Trust me, I am an insurance company

Financial Newswire’s life/risk expert, Col Fullagar, outlines a case where a client’s back twinges became a pain in the neck when an insurer’s comfort letter gave rise to a succession of uncomfortable outcomes.

A recent and unfortunate incident highlighted the risks associated with trusting a life insurance company. That’s not to suggest they cannot be trusted but rather even if they can, protocols should be put in place on the assumption they cannot.

By way of background ……

Five years ago Betty Bachus applied for TPD and income protection insurance. In the application she disclosed she had been to a chiropractor for a sore back a number of times over the last ten years. The catalyst was poor sitting posture and sitting for extended periods of time in her office chair. Betty was 35 years old, and her occupation was 50% office-based and 50% light manual.

The actual number of consultations were:

• 2008 – 2
• 2015 – 3
• 2018 – 6
• 2019 – 3

The insurer offered cover subject to a Full Spine Exclusion ie “We will not pay any Total and Permanent Disability or Income Protection benefits under this policy for any claim that is caused or contributed to by any disease or disorder of the spine, its intervertebral discs, nerve roots, supporting musculature or ligaments.”

The clause went on …..”We will, however, give consideration to a claim where the medical evidence clearly shows that the claim has not in any way been caused by, aggravated or complicated by any condition associated with the back or spine that was diagnosed, or where symptoms became apparent prior to the commencement of this cover.”

Betty was less than impressed as she did not believe she had a “back condition” but simply experienced some very occasional muscular, middle back pain. Betty spoke to her financial adviser and asked that the insurer be questioned further about how the clause would work in practice. 

The adviser went back to the insurer “Betty needs more clarity on this. For example, if she came off a road bike and broke her spine and ended up in a wheelchair for life, would you invoke the exclusion?”

The insurer sent the adviser a so-called comfort letter that stated in part …….

“It is not our intention or desire to use the clause unfairly and each claim is assessed on its merits and on the evidence available at the time. If in our opinion the claimed condition was in no way associated with, or aggravated or complicated by the pre-existing condition then consideration will be given to payment of the claim …..”

This letter was passed onto Betty who still harboured concerns. She asked the adviser “Would the insurer be willing to review the need for the exclusion clause at some point in the future?”

The insurer’s response “Yes, we can certainly look to review the exclusion once Ms Bacchus is completely treatment and symptom free from any back pain for 2 years ……”

Betty and her financial adviser talked further about what to do and finally Betty decided to proceed with the cover on her understanding that if she remained treatment and symptom free for 2 years the insurer would review and remove the exclusion.

The necessary instructions were issued and the policy started.

Fast forward 5 years to 2024 ………..

Betty contacts her adviser and asks if the insurer could be approached with a view to having the exclusion removed as she has been treatment and symptom free for not only two years but in fact for five years.

The insurer was contacted, and all relevant information provided. The assessment process concluded, and an email sent from the underwriter to the adviser:

“Many thanks for your patience with this case. I have reviewed the client’s disclosures  …… overall, due to the history of back symptoms between 2015 and 2019, mention of seeing a chiropractor since approximately 2009 and (her) occupation …….., we would not be in a position to consider a review of this exclusion.”

The concerning thing for the adviser was not only that there was an unwillingness to remove the exclusion but to justify the decision the underwriter was simply restating the detail as it existed when the application was being assessed; there was no mention of the 5 year period since the policy started during which Betty had been treatment and symptom free.

The adviser contacted Betty and let her know. To say the least, Betty was less than impressed and asked the adviser to go back to the insurer and request a further review.

The matter was escalated to a senior underwriter who was also made aware of the 2019 email committing to a review if Betty was “completely treatment and symptom free from any back pain for 2 years”. The point was made that Betty had reasonably interpreted this to mean the exclusion would not only be reviewed but removed if she satisfied these criteria. It was further put that, to set these conditions, have them met and then not remove the exclusion would arguably be a breach of the insurer’s duty to act in good faith.

The senior underwriter undertook a second review and responded:

“The client took out cover originally with us in 2019. At that time, she advised she had seen a chiro regularly for 10 years. This would have made the client 25 when she started chiro visits. Based on that disclosure and the client’s manual occupation we would not look to review the spine exclusion.”

Of concern was the fact that the response did not comment on the email from the underwriter in 2019 but to make it worse:

• Betty was represented as seeing a chiropractor “regularly” for 10 years which was not the case; and
• The senior underwriter was now indicating that, in effect, had he been assessing the case in 2019, a review would not have been offered. The relevance of this was unclear especially bearing in mind the fact that a review had been offered.

These matters were pointed out to the senior underwriter with yet another request for reconsideration. The response was swift “A promise to review is never a promise to remove. The reason being our underwriting guidelines are agile and regularly change.”

A new dynamic had entered the equation ie the matter of changing reinsurance guidelines was added albeit the 2019 offer made no mention of a review being subject to the then current reinsurance guidelines.

Further, and as an aside, it would seem to have been an easy thing for the insurer to add a few words to the original communication to make it entirely clear that a review did not guarantee the exclusion would be removed.

Back to the underwriter who now responded with an offer of passing the information to a different insurer if Betty wanted to move her insurance. Whilst this may be an option for the TPD cover, subject of course to proper financial advice, it was less so for the income protection because of the APRA mandated changes that had since permeated the IP market.

So where does this all lead …..

As mentioned at the start of the article, the question is not whether insurance companies can or cannot be trusted but rather there is a risk in relying on trust rather than setting in place protocols such that trust is unnecessary.

By way of example, when it comes to reviewing exclusions or loadings, it may be prudent to not only secure a commitment to review but also to drill down to establish and agree on the terms of the review. For example:

• What timeframe must elapse before a review can be requested;
• What conditions must apply during that timeframe such that a review can be undertaken;
• Will the review be made taking into account current reinsurance guidelines or those applying at the time of the review; and
• What conditions need to be met such that the exclusion or loading will be removed.

There are two other relevant and crucial aspects of the review that should be known and agreed upon:

• What information will be requested in order to facilitate the review; and

• Will the insurer look to alter the policy in any other, unrelated way subsequent to the review.

By way of a separate but equally recent case, a client sought to have a health loading reviewed. The insurer insisted on a full personal statement being completed. The outcome was that the insurer offered to reduce the loading but only if the insured accepted the addition of a musculoskeletal exclusion. Needless to say, the two matters were completely unrelated.

It increasingly appears to be the case that insurers are trying to apply the above albeit logically only information directly or indirectly relevant should be quizzed ……. but that for another article !!!

If an insurer is unwilling to drill into the specifics, the choices may be to move forward in trust or give serious consideration to moving forward to an insurer who will drill.

Another matter is the so-called comfort letter. As an alternate should the adviser push to have any necessary and additional wording incorporated into the exclusion clause with two added advantages:

• The additional wording then directly forms part of the contractual obligation rather than being an adjunct to it; and
• If an insurer is relying on an exclusion clause, the onus of proof is on the insurer.

The above might theoretically give rise to an exclusion clause along the following lines:

“The effect of this Exclusion Clause is that no claim shall be payable to the extent that:

• the event giving rise to the claim is directly or indirectly caused by a disease, disorder or condition of the (EXCLUDED AREA), or any treatment, surgery or complications of same; and
• the event giving rise to the claim is directly or indirectly related to the disease, disorder or condition giving rise to this Exclusion Clause.”

As for Betty Bacchus, as at the date of publication the matter remains unresolved ……..

PS Whilst every care has been taken to ensure the essential facts of this case have been accurately reported, the insured’s name and some miscellaneous detail have been altered to retain anonymity for the parties involved.