Non-disclosure can ruin your life

6 March 2017

Updating our insurance law on unintentional “non-disclosure” would help prevent consumers finding themselves uninsured or uninsurable in future, says Insurance & Financial Services Ombudsman Karen Stevens.

When things go wrong, and you think, “at least I’m covered by insurance”, what if you then find out you’re not covered, because you forgot to tell the insurer something? 

Greta* had that experience - when she signed up for vehicle insurance, she was asked on her application form whether she’d had any previous claims declined. Greta didn’t disclose that she’d had a previous contents claim declined by another insurer.  When Greta’s car was later stolen, her claim was not only declined, but the policy “avoided” (i.e. treated like it never existed). 

About 10% of complaints to the IFSO Scheme involve non-disclosure. “Over 22 years, a constant stream of people have contacted us because their insurance claim has been declined, or their entire policy avoided because they left out information on their insurance application,” says Karen.

“While some cases are clear, and people have deliberately failed to provide information they were asked for, in many cases people unintentionally leave out information, because they have forgotten, or they do not realise it is so important.”

“A review of the law on non-disclosure is long overdue,” says Karen. “Legislation to bring us more in line with Australian and UK law would help protect these consumers who unintentionally leave out information.”

The most common things people don’t disclose are their pre-existing medical conditions, convictions, and claims history. The current law requires a consumer to disclose all information a prudent underwriter would consider “material” to the risk of providing insurance. 

“Many consumers don’t understand what that means,” says Karen. “While insurance policies explicitly state that certain information is required, our real concern, from the complaints we see, is that consumers don’t appreciate that they need to tell the insurer about everything – not just what they think is relevant,” says Karen. “Most consumers don’t understand how dire the consequences of non-disclosure can be.”

If a consumer has a policy avoided, he/she will have to disclose that information on all future insurance applications, which could make it difficult, or sometimes impossible, to get any insurance cover.

Insurers and financial advisers have a key role to play in educating clients about their duty of disclosure, what information is material, and the consequences of failing to disclose.

The Fair Insurance Code applies to general insurance providers which belong to the Insurance Council of New Zealand (ICNZ).  It applies a “reasonableness” test i.e. the insurer’s response to any non-disclosure must be reasonable in relation to what the insured did not disclose.

“However, industry self-regulation is not enough on its own,” says Karen. “Life, health and disability insurers are not part of the ICNZ and are not covered by the Code. Developing legislation to reflect the law in Australia or the UK would mean that all insurance policies could only be avoided when the non-disclosure was deliberate.”

In the mean time, consumers need to understand: if in doubt, disclose. If you fail to disclose material information, at law, there is likely to be no cover.

For more information see our information sheet

Tips for consumers:

  1. Answer all of the questions on the insurance application, even if you don’t think they are relevant.
  2. Contact your insurer if you forgot to include something on the application.
  3. If someone else fills in the insurance application, you must read through it carefully before signing it.
  4. When you renew house, contents or vehicle insurance, tell the insurer about any events (convictions, speeding, accidents, losses, etc) that have happened since the last renewal.
  5. If you can’t remember your full medical history, ask your doctor for a copy of their medical notes, and double-check the insurance application.

Recent non-disclosure cases seen by the IFSO Scheme

Vehicle insurance
http://www.ifso.nz/assets/Uploads/133707-2016.pdf
Ben* bought a car with finance from a finance company, and the finance company arranged Ben’s insurance. When the car was later stolen, Ben’s claim was declined and his policy avoided, because Ben hadn’t mentioned his previous criminal convictions. Ben said he wasn’t asked. The only documentary evidence available was the policy schedule, which showed that Ben had answered “no” to the question about whether he had any convictions.

House insurance
http://www.ifso.nz/assets/Uploads/130524-2015.pdf
When the Brown’s* house was damaged by a fire, Mrs Brown phoned her insurer to make a claim. She mentioned, during the phone call, that a previous contents insurance claim had been declined by another insurer. The insurer then discovered that the Brown’s previous policies had been cancelled. On their insurance application, Mrs Brown had answered “no” to the question of whether they had any previous declined claims or policies cancelled in the past 5 years. Their claim was declined and policy avoided. 

Trauma insurance
http://www.ifso.nz/assets/Uploads/132910-2016.pdf
After John* suffered a stroke, he made a claim under the critical illness benefit of the policy. His claim was declined and policy avoided, as John had not disclosed information about renal function tests and drug and alcohol use when he applied for insurance.

House insurance
http://www.ifso.nz/assets/Uploads/130244-2015.pdf
After Denise’s* house burned down, her claim for the loss was declined and her policy avoided; Denise had not disclosed her ex-husband’s criminal convictions and they were important because he was living at the house.

* Names have been changed for anonymity.