Insurance And Savings Ombudsman - Assessment #6
In this Issue:
Casebook - The Millenium Edition
Income Protection - Mis-selling, or Mistaking the Type of Cover?
A Word on Renewals
When is a Loss not a Loss?
A Reminder to Participants
Casebook - The Millenium Edition
Last year, we published a casebook for the first time. It contained summaries of all the complaints, which had been investigated from 1 January 1999 to 31 December 1999. We are now at the stage of printing the casebook for complaints, which were investigated between 1 January 2000 and 31 December 2000.
The 1999 casebook was well received - to the extent we had to print further copies to meet demand. The feedback we received suggested it was viewed as a valuable tool. Since that publication, we have altered our way of preparing the case summaries, which now include a lot more details about individual complaints, as well as more specific reference to the factors which influenced the final decision, including relevant legislation and case law. Accordingly, we believe the 2000 casebook will build on the basis established by the 1999 casebook to provide, not only an indication of the factors we consider relevant in investigating complaints, but also the foundation for quality decision-making by Participants of the ISO Scheme.
While the ISO strives for consistency in decisions issued by this Office, it is important to recognise that individual case summaries do not set precedents and each case is considered on its facts and in accordance with the law, any applicable Code and good insurance practice.
This year, the casebook is also available on CD-ROM, as well as in hard copy. We have included an order form in this Assessment, which can be posted or faxed back to us. (Please note that each Participant and nominated consumer groups will receive 1 copy free of charge). We look forward to receiving feedback on both the new style of the case summaries and the use of the CD-ROM.
Income Protection - Mis-selling, or Mistaking the Type of Cover?
This Office has considered a number of complaints relating to the issue of whether income protection policies were mis-sold. On 2 particular occasions, the Complainants argued that they believed they were purchasing an Agreed Value income protection policy but, when it came to a claim being made, it was ascertained the policy only provided for Indemnity Value cover. In each situation, the fact the Complainant was in receipt of a benefit from the Accident Rehabilitation and Compensation Insurance Association, meant they received little or no payment from the insurer, due to the benefit being offset against Other Income.
In accordance with normal practice, the policies were arranged by an adviser - in one complaint, the adviser was a tied agent of the insurer at the time the policy was arranged; in the other complaint, the adviser was an independent broker.
When investigating allegations of mis-selling, it frequently comes down to a matter of the Complainants alleging they did not get the type of cover they were led to believe they were purchasing. On the other hand, the adviser (be it an agent or broker) argues that he/she clearly explained to the Complainants, at the relevant time, the nature of the cover being proposed. In this “he said, she said” situation, this Office is only able to investigate on the documentation, because the informal nature of the Insurance & Savings Ombudsman’s investigations prevent us from determining who is the more credible witness. It is usually the case that the proposal notes the policy was not to be for Agreed Value cover and, potentially, there will be illustrations indicating the cover was for Indemnity Value. Moreover, when the insurer has accepted the proposal and has issued a policy document, the nature of the cover is generally explained and would be clear, even on a cursory reading of the document.
The reality is, however, that when people go to an adviser (broker or agent) with the idea of arranging income protection cover, they may not necessarily understand the distinction between Agreed Value and Indemnity Value cover. This can be complicated by a number of factors, including the requirement for the proposer to nominate a benefit amount. If the nature of Indemnity Value cover is not clearly explained, it is understandable that a proposer may believe the benefit amount is the set amount he/she will receive upon making a claim, rather than being the maximum amount payable. Also, while it is noted that many proposals specifically ask whether the proposal is for Agreed Value cover, the fact that it is often the adviser, who completes the proposal (although in consultation with the proposer), means this crucial point may be passed over. (It is appreciated that the declaration in the proposal generally includes an acknowledgement, from the proposer, that he/she has read the proposal and all information is correct).
If an allegation of mis-selling is made against an adviser and the adviser was acting as an agent for the insurer, the insurer will bear the responsibility for the agent’s actions, if it is determined the allegations have foundation. However, even if the adviser is, in fact, an independent broker, it is arguable that section 10(1) of the Insurance Law Reform Act 1977 may apply and deem the broker to be an agent of the insurer, in which case the insurer will still bear some responsibility. Again, however, the determination of whether a policy was mis-sold will come back to the documentation.
Having considered the 2 complaints referred to, we believe it is important for insurers to ensure the nature of the cover being proposed is clearly explained to the proposer, by their advisers. Furthermore, insurers need to give careful consideration to the documentation they issue to the insured, to enable the insured to clearly understand the cover provided. This applies to new policies, when income protection is added to an existing policy and in any subsequent correspondence concerning the policies. This will help to promote good customer relations and makes good business sense, because less time will ultimately be spent on determining what actually happened when the proposal was completed, if a claim is made and the nature of cover challenged. In contrast, if the documentation itself is unclear in respect of the cover provided, an insurer is potentially liable to allegations of misleading and deceptive conduct under the Fair Trading Act 1986. (Refer Case Study 1.)
A Word on Renewals
Consumers are often confused or mistaken about the currency of their fire and general policies at renewal. This confusion can arise from the insurer’s practices and the documentation provided to the insured when the policy is due to be renewed. Most consumers assume renewal is the continuation of their contract and do not realise that renewal means a new contract is formed at the expiry of the original contract.
At common law, the insurer is not obliged to remind the insured that the policy is due to expire, unless provided for in the policy. As a matter of law, it has been established that no positive action needs to be taken by the insurer to lapse a policy. If a policy lapses for non-payment of a premium, then it cannot be cancelled, as the policy no longer exists. However, the reality is that it is good practice for insurers to remind consumers of the expiry date to ensure continuation of business. Many insurers will give a period of grace after the renewal date, within which an insured can pay the premiums and cover is backdated to the expiry date.
Generally, insurers in New Zealand adopt the 2 following approaches to renewal:
1. To send reminder notices up to
the expiry date, informing the insured that the policy will
expire at that date if the new premium has not been paid;
2. The policy is treated as renewed and the premium is backdated when received. If the premium is not received within a specified time, the insurer cancels the policy within the terms of the contract.
The confusion arises for consumers when these practices are not followed consistently, which may lead consumers to believe they have current insurance cover for which the premium remains owing. This is further reinforced if renewal notices do not give a specific date on which the policy will expire, or if renewal notices continue to be sent after the expiry date. Consumers can view these notices as invoices requesting payment for a product already provided.
Complaints to this Office about renewals occur when an insurer will not accept a claim, on the basis that the policy was not in existence at the time of the loss. This type of complaint often arises when consumers believe their insurance policy has continued to exist - a belief which is based on past conduct of the insurer in accepting and backdating a late premium payment. The practice of backdating cover may, in some circumstances, be advantageous to the insured. However, it is of concern when we hear of insurers which will backdate cover when a premium is paid late and no claims have been made, whereas, if a claim has been made, the policy is treated as expired. The doctrine of estoppel may apply in some of these situations.
The courts have held that the backdating of a premium does not amount to a representation for estoppel. However, it is the belief of this Office that other conduct, such as the wording on renewal notices, may amount to such a representation, particularly if cancellation notices have been issued previously when premiums have not been paid for the renewal of policies. This behaviour may also amount to misleading conduct under the Fair Trading Act 1986.
We believe that consumers’ confusion regarding the renewal of their insurance policies can be avoided by clearly worded documentation, reinforced by consistent behaviour by insurers. (Refer Case Study 3.)
When is a Loss not a Loss?
Insurance policies generally provide cover for a “loss”. However, what constitutes a “loss” is rarely defined. What appears to be a fairly simple concept has, in fact, required judicial interpretation. Moore v Evans  1 KB 458 concerned a situation where the insured was unable to regain possession of jewellery stored in a bank, due to World War 1. The court held that “Mere temporary deprivation would not under ordinary circumstances constitute a loss. On the other hand complete deprivation amounting to a certainty that the goods could never be recovered is not necessary to constitute loss.” A “loss” fell somewhere between the 2 states of “temporary deprivation” and “complete deprivation”.
In Holmes v Payne  2 KB 301, the judge affirmed the test used in Moore and explained that “Uncertainty as to recovery of the thing insured is, in my opinion, in non-marine matters the main consideration on the question of loss.” This test has been adopted for New Zealand purposes in the case of EJ Hampson & Others Syndicate 1204 v Mining Technologies Australia Pty Ltd (1998) 10 ANZ Insurance Cases 61-389, where the judge set out the test as “whether, after all reasonable steps to recover a chattel have been taken by the assured, recovery is uncertain”.
Accordingly, it is only if the evidence suggests recovery of the “lost” property is still uncertain, even after all reasonable steps to recover it have been taken, that an insurer can be satisfied that a true “loss” has occurred.
A Reminder to Participants
When a consumer has exhausted a Participant’s internal complaints process and, providing the complaint falls within the jurisdiction of the ISO, it can be referred to this Office for investigation. From this point, the relevant Participant has the following 4 tasks to perform:
1. “Deadlock” letters
A Participant is obliged to provide the Complainant with a “deadlock” letter. A “deadlock” letter confirms the consumer has exhausted the Participant’s internal complaints process, that “deadlock” has been reached, that the complaint can be referred to this ISO and, importantly, the complaint must be referred to the ISO within 2 months of “deadlock” being declared. The procedure is set out in paragraph 3 of the Terms of Reference.
We frequently see letters purporting to be declarations of “deadlock”, but which are issued prior to the internal complaints process being completed, or without any reference to the 2 month time limit. If a complaint is referred to this Office outside the 2 month limit and the “deadlock” letter was issued in the appropriate form and at the appropriate time, we can ask whether the Participant is prepared to waive the time limit. However, if the “deadlock” letter does not refer to the 2 month time limit, we will accept the complaint for investigation.
2. File presentation
A Participant is obliged to provide the ISO with its file - the full, original, unedited version. The file needs to include everything relating to the complaint under consideration and, in every case, must include the original proposal/application documentation, the original claim/surrender/discharge forms and the applicable policy document/trust deed. We note that some Participants tend to provide photocopies of files. However, occasionally, an investigation can come down to assessing the colour of pen used to complete a particular document, to determine who completed it - in such cases, a photocopy is unsatisfactory. We have also had situations in which relevant documentation has been photocopied, with parts of the document obscured (albeit unintentionally), but it creates delay while obtaining a new copy. It is also appreciated if files can be presented in some form of binder in chronological order, as it is exceedingly difficult to review a file, when it contains a large volume of loose and unordered paper.
A Participant is required to provide the ISO with a report on the complaint. This report must address the issues raised by the Complainant and set out the Participant’s response to those issues. We receive a lot of reports, which are approximately 1-5 sentences long. While the nature of the complaint will, to a certain extent, dictate the length and depth of the report, a single paragraph is unlikely to be sufficient. At the same time, we do not need the Assessment written for us! (We also remind Participants that, if tapes are provided to us for consideration, they must be accompanied by legible transcripts. In addition, if unreported judgments are referred to, copies should be provided). Given the increasing complexity of complaints, it is likely that an unacceptable report will be returned to the Participant for resubmission.
The success of the ISO Scheme largely depends on how it is perceived by the public in terms of both quality of the decision making and the time it takes to provide a decision. Currently, the performance of this Office compares very favourably to other disputes resolution schemes, with a benchmark of 90 days from when a complaint is accepted, to when the file is closed. However, changes in our procedures mean that a complaint is formally accepted when the complaint and confidentiality forms are received from the Complainant. This is when the clock starts running and it is also when Participants are requested to provide their files. It is difficult to explain to a Complainant the reason a Participant is able to delay in providing its file to us, when that Participant has been on notice about the complaint, since the Office was contacted. It also raises the question with consumers about why the Participant is not acting within the spirit of the Scheme.
Notwithstanding the above comments, the ISO Scheme is well supported by all its Participants. However, improvements in the above areas will continue to ensure consumers are provided with quality service from both Participants and the ISO Office.
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Case Study 1
C and his wife had an existing sickness and accident policy with another insurer. In 1998, they arranged a new income protection policy with P, through an adviser. C and his wife believed the policy provided an Agreed Value benefit in the event of a claim being made. However, when C’s wife made a claim, it was discovered the policy was for Indemnity Value only. Because C’s wife was receiving a benefit from the Accident Rehabilitation and Compensation Insurance Corporation, there was no benefit payable under the policy (due to it being offset). C argued the adviser led them to believe they were purchasing an Agreed Value policy. Accordingly, he wanted a refund of all premiums paid.
C also argued that they had never received the policy document from P and, therefore, were unable to exercise their rights under the free-look period. The proposal completed by C showed the policy was for Indemnity Value. However, it was noted the proposal was completed by the adviser, who had also indicated the policy was not replacing an existing policy when, in fact, it was. C was unable to locate any documentation relating to the earlier policy to determine the type of cover provided. The Case Manager was also unsuccessful in locating any relevant information.
P confirmed the adviser was an agent for P at the time the policy was sold. Accordingly, P would be liable for his actions. Unfortunately, however, the adviser refused to provide his file to this Office. The adviser was no longer an agent of P and, therefore, P could not compel him to do so. Neither was the adviser a member of the Financial Planners and Insurance Advisers Association, which meant there was no way for the Case Manager to obtain his file to determine how the policy was sold. After discussing these issues with P, including the question of whether the adviser was not co-operating due to possible self-incrimination, P made an ex-gratia offer to C of 50% of the premiums paid. This was accepted by C in settlement of the complaint.
In respect of whether P had provided the policy document, the Case Manager was aware it was P’s standard practice to do so. P could confirm the date on which the policy document was prepared, but could not say when it was sent to C. That notwithstanding, C had noted in correspondence to P and this Office, that he had received a document from P, which had the sum assured amount written on it, but it was immediately filed away. This suggested that C did receive the policy document but, given C’s current belief that the policy document was not received, the Case Manager was unable to resolve that issue.
Case Study 2
In May 2000, P provided C with details of a premium review, which was to occur in June 2000. P subsequently wrote to C advising the cost of the cover had recently been reviewed and had resulted in a “small increase” in the premium rate for the coming year. These comments were queried by C, because the information previously provided by P showed the premium was to increase by approximately 33%. In response, P advised C the premium increase resulted from a combination of an increase in the life insured’s acceptance of the Consumer Price Index increase in cover and the application of new premium rates. C believed P was discriminating on the basis of age and suggested this contravened the human rights legislation in New Zealand and that, as a result, P was acting illegally. C was seeking a reduction in the premium and an acknowledgement that P’s process was unfair and unlawful.
The policy document issued by P to C gave P the ability to review the premium rates and to vary the premium, with changes occurring on the policy anniversary. Consequently, P was acting in accordance with the policy conditions.
The policy commenced in June 1993. At that time, the Human Rights Commission Act 1977 (“the 1977 Act”) applied, which made it unlawful to discriminate on the grounds of sex, marital status, religious or ethical belief, colour, race and ethnic or national origin. The Human Rights Act 1993 (“the 1993 Act”), which came into effect on 1 February 1994, retained those bases of discrimination and added new grounds, including discrimination on the basis of age. Under section 21 of the 1993 Act, it is illegal to discriminate on the basis of age. However, section 48 the 1993 Act provides an exception in relation to insurance, providing certain criteria are met. This includes the ability to provide for different treatment “for persons of different ages”, if the different treatment is based on:
“(i) Actuarial or statistical data, upon which it is reasonable to rely, relating to life-expectancy, accidents, or sickness;”
The courts have confirmed that statutes will not be given retrospective effect so as to impair substantive rights and obligations, unless there is clear language to that effect. Thus the Human Rights Commission has indicated that the 1993 Act will not apply to contracts of insurance entered into prior to 1 February 1994. Accordingly, it was concluded that, because the policy commenced prior to 1 February 1994 and did not expire each year, it was not subject to the provisions of the 1993 Act.
However, even if the 1993 Act did apply, P was able to discriminate on the basis of age, providing it could substantiate the reason for the discrimination with actuarial data. Consideration of the latter aspect was not a matter which could be addressed under the TOR. The complaint was not upheld.
Case Study 3
C failed to pay the premium for his motor vehicle policy by the date renewal was due. After the renewal date, P sent C a statement referring to the outstanding premium. During this time, C had an accident and made a claim to P for the damage. P declined the claim because, at the time of the accident, the policy was not current, as the premium had not been paid. C argued the policy was still in force and that P’s practice of accepting and backdating late premium payments reflected this.
At law, no positive action needs to be taken by an insurer to lapse a policy. However, if a policy was found to be in existence at the time of the loss, non-payment of premium was not fatal to the contract of insurance (Tapa v Attorney General  2 NZLR 435, at 442). However, the Case Manager believed the doctrine of estoppel could be applied to this complaint. Estoppel requires a representation to be made, which is detrimentally relied upon. On a previous policy, P allowed C to pay the premium after the expiry date and had backdated the policy to the expiry date. The case of Sleigh v State Insurance General Manager  3 DCR 180 confirms that backdating of a policy is not evidence of a representation for estoppel. However, the Case Manager considered that all of P’s previous conduct could be looked at to determine whether P had made a representation to C, regarding the status of the policy. P had previously advised C a policy had been cancelled, some time after the renewal date, because the premium had not been paid. The cancellation was not in accordance with the policy provisions and, therefore, suggested there was a policy in existence to cancel. In addition, P had sent C a statement for the outstanding premium more than 3 months after the policy expired.
C relied on this representation, as he did not seek insurance cover from another company to ensure cover was continuous. As a result, C suffered detriment, as he was then liable for his own damage, as well as the damage suffered by the third parties involved in the accident. Accordingly, P was estopped from denying the existence of the policy after the expiry date. It was also considered that section 9 of the Fair Trading Act 1986 may apply, in that C’s inconsistent practice in respect of policy renewals could mislead or deceive an insured. The complaint was upheld.
Office of the Insurance & Savings Ombudsman
PO Box 10-845
Wellington, New Zealand
04 499 7612
Fax 04 499 7614
Freephone 0800 888 202