In the second part of his article explaining the complications surrounding insurance policy start dates, Col Fullagar explains how advisers and clients can avoid some common mistakes.
In the first part of this article in a recent issue I considered the legal issues relating to when cover starts under an insurance policy and some of the inconsistencies that can arise as a result.
The second part will look at the how to mitigate the complications created for the adviser and the client.
The complications
The following issues can create potential problems for the adviser and the client: a misalignment between the policy start date (or risk commencement date) on the policy schedule and the legal position start date; and a lack of clarity within the policy document.
(i) Distortion of time-based exclusions
Time-based exclusions, such as the 13-month suicide clause and the three-month trauma exclusion, are generally believed to operate from the policy start date shown in the policy schedule. If this date differs from the legal position, the period during which an exclusion applies may be unclear.
The same situation will apply in regards to the three-year provision under the duty of disclosure that separates the need to prove fraud as distinct from innocent misrepresentation or non-disclosure.
A number of situations have arisen where a difference of a day was critical for determining whether cover applied.
(ii) Adviser uncertainty and credibility
Uncertainty about the precise position in regards to when cover begins can create uncertainty for the adviser, which in turn affects the adviser’s credibility with the client.
The adviser may be faced with choosing between telling the client the legal position, telling them the contractual position, and simply avoiding the problem in the short term by referring the client to the policy schedule.
Naturally, any potential conflict between the dates could make an explanation difficult for the adviser and confusing for the client, which may reflect poorly on the adviser.
Also, the position will not be improved if the adviser simply says the problem is the same for all insurance companies.
(iii) Insurance company exposure
There is also the issue of exposure for the insurer. By using terminology in the policy schedule such as ‘risk commencement date’, the insurer may be giving the client the impression that unrestricted cover does in fact start on that date.
After the policy starts cover is limited by the various exclusions and other restrictions that apply under the policy (ignoring for a moment any conflicts with the start date of the cover).
There has been more than one court case where the ruling went against the insurer and/or the adviser because the client was told that “once the application is accepted or the policy starts, you will be covered”.
The replacing of terms such as ‘risk commencement date’ with ‘policy start date’ would seem more a more appropriate way to accurately represent the position.
(iv) Uncertainty of cover
The potential conflict between the legal (ie, contractual) position and the position reflected in the policy schedule may give rise to uncertainty at the time of a claim.
If an insured event falls upon the cusp of dates, the validity of the claim may be called into question.
There is always the risk that the likelihood of payment in these instances will in part be affected by the size of the claim, the influence or otherwise of the adviser and the involvement of a reinsurer.
This is hardly an ideal position for the client, the adviser or the insurer.
(v) Replacement business
The issue of when cover starts if a new policy is replacing a current contract requires special attention. A case went to court a few years ago where the client had applied for a large amount of trauma insurance that was intended to replace a similar amount of cover in force with a different insurer.
The application was accepted and a new policy issued by the new insurer, but the client did not cancel the existing cover.
Both policies were kept in force with premiums being paid on each.
Several years later the client suffered an insured event.
The original insurer paid the claim but the insurer whose cover was meant to replace that of the first insurer refused to pay on the basis that cover under their policy was contingent on cover being cancelled with the original insurer. In these situations a number of complications can arise, but the main questions to consider are:
- Did the new insurer make it clear to the adviser that cover under their policy did not start until the original policy was cancelled?;
- What did the adviser say to the client?;
- Did the new insurer wait for confirmation of cancellation of the original policy before they issued their policy?; and
- Did the policy conditions for the new insurer contain a clear statement that cover under their policy would not start until the original policy was cancelled?
Procedures in these areas have not always been well policed in the past, and there are no doubt examples of similar situations that are waiting to happen.
To achieve some level of protection the adviser should ensure that if replacement business is being put in place the existing business is cancelled at the appropriate time, which will usually be when the new policy has in fact started.
If the adviser has any doubts about whether the policy being replaced has been cancelled, the client should be advised of the consequences of not doing so (ie, a future claim could be jeopardised).
If it appears that this situation arose simply because of an oversight on the part of the client, the matter should be file noted. If
it appears that a deliberate misrepresentation or fraud has occurred, the adviser should obtain legal advice and possibly inform their broker or the new insurer.
The solution
Insurers are always looking for ways to differentiate their insurance offering in order to capture the attention of advisers so that advisers will in turn recommend their products to clients.
Unfortunately, in striving for new business insurers can lose sight of the importance of providing an environment that does not expose the adviser to unnecessary risk arising as a result of uncertainty about the precise position.
Any uncertainty about when cover starts under an insurance policy could be reduced if:
- There was a consistent approach on the part of insurers regarding the terminology used when referring to the start date of an insurance policy;
- There was clarity within the policy document about what the policy start date in the policy schedule represented; and
- There was appropriate training provided for advisers about when the cover started, and how this could be communicated to clients.
Of course, advisers could reduce any risks by ensuring they have a thorough understanding of the various nuances about when cover starts.
Most importantly, advisers should have administrative procedures in place so that unnecessary delays do not occur during the various stages of the application acceptance process.
Col Fullagar is national manager of risk insurance for RI Advice.
