen to insure somewhere else if they knew the truth which AMI with-held from the insured. The time has come for insurance companies to be treated like the dishonest creatures they are.

Sorry wrong spot....

But...insure yourself against theft as a Customer.......it works both ways...

When are we going to reverse the trick of inflating Oil Companies profits, whilst severely deflating the cost of the Raw Product.

I know the Government likes its shares and is taxed heavily, to keep the economy afloat, but surely the economy is motoring quite nicely, so how about the poor sucker, filling the tank.

I know oil and the economy is rigged, but surely ...enough is enough.

Even towns a few Kms apart, are blowing up the price, quite severely. The margins are getting quite astronomical.

So please stop gassing and do not fill the tank, just use yer jalopy a little. That way we can get our message across.......it is not as if some of us have money to burn.....unlike the Government Agencies..and other subsidised ....folk.

What goes up, must come down.....it ain't fair to milk it like a Dairy Farmer.....is it....or is it Not.?.

Please note...only support the lowest common denominator, not the greediest bunch in Town.

http://money.cnn.com/2017/05/05/investing/oil-prices-drop-opec-us/index....