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the history and development of the ombudsman's approach to non-disclosure

This is an extract from Chapter 4 - written by Melissa Collett, an ombudsman at the Financial Ombudsman Service - of the book, Consumer Insurance Law (Bloomsbury 2013, general editor: Peter J Tyldesley).

The book explains the reforms brought about by the Consumer Insurance (Disclosure and Representations) Act 2012 - in force from 6 April 2013 - and the impact these changes these will have on insurance practice.

The Act reflects the ombudsman's long-standing approach to non-disclosure - as this extract explains.

current approach


The Financial Ombudsman Service sees a significant number of complaints about non-disclosure each year. Such complaints arise across the spectrum of insurance products, including both long-term and general. Typically, non-disclosure arises in life and critical illness insurance as well as motor and household, but also arises in travel, private medical and even pet insurance. Commercial insurance products also give rise to complaints about non-disclosure.

If there is any disclosure element on the application form or in the application process, then this can give rise to allegations by the insurer of non-disclosure, usually at the claims stage. If the insurer denies coverage and the consumer (or small business) believes this is unfair, this can ultimately result in a complaint being referred to the ombudsman service, if the parties cannot resolve their disagreement themselves.

"fair and reasonable"

The ombudsman determines complaints by reference to what is fair and reasonable in all the circumstances, having regard to all the matters set out in paragraph 4.3 above. Ultimately, it is this fair and reasonable jurisdiction which allows the ombudsman to develop approaches which result in fair outcomes in individual complaints even where these depart from the strict legal position.

three-stage approach

The ombudsman's long-standing approach to complaints about non-disclosure is a three-stage one:

  • Was there a clear question, and was it answered incorrectly?
  • Was the insurer induced?
  • What kind of non-disclosure was it?

The rest of this chapter discusses in detail each aspect of these stages.

clear questions and information-gathering

Examining whether a clear question has been asked is all about whether the insurer's information-gathering process is fair. For reasons already explained, the ombudsman does not consider it reasonable to expect consumers to volunteer information, rather it is up to the insurer to ask.

It is recognised that insurers are entitled to seek such information from applicants in order to assess the individual risk they are underwriting. Traditionally insurers use paper application forms to obtain the information they need. The paper application may be filled in by the consumer themselves, or by an intermediary, often during a face to face meeting with the consumer.

Increasingly, however, insurers are using online information-gathering where a consumer is asked a series of questions over the internet and answers are selected via a drop-down list. Often there is little if any space for free text entries. Such applications can be completed directly by a consumer, or by an intermediary using a computer during a face to face meeting.

There are pitfalls and advantages of each of these methods of information-gathering. It is common (and understandable) that insurers often choose the least expensive and fastest method of information gathering. The speed at which a policy can be underwritten and put into force is a major factor in process design. Systems which allow the policy to be underwritten instantly, depending on the information given, are often preferred.

The method of gathering information can be important to the outcome of the complaint. Often the complaint will turn on whether the process was straightforward and clear, or if it was confusing for consumers.

clear questions (and wrong answers)

As explained in the first part of this chapter, the starting point for reviewing a complaint about non-disclosure is whether clear questions were asked. If an insurer wishes to rely on non-disclosure as a valid defence to a claim, it must first demonstrate that it asked the consumer at least one clear question to which a wrong answer was given.

burden of proof

It is up to the insurer to prove on balance that a clear question was asked, and answered wrongly. This reflects the fact that an insurer is relying on non-disclosure as a defence to an otherwise valid claim. The requirement to establish that a clear question was asked is discussed at length below. Equally, the insurer is required to show that the answer was, in fact, wrong, incomplete, or only partially true. Without evidence to show that the answer was inaccurate, misleading or otherwise inadequate, the defence will not succeed.

warnings about the consequences of non-disclosure

Concurrently with the duty of asking clear questions, insurers must also carefully explain the importance of disclosing material facts and the serious consequences of not doing so: the policy may be avoided and the claim refused. This reflects long-established good industry practice as well as current regulatory rules.

However, many application forms that the ombudsman sees do not make this warning prominent enough, and it is just one more sentence in almost an entire page of sentences in 8-point font on the declaration and signature page. Commonly, at least half of the small print on the declaration page concerns data protection, rather than the potentially dire consequences of non-disclosure.

The declaration page usually also doubles as a direct debit mandate form, again which can distract from and dilute the importance of the declaration that the consumer must sign which states: that to the best of the applicant's knowledge and belief, the information included in the proposal is true and correct.

basis of the contract clauses

In the past, insurers often turned the above declaration into a warranty of the contract. This is known as a "basis of the contract" clause. The intended effect of this was to enable the insurer to regard any non-disclosure as a breach of warranty, as well as a breach of the duty of utmost good faith. The remedy for a breach of warranty was to discharge the insurer from liability under the contract from the date of the breach, which in this case, pre-dates the contract.

This effectively gives insurers a double remedy in the event of non-disclosure and is unnecessarily harsh on consumers. To their credit, consumer insurers have largely recognised this, and generally have not sought to rely on basis of the contract clauses. An ombudsman would not regard an insurer's reliance on such a clause as fair. As explained in earlier chapters, the Bill now abolishes such clauses in consumer insurance.

problems with questions

Over the years, the ombudsman has seen many examples of poor questions, or poor application form design, which has led to information needed by insurers not being captured. The ABI has recognised this problem and has issued guidance on application form design, which goes some way towards rectifying the problem, as least in protection insurance.

Common flaws include "memory test questions": "Have you ever suffered from …" which asks consumers to recall episodes of ill health potentially dating back to birth. Other "laundry list" or "catch-all" type questions contain a series of unrelated conditions together: "Do you have any problems with your heart, lung, liver, spleen, digestive system, urinary tract, eyes, ears or nose, or throat, allergies, back pain or spinal trouble?"
Other questions use ambiguous phrases such as "Have you ever had a back, spine or joint disorder?" The use of the word "disorder" in this context connotes something serious and lasting whereas insurers may be simply trying to capture an episode of lower back pain.

Other examples from general insurance are questions that ask the applicant whether they had any claims in the past year, but do not mention losses that did not give rise to claims even though the insurer expects the applicant to disclose this information. Likewise a common question on motor insurance applications, "Do you have any motoring convictions?" may not mention fixed-penalty offences, even though the insurer expects disclosure of this information.

problems with layout

Other problems with applications arise from the layout. Boxes that are too small to capture the extent of information an insurer is seeking are a typical problem. This often leads to under-disclosure of information. For instance, the question "Have you seen your doctor in the past three years?" often has space the size of a matchbox for the applicant who ticks the "yes" box to list all appointments in the past three years (if the question was taken literally).

Clearly, the small size of the box is inviting the applicant to edit their response to include only important or material visits. Just what is important or material to the applicant is, however, very subjective. What seemed a minor symptom or episode at the time can often turn out later, with hindsight, to be the start of a serious illness. In the circumstances, it is arguably unrealistic to expect a layperson to know what doctor's appointments are significant to an underwriter and what are not.

Also some application forms refer the applicant to a blank page at the end of the form where they can provide additional information. Again, this may be unsatisfactory, not only because the instructions are usually in small print and therefore not always noticeable, but also from the point of the view that the information that is provided is very much left up to the applicant's judgment, which does not always match up with what an underwriter is interested in knowing.

problems with face to face interviews

The ombudsman has seen many complaints over the years arising from applications made via face to face meetings with sales advisers. Often set up to arrange a mortgage or a re-mortgage, these meetings can also result in the sale of life and critical illness insurance to cover the mortgage loan in the event that a mortgage applicant dies or falls ill and cannot afford the monthly repayments.

These meetings often take place in banks with mortgage advisers who use a particular insurer's (or reinsurer's) own underwriting system (such as Swiss Re's "Magnum"), which automatically sets up the life and critical illness (or mortgage payment protection) policies. Such meetings can also take place at the office of an independent financial adviser (IFA), or even an applicant's home, as many IFAs conduct home visits.

If the insurance is being sold alongside a mortgage, the insurance is often secondary to the main purpose of the meeting, which is in most cases to obtain a mortgage to finance a house move. The insurance is usually "sold" to the consumer - in other words, the consumer does not ask for the insurance, it is offered to them by the adviser. The consumer (or consumers, as it is often purchased jointly) is encouraged to take out the same level of cover, for the same number of years, as their mortgage loan, often on a decreasing basis, as this is less expensive than level (ie fixed) term cover.

The application process tends to consist of the adviser asking questions from a computer screen, and the oral answers from the applicant are input back into the computer. Tick boxes and drop down lists are widely used to speed up the process and make it more uniform. There is very little scope for free text entries, and often the applicant does not see the questions on screen or written down at all throughout the process.

Depending on the answers given, additional questions may be generated. Equally, if the answers are negative, the additional questions are not posed. This makes the initial questions very important - effectively acting as a "gatekeeper" question for the more detailed questions within the system. However, the "gatekeeper" questions often have the same problems as identified above, ie they can be ambiguous or be "memory test" type questions.

Or there may be too many conditions listed in one question for an applicant to take in when it is being read aloud. Remembering the time pressure both the applicant and the adviser are often under to get the mortgage loan documentation completed within the course of the meeting, one can imagine how the intricacies and nuances of the insurance questions can be sometimes be overlooked, with catastrophic results: if something is missed during the application process and then someone dies, the insurance might not pay out as a result.

After the question and answer session, the consumer is usually asked to sign a declaration page. The rest of the application may or may not be printed out for the consumer to check; the process varies from insurer to insurer. The declaration page usually requires the applicant to give the insurer the right to obtain a medical report from their doctor, and they can tick a box as to whether they wish to see the report before it is sent to the insurer.

The ombudsman says it is good practice for an insurer to inform the applicant that a medical report might not be obtained, but insurers often do not make this clear. Many consumers believe that an insurer will obtain a report from their doctor as a matter of course, and are surprised when this is not the case.

The declaration itself usually states that all information in the form is given "to the best of my knowledge and belief", which has important ramifications, to be discussed in the "innocent" non-disclosure section below.

Face to face meetings as described above are rarely recorded and can often lead to disputes about what was said during the meeting. A common complaint is that a consumer told the adviser about a doctor's visit or a symptom, but the adviser said it was not necessary to disclose, and therefore it was not included or input into the computer system. Alternatively, the consumer says that the adviser asked the question differently than posed on the application system, such as "Do you smoke?" rather than "Have you smoked in the last 12 months?"

Either way, it is very difficult to prove exactly what happened during a meeting, which may have occurred many years previously, in the absence of a recording. Very rarely, the ombudsman may convene an informal hearing where the both the consumer and adviser attend to give oral evidence about exactly what happened during the meeting. But in the vast majority of cases, the ombudsman tries to work out what happened based on the documentation and the written testimony of both parties.

ombudsman, Melissa Collett

ombudsman, Melissa Collett