Let’s keep the party going

Col Fullagar considers six topical issues advisers in risk insurance need to be aware of, including trauma definition, the timing of the duty disclosure, and the pros and cons of tele-underwriting.

Assistance for those finding themselves socially challenged at parties was initially provided in the article "Let's Get the Party Started" (Money Management: 5 April 2012) in which six surefire, risk insurance conversation starter topics were aired.

In this much-overdue, but possibly not long-awaited, sequel, a further six topical issues are made available to ensure the party not only gets started but lasts well into the night.

Issue 1 — mygov.au: A little known party magnet

Well might it be asked, in what way is registering with mygov.au going to lead to social scintillation?

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At least two opportunities come to mind.

Firstly, subsequent to opening an account, a client can procure an online Medicare report detailing medical consultations and testing for the previous three years.

One of the challenges facing both the adviser and client when completing an application form is recalling, for the purposes of recording, everything that the client knows to be a matter relevant to the decision of the insurer whether to accept the risk and, if so, on what terms. In other words, the challenge is minimising the risk of any actual or perceived failure to meet the duty of disclosure.

A client armed with, and assisted by the adviser to interpret, the above Medicare report may have a great start to the risk reduction process with said report being used as a memory jogger.

A flow-on question might be, is there merit in providing a copy of the report to the insurer when the application is submitted?

Two considerations appear to favour the negative:

• It is not necessarily required to detail all consultations and testing when completing the application form but only those that meet the criteria set out in the Duty of Disclosure, thus provision of a report detailing all might be theoretically contrary to the duty and thus counter-productive; and
• Provision of such a list to the insurer might result in insurer questioning and investigations otherwise unnecessary with the resultant delay adding to the risk of the client being rendered less insurable prior to the policy being entered into. Risk exposure for the adviser may well follow this occurrence.

The second advantage falls out of an increasingly common rumour in the market; i.e. if an insured event occurs relatively early in the policy duration or if the benefit amount is sufficiently large, a mandatory Medicare report going back anything up to five years prior to the policy start date will be requested when the claim is made.

With delay times for paper-based reports of anything between six weeks and six months, a sound suggestion would no doubt be to retain a copy of the initial three-year report on the client file with subsequent reports being obtained at every third annual client review.

By following this protocol, should a Medicare report be reasonably required when the claim is made, provision of it might be all but immediate. Additionally, the report might be accompanied by an analysis which includes an explanation of any items that appear to warrant this.

Coming out of the above, party popularity should be building; if not, the problem may be the party. not the person.

Issue 2 — reality bites in trauma definition

"STROKE — An incident in the blood vessels of the brain or bleeding in the brain leading to neurological deficit that last for at least 24 hours."

Party attendees might reasonably conclude there is nothing wrong as the intent of the clause to date is to exclude so-called transient ischaemic attacks for which, whilst they may warn of an impending more serious event, effects generally last less than 24 hours after which time full recovery results.

The definition continues, however:

"Transient ischaemic attacks, symptoms due to migraine, vascular disease of the optic nerve, physical head injury, reversible neurological deficit or any blood vessel incident outside the cranium, except embolism resulting in stroke, are excluded."

Now full attention is assured as reality bites; whilst neurological deficits lasting less than 24 hours are reasonably excluded, by also excluding "reversible neurological deficit" the definition not only requires the deficit to last for at least 24 hours but it must be irreversible i.e. permanent.

Thus, notwithstanding an insured may suffer a significant neurological deficit lasting more than 24 hours, if that deficit is in full or in part, reversible i.e. there is a degree of recovery, it would seem that the definition is not met and benefit not contractually guaranteed.

As if that was not bad enough, when the matter is raised and explanation sought from the insurer, the less-than-comforting product manager response may well mirror that recently obtained:

"This is a complex medical matter rather than an insurance matter...As I expect you know, our stroke definition is in line with definitions used across the industry...we look to provide cover for our customers where they suffer an illness which is critical...(so) the answer to your specific question is that it would depend on the individual circumstances."

Echoing Neville Chamberlain (30 September 1938), the above response is unlikely to bring “Peace in our mind” and only a Wally would wear it.

Issue 3 — when might an adviser inform a client about the duty of disclosure?

The gathered crowd starts to drift away as the answer appears boringly obvious:

"When about to engage in the application completion process".

A wry smile unfurls as the trap is triggered:

"Yes, but what are the other nine possible occasions?"

The crowd returns and hangs expectantly for the answer:

• If questions are asked by the client when completing the application about whether or not to disclose a matter, this is a perfect opportunity to assist by way of clarifying and reinforcing the duty;
• Prior to signing the Declaration within the application;
• If the insurer offers amended terms, the duty should be reinforced prior to the client completing and signing the requisite form;
• If there are underwriting requirements or whatever that result in completion of the application being delayed, the duty should be reinforced when acceptance of the application is confirmed by the insurer;
• If the insurer requires a declaration of good health prior to final acceptance of the application, once more a reminder regarding the duty prior to signing would be prudent;
• When a copy of the application is sent to the client to check;
• If a policy is changed in some way requiring underwriting acceptance e.g. reduction in the waiting period, the duty of disclosure would apply;
• When a policy reinstatement application is completed; and crucially
• If a policy is to be replaced with another; prior to cancelling the existing insurance that is to be replaced.

Issue 4 — what pragmatic precautions should be taken when replacement business is being considered?

This is the risk insurance equivalent of drink spiking; in the absence of great vigilance, consequences can be dire.

An opening suggestion might be that it is illogical and premature during the completion of the fact find or within the Statement of Advice to notate existing insurance as "to be replaced". A more appropriate notation might be "to be reviewed."

When completing an application, it may still be too soon to similarly notate existing insurance bearing in mind that replacement of business may be dependent on the underwriting terms offered. Thus, more precisely, the notation might be "to be replaced subject to satisfactory underwriting terms".

As an aside, it might assist if insurers amended the application terminology bearing in mind the above.

The nuances of replacement business, however, do not end there.

Some might suggest there is merit in having a concise and consistent way to brief clients about the treatment of existing insurance within the advice process:

• Explain that one component of the advice process is to review the appropriateness of existing insurance;
• As part of this review, the application for the existing insurance will be checked to ensure that nothing within it conflicts with the current information to be disclosed;
• Point out that any suggestion to replace existing insurance will be predicated on new insurance being in place first;
• When new insurance has been confirmed, then and only then will a cancelation letter be sent to the client to sign;
• With the cancelation letter will be a reminder to the client about the duty of disclosure and a request for confirmation or otherwise that nothing has occurred between application completion and "now" that requires disclosure;
• If, and only if, no additional disclosure is required, should the client sign and return the cancelation letter to the adviser for on-sending to the insurer; and
• If additional disclosure is deemed to be warranted, the adviser will assess and discuss the position with the client prior to any further action being taken in regards to the existing insurance.

And of course, the adviser would ensure that the client is fully briefed about the loss of protection under Section 29(3) of the Insurance Contracts Act (1984). This loss results to a greater or lesser extent in all circumstances even if existing insurance has been in force for less than three years, as in this case the loss is reflected in the fact that the existing insurance is closer to being in force for longer than three years than any new insurance.

Issue 5 — prior to signing anything, what advice should be provided to the client?

The temptation is to respond with "make sure you read what you are about to sign", but there are two immediate issues that come to mind:

• How many clients actually take this advice and, is the protective benefit of giving the advice lost if the adviser witnesses it being ignored?
• Even if a client read prior to signing, would they fully comprehend the implications of what they read?

Bearing this, and the importance of informed clients in mind, it would seem that more might be necessary.

This imperative is even greater when a study is made of something that is oft signed; the application declaration. One declaration was carefully studied and the following became evident:

• Consent was given for the insurer and its banking parent to send the insured information about its products and services; all of them, not just the insurance ones;
• Confirmation was given that the product disclosure statement had been received and the duty of disclosure had been read AND understood;
• Consent was given in two separate sections of the declaration for the collection, use and disclosure of personal information in line with the insurer's privacy policy; which arguably should also be read;
• Authority was given for the adviser to have access to the insured's personal information;
• If the insured failed to attend for an arranged medical examination, they could be liable for the associated costs;
• Confirmation was provided that disclosure within the application had been made in line with three disclosure responsibilities that were materially different to the duty arising out of Section 21 of the Insurance Contracts Act (1984);
• Agreement was provided that, if existing insurance was noted as "to be replaced" but it was not replaced, a claim offset would apply to the extent of the existing insurance;
• Confirmation was made that insurance applied for would not become effective until the application was accepted "in writing";
• If the policy owner was to be a trust/company, confirmation was provided that capacity and authority existed; and
• Confirmation was given that the insured was not receiving or eligible to receive benefits under any life insurance policy or compensation scheme.

Thus, in response to the question, prior to the client signing anything, the adviser should be aware of the contents of what is being signed so the client can be informed in a way that will facilitate comprehension and signing on an informed basis.

As an aside, the above applies equally to the signing of "authorities" with an additional suggestion; notate the authority with a used-by date i.e. "This authority is only valid for 12 months from the date of signing".

Issue 6 — tele-underwriting; risk mitigation or not?

The relative merits or demerits of tele-underwriting as a way to facilitate the application completion process may well be sufficient to keep a party rocking all evening.

Some one-liners that might be tried:

i) What is the purpose of the application completion process? Arguably it is the process by which data is collected from a client such that the best possible terms and conditions and the lowest premium rate can be obtained plus the chances of problems at the time of claim associated with the duty of disclosure can be mitigated.

The question thus becomes, is tele-underwriting the best way to achieve the above?

ii) The adviser's and their staffs' primary responsibility is to the client whereas the tele-underwriter's is to the insurer.

Is it possible that a position of conflict may arise out of these diametrically opposed responsibilities?

iii) The duty of disclosure requires the client to disclose that which they, or a reasonable person in their circumstances, knows to be relevant to the acceptance of the risk.

Thus, for example, whilst a particular circumstance may exist, advice from the treating doctor may lead the client to reasonably believe it is of no consequence and thus, within the confines of application completion, not requiring disclosure.

Is it possible, however, that under the coaching of the tele-underwriter, a client may disclose this information leading to insurance being denied, loaded or excluded? If this occurred, could any responsibility fall back on the adviser? (P.S. For the skeptic, occurrences of this have been recorded).

iv) Prior to referring a client to tele-underwriting are there safeguards and warnings that might prudently be passed on by the adviser such that the client is better prepared for the process?

In this regard, is there merit in the adviser sitting in on a tele-underwriting call so advice can be provided in the future on an informed basis?

v) Is tele-underwriting equally appropriate or inappropriate for all clients and all adviser businesses?

vi) Setting aside the matters of time and cost savings for the adviser, is the main merit of tele-underwriting a perception that it removes in large part any risk exposure to the adviser coming out of the application completion process?

Does this render redundant all the above?

Conclusion

By now the party has no doubt entered the wee small hours and those gathered around, whilst energised are also mentally exhausted. It is time to depart the scene, assured that the airing of the above risk insurance related issues has turned the not-so-party-animal into an A-listed invitee for future events.

Col Fullagar is the principal of Integrity Resolutions Pty Ltd.