Its hard to get a handle on the number of disputes involving alleged negligence by advisors leading to non-payment of insurance claims — regulators typically do not ask advisors or insurers for this information.
But whatever that cryptic total might be, the industry can expect it to rise, according to Jim Bullock, a 45-year veteran of insurance with eight of those years as expert witness working with lawyers to resolve such lawsuits.
In a prototypical scenario, a lawyer acting for a broker, brokerage company, insurer, managing general agent or disappointed beneficiary will ask Bullock to review the file, looking to see where the process broke down and its impact.
Bullock attributes the potential increase in disputes to several factors, including the disbanding of career agency forces which has led to a decrease in field underwriting expertise.
“The problem is the [brokers] are getting less and less skilled in this area because there is nobody leaning over their shoulder who is an expert, correcting them and rapping their knuckles,” he says.
The number of lawsuits could increase further since a commonly-accepted threshold for cost-effectiveness in mounting a lawsuit is $100,000 while almost all denied insurance claims exceed that amount, whether for disability insurance, critical illness, long-term care or life insurance.
Another component in the equation is that insurers have become more profit-oriented than previously, Bullock maintains. “As managers they devote attention to the issues that either reduce costs or increase profits — that’s what management does” he says, suggesting that field underwriting does not lead to increased profits or reduced costs, a conclusion that he believes means less attention paid to quality of field underwriting.
Claim denials occur for two broad reasons. One occurs with deliberate misrepresentation in which a client knowingly fails to provide all necessary medical information, such as a heart attack.
In a recent case, a woman was killed while jaywalking and the claim was denied because she had not disclosed a case of breast cancer three years earlier. The insurer justified the denial by saying that it would not have issued the policy in the first place if it had known about the breast cancer.
Other claims may be denied even where no deliberate fraud has occurred, but questions were poorly answered due to a sloppy attitude in areas such as medication. With a question such as “Do you use any medication?” most clients would know that blood pressure medication would be important, but might not include details such as over-the-counter medications such as Tylenol. “The word medication doesn’t have a modifier on it,” Bullock points out.
In a case currently before the courts, a woman had ceased taking medication connected to preventing rejection of an implant. Meanwhile the insurer’s questions regarding medication excluded drugs prescribed during routine doctor’s visits and so she did not include it in her answers. After her decease, the insurer denied the beneficiary’s claim.
Bullock suggests four strategies for brokers looking to avoid a trip to the lawyer’s office or courtroom and a potential errors and omissions claim. First, the broker should explain to the client what the legal language calls “the dire consequences” of failing to provide accurate and complete information.
“They want to know everything the client knows,” including illness during a recent vacation trip, he warns. “The underwriter adds up all these little things and decides if all these little things mean something important.”
The second step occurs with the return of a photocopy of the application to the client along with a letter stating that the insurer is considering the application, mentioning again the ‘dire consequences’ of providing incomplete information and asking the client to review the information and contact the broker if anything should be added. That shifts the responsibility for full and accurate information to the client, since the broker obviously cannot know everything.
In the third step, the broker requests the insurer attach a copy of the application form to the completed policy, a step taken by some but not all insurers.
Bullock also urges brokers to include an underwriting letter with the application, explaining the client’s situation in detail, including information not covered in the application form and insertion into the Agent Report of everything not covered elsewhere.
“If that section is blank then the judge can infer that the (broker) doesn’t make a habit of disclosing the things that he learns in meetings and the client is right and therefore the claim has to be paid,” Bullock warns.
Finally, Bullock recommends a delivery letter with the completed policy reiterating that the policy is only valid if the underwriting information is completely accurate and asking the client to review the application form. Where a dispute arises, this precautionary step allows the broker to maintain that he or she did everything possible to provide full information.
Al Emid, a Toronto-based financial journalist, covers insurance, investing and banking.
