The devil (and a possible payout) is in the detail

If you are applying for any sort of insurance – be it private medical cover or life insurance – it is important to read the fine print when filling out application forms.

Thousands of people are only finding out when it’s too late that because they did not reveal a seemingly innocent piece of information, their insurer is failing to honour the claim.

In the past five years, the Financial Ombudsman Service (FOS), the industry watchdog, has seen a sharp rise in cases sent to arbitration which involve customers who have taken out policies worth tens of thousands of pounds and been denied payments after failing to disclose a particular item on a medical questionnaire. Last year alone, the ombudsman received 2,000-3,000 such complaints against insurers.

The Association of British Insurers, the industry body, has also received complaints from angry customers who have been denied payments for life, critical illness, income protection and private medical insurance after underwriters argued they failed to properly disclose information in their applications.

In response, the ABI last year asked insurers to revise their application forms for these types of insurance to make sure questions related to pre-existing conditions are pertinent and clear. The changes to applications must be rolled out by insurers in the next few months, according to Jon French, an ABI spokesman. And most insurers, including Norwich Union, Prudential and Scottish Widows have already adjusted their applications.

“We don’t just do these things on a whim. This is the result of an ongoing programme of work the ABI is doing to improve the clarity of these sorts of insurance products and ultimately to increase the number of claims paid and to reduce the instances of non-disclosure of pre-existing medical conditions which have led to claims being declined,” French says.

“This is a big issue for us. We’ve been doing a huge amount of work on it,” says David Gwyer, a spokesman for Norwich Union.

The ABI is not the only group attempting to respond to a surge in complaints about disputes involving non-disclosure agreements.

In many of these cases, Walter Merricks, the financial ombudsman, has ruled in favour of customers, arguing that insurers must pay full claims as these customers were unfairly denied them.

Some examples of cases Merricks has upheld recently include one involving a man diagnosed with lung cancer who was denied a critical illness claim because the insurers claimed he drank more alcohol than was reported in his application. Another involved a woman diagnosed with breast cancer who was also denied a critical illness payout for failing to disclose that she had suffered from back problems in the past.

There is always considerable territory to be debated when it comes to insurance claims, so advisers say it is best to be as detail-oriented as possible when considering what to disclose. Always keep in mind that insurance underwriters are quite skilled at quibbling, they say.

“When in doubt, disclose as much medical information as possible, even if you think it is tangential,” says French of the ABI.

But if you have already taken out cover and your insurer is disputing a claim, your first port of call is to ask your insurer to review your claim. If you are not happy with the outcome, you can take your case to the FOS.

When it comes to deciding the merits of cases involving non-disclosure, the FOS first considers whether the questions an insurer asked about the matter were clear. An attempt is also made to assess whether customers intended to deliberately mislead insurers by failing to disclose information.

If an applicant did not deliberately try to falsify or withhold information, the ombudsman is far more likely to rule that an insurer is required to meet the claim, Merricks says.

But disputes over insurance application forms have even attracted the attention of the Law Society. It will stage a public meeting this month to debate whether the UK should adopt other countries’ standards for claims handling. In the US and Canada, for instance, insurers cannot deny claims if they have been in place for a number of years unless they are verified to be fraudulent.

“The general view is the industry should look at this approach,” says Johnny Timpson, head of protection development and technical support at Scottish Widows. “But the jury is still out on whether it’s the right thing for the UK market as increased claims means that premiums could rise as a result.”

As it stands now, the onus is still on applicants to disclose as many details as possible about any aberrant behaviour and their medical history. Otherwise, you face the risk of having your claim annulled. Alcohol, smoking, depression and drugs are four areas people tend to gloss over in their applications.

“You should be very open and not try to downplay the number of glasses of wine and beer you drink a week,” warns Louise Colley, head of protection marketing at Norwich Union.

In response to new demands from the ABI to make applications simpler, Norwich Union now supplies financial advisers with information packs designed to make sure “they don’t lead customers on” about insurance policies. Scottish Widows has torn up its application forms and replaced them with ones designed to “address customers in plain English”.

“We’ve moved away from using medical terminology. We now say high-blood pressure not hypertension for example and we’ve tried to make these questionnaires as friendly as possible,” says Timpson at Scottish Widows.

Along with rival Prudential, Scottish Widows is also making increasing use of a process dubbed “tele-underwriting” when completing applications. In such a scenario, underwriters call clients to have an informal chat about their medical records. Underwriters say capturing additional information over the telephone can alter their underwriting decisions. “It’s an excellent way of gathering information because it’s more conversational,” says Paul Cowman, head of proposition and market strategy at Prudential.

Timpson reports that the changes introduced in recent months seem to be having a positive effect as the disclosure forms the insurer receives are now more complete than they were previously.

Both the ABI and the FOS expect that the additional steps insurers are taking to clarify their guidelines on disclosure agreements should have a positive impact. But only time will tell whether this will stem the tide of rising complaints from policyholders.