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Insurer pays for Flawed Application Form

It is interesting to note that an insurer’s failure to provide for a key exclusionary clause resulted in payment of a claim it initially rejected.

The most recent Short Term Ombudsman Briefcase contains a case study in which the insurer rejected Mr. H’s claim for accidental damage to his motorcycle on the ground that the person riding the motorcycle at the time that the damage occurred was not a named rider on the policy.

Complainant’s Case

In his complaint to this office, Mr. H argued that he clearly communicated to his independent broker that he bought the bike for his son to use to travel to school. He felt that the claim was unfairly rejected as he had made this disclosure to his broker. Mr. H argued that the claim should be settled with an additional excess being charged for his son who was under the age of 25.

Insurer’s Response

The insurer maintained that it had not received any communication from the broker stating that Mr. H’s son was a named rider of the bike. As cover was excluded for any person not noted as a named rider on the policy schedule, the insurer persisted in the rejection of the claim. The insurer requested that the complaint be directed to the FAIS Ombudsman for investigation into the conduct and possible negligence of the broker.

Ombud’s Investigation

The Ombudsman requested the insurer to provide a copy of the proposal form and/or a recording of the underwriting conversation in order to show that the insurer had created a duty on Mr. H to disclose the details of the named riders. The insurer was also required to demonstrate that Mr. H was informed that if he failed to provide the correct details of the named riders on the policy there would be no cover for additional riders of the motorcycle.

The proposal form that the insurer provided did not create a duty on Mr. H to disclose the details of the named riders on the policy. Furthermore, there was no recording of an underwriting conversation as the risk was accepted on the proposal form alone.

Ombud’s Views and Findings

A recommendation was made for the claim to be paid as the insurer had failed to demonstrate compliance with the Policyholder Protection Rules. In particular, Rule 4.3 (i) requires an insurer to provide an insured, prior to the entering into of a policy, with the “concise details of any special terms and conditions, exclusions, waiting periods, loadings, penalties, excesses, restrictions or circumstances in which benefits will not be provided.”

The insurer agreed to settle the claim and deducted the additional excess for the rider being under the age of 25 years. Mr. H accepted this settlement.

I have little doubt that if the case was referred to the FAIS Ombud, as suggested by the insurer, the broker would have been held liable.

One can also ask just how detailed an application form has to be, if all possible exclusions are to be included, and would that mean that the client was informed because it appeared in the application form?
Perhaps the insurer should rather have requested the disclosure information from the broker, rather than suggest that the FAIS Ombud review the matter?

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