14 Apr 6 things you need to know about your duty of disclosure
Life and disability insurance is serious business because it is designed to ensure that if you die or become sick or injured, you have the security of knowing that your insurer will pay a claim allowing you to take care of your (and your family’s) future financial needs.
Obtaining life and/or disability cover is not a simple matter of mindlessly filling out a form and sending it through to the insurer, no matter what the ads on TV and radio tell you (don’t get me started on them!).
1. What is my duty of disclosure?
Put simply, it means don’t lie to the insurance company. In proper terms it means that you have a duty to tell the insurance company anything that you know, or could reasonably be expected to know that may affect the insurer’s decision to insure you and on what terms, and/or a reasonable person in the circumstances could be expected to know to be a matter so relevant. For life and/or disability insurance any information that deals with your medical and occupational history are key areas of disclosure.
The golden rule is ‘if in doubt, disclose’.
What is important to note is that for the life and disability insurance that this article pertains to, your duty of disclosure only applies during the application process up to policy issue. Most life and disability policies in Australia are ‘guaranteed renewable’, which means once the policy is in force each year they simply tick over and you are not required to inform the insurer of any changes to your disclosures.
2. Why is the duty of disclosure important?
Because if you get it wrong then you run the risk of not being paid in the event of a claim and causing yourself unnecessary stress at an already stressful time.
A life insurance contract is based upon the premise of “utmost good faith” between the life insurance company and the insured (s13 Insurance Contracts Act 1984). Both parties have an obligation to uphold the terms of the contract. The life insurance company has an obligation to pay legitimate claims that arise under the contract, while the insured has a duty of disclosure when they are applying for a policy. Insurers rely on the duty of disclosure to avoid fraudulent claims.
3. How will the insurer know if I have complied with my duty of disclosure?
Most insurers require that an insured provide authorisation to the insurer to access the insured’s medical records. The authority provided usually permits the insurer access to your medical information at any time. In determining a claim, the insurer will usually obtain the medical records of the insured and cross reference that information with the disclosures made on the application for the policy.
We’ve had cases where due to medical disclosures the insurer has obtained the life insured’s medical records during the initial underwriting process and in obtaining those records other medical information has come to light that was not disclosed by the person applying for cover but that were relevant to the insurers decision to issue the policy.
4. When does the duty of disclosure end?
Once the policy is entered into and the policy issued.
Where a person applies for life insurance cover and, between the proposal date and the date of issue of the policy, additional medical information arises that is relevant to the assessment of the risk of the policy, the insured is required to disclose this new information to the life insurance company.
The duty of disclosure applies again when you make variations to your policy such as increases to cover.
5. What happens if you fail to comply with your duty of disclosure?
The insurer can avoid the claim or alter the terms under which the policy can be claimed. This may mean varying the sum insured or adding exclusions that should have been added had the disclosure been made at application time.
If this situation occurs it is strongly recommended the insured speak with their adviser who can work out next steps such as resolution directly with the insurance company, going to the financial ombudsman or seeking legal advice.
6. An example in action
In regards to point 4 above, where the duty of disclosure applies right up until the policy is issued, let’s say the insured has a medical change during the underwriting process. Where this new information is not disclosed and it is deemed to be material in the assessment of the insurance risk, the life insurance company has the right to avoid a claim (Summerton & Ors v SGIC Life Limited No. SCGRG-97-1630 Judgment No. S121  SASC 121 (26 March 1999)).
In this particular case the insured applied for $300,000 of death cover on 25 March 1995. The insured undertook a medical examination as part of her application on 20 April 1995. On 24 May 1995 the application was accepted on standard rates.
- The policy document was created by the life insurance company on 30 May 1995 and was despatched to the client on 2 June 1995.
- On 21 May 1995 the insured had abdominal pain and experienced blood in her stool after a bowel movement. On 22 May 1995 the insured’s doctor (GP) found swelling in her abdomen.
- On 23 May 1995 the insured’s doctor diagnosed the swelling in her abdomen as a tumour of the kidney.
- On 24 May 1995 the insured’s doctor diagnosed the tumour to be cancerous. The insured died on 29 October 1995.
- The courts ruled that the policy was “entered into” on 2 June 1995. The insured’s duty of disclosure extended up to and including the dispatch of the policy document and accompanying schedule on 2 June 1995.
Based upon the omission by the insured, the life insurance company was entitled to avoid the contract and not pay anything at time of claim.
In summary the duty of disclosure is extremely important and you must be aware of it when entering into a contract of insurance. When completing your application if you’re in doubt about any questions or answers be open with your adviser and they will be able to help you understand what your obligations are.