One-word slip-up costs millions

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A $4 million claim on an insurance policy – where the insured person was diagnosed with incurable metastatic melanoma – has been denied due to the interpretation of one word.

The clause in dispute was: “will result in the death of the person insured within 12 months, regardless of any treatment that might be undertaken”. The Court held that “will” meant it had to be absolutely certain the insured person would die within 12 months. However, the person in question was still alive at the time of the appeal, more than 12 months later.

Queensland Law Society accredited specialist in succession law Christine Smyth, says that insurance is a big part of the toolkit for financial planners, but contracts are drawn by insurance companies – whose objective is to make money.

Although insurance contracts may look good at first, a lot of their terms are pregnant with meaning, and clients will often put more importance on the cost of a policy than its terms, says Smyth.

Advisers recommending insurance policies are increasingly at risk, as people look to shift blame and responsibility.

“If it comes to pass that the policy didn’t suit someone’s requirements, there is a risk – and I think it’s a growing risk – that the client will say the adviser should have known because they were the one recommending that particular policy,” says Smyth.

Advisers need to be aware of what is being asked by clients, and marry the purpose of the policy with the wording of it. Smyth warns advisers to look over the clauses that trigger the event and realise that those words have meanings that are distinguished.

She also warns planners to review their risk management procedures. “So, for example, I’d be looking at my documentation and aiming to re-word my documentation to ensure that I’m not going to be held liable where a policy doesn’t pay out because of its terminology. So I’d be making the client responsible for investigating the terminology of the policy.”

  • alleycat on 23/05/2013 2:44:12 PM

    Dear Sue,
    I stand corrected, terminal illness is offered under some group policies, but usually as an optional extra like TPD.
    For @Pat, I don't presume to know all and you are entitled to your view even if it's wrong.
    The fact of the matter is that 99.9% of Risk advisers do not charge fees for service and are unlikely to.
    Not because they make more from commission but if there is an issue such as a claim, the client is not charged any more particularly when help is most needed.
    You have no idea the work involved in assisting clients with a sizable or ongoing claim, otherwise you would not be so sanctimonious.

  • Peter on 23/05/2013 12:18:06 PM

    Some of these comments are laughable. Perhaps read some more facts about this case before commenting. His "employer" cancelled it??? The "employer" was 100% owned by the Insured. They are one and the same. He cancelled/lapsed the policy and then got sick and tried to claim agianst the previous policy year. If he had maintained cover, there wouldn't be this problem. Paul is on the money with his comments. Sorry to those that are trying to find some sort of conspiracy theories about insurance companies avoiding claims for any reason.

  • Pat on 23/05/2013 11:07:02 AM

    But Sue, that would suggest that the omniscient alleycat may be wrong. Maybe he can use some of his commissions to fund some further education.

  • Sue Laing - the risk store on 23/05/2013 10:59:25 AM

    I can't let an incorrect fact go uncorrected - many industry funds and other users of group life policies now enjoy terminal illness benefits built in, since SIS changed to allow for TI to be a condition of release.

  • mark thompson on 23/05/2013 10:54:33 AM

    Hey Pat, next time you see Sue Laing walk past try kissing the earth that she trod on; something useful might rub off

  • alleycat on 23/05/2013 10:12:34 AM

    @Pat,
    It's a wasted forum that left wing loonies like you use to push their own agenda.
    Let's be clear, I do not churn, I've been in this business a hell of lot longer than you in senior roles in both life companies and fund management.
    I hold a CFP designation which is consistent with my University education.
    You clearly have no idea, but will make allegations which support my previous assessment of you.

  • Pat on 23/05/2013 9:17:33 AM

    Sue - I am simply responding to alleycat's pathetic and very childish little comment about commissions. I agree that any decent adviser, and perhaps alleycat as well, would ensure the client remained adequately covered.

    Perhaps the commission based "advisers", like alleycat, wait for the clawback period to expire before churning the client to a new policy for another, excessive upfront commission.

    Regarding ignorance, alleycat, you have shown in many, many previous instances on this website your inability to put a couple of numbers together or formulate cogent arguments, so, beyond this post, I am not going to bother responding to you anymore.

  • alleycat on 22/05/2013 6:02:33 PM

    @Pat
    For the record, Employer sponsored life policies do not have a terminal illness benefit attached only retail products do.
    For a critic, you don't know that much obviously.

  • alleycat on 22/05/2013 5:57:49 PM

    @ Pat
    You're obviously very new in this business, so I'll make allowances for your ignorance.
    I don't know the full circumstances nor do you but for $4.4m of cover it's most unlikely the adviser did it out of the goodness of his heart for nothing.
    It does not obfuscate the responsibilities of all involved in the process, being the Life company and the adviser.
    What that means is that it's more than likely that the life company notified the adviser that the policy had been cancelled.
    For the record, I've placed life cover for clients in industry funds for no commission and no fee for service because it was it their best interest to do so, you opiate.

  • Sue Laing - the risk store on 22/05/2013 3:22:46 PM

    Pat any policyholder has the legal right to cancel a policy they own. The facts presented in other fora state the policy was a keyperson - or at least that's the assumption - as it was owned by the employer.
    On your other point, many advisers have been in a situation where a client insists on cancelling a policy no matter what the adviser does so none of us should be making any assumptions about the adviser not doing their job. I can't imagine any adviser (after successfully placing $4 million with all the underwriting involved) whether fee-based or commission-based not caring about/acting to stop $4 million cover going out the door - certainly out of concern for the client but also for their own protection from a PI perspective!
    And I agree with your disgust Innocent Observer over the author's statements, as I stated in my post above.

  • Pat on 22/05/2013 11:59:04 AM

    @alleycat - given the policy was one that the employer could cancel, it was probably one that didn't pay a commission to an adviser. Therefore, you can bet someone like you wouldn't have touched it as you wouldn't get remunerated for selling it.

  • alleycat on 22/05/2013 11:12:17 AM

    I may have missed something here but the policy was cancelled less than 9 months after issue.
    The manner in which this was handled by the insurance company was correct and the solicitor advocating we should all increase our PI should know better.

    But, where was the adviser in all of this when and if he received a full write back of commission or was he one of those "new breed" who charge fees for service and wasn't too worried about the client because he had his fee.
    Just one of the many warts associated with fee for service when recommending risk insurance.

  • Innocent Observer on 22/05/2013 10:31:37 AM

    Ok, so let's get this right.

    (1) If the details provided by Paul above are correct, then this really has nothing to do with the adviser. The client had the policy cancelled, therefore was not covered and not entitled to a payout. I have NO problem at all with this. It's fair, and it's what should be done. If insurers paid out anyone who, at one point or another, had cover with them then the premiums would be astronomical.

    (2) If it was the employer that cancelled the policy contra to the client's wishes, then sue them. It really has nothing to do with the adviser, except that they probably weren't consulted prior to cancellation (implied by the reduction in cover from $4 to $0). ...on the other hand, if the "facts" presented in the article are correct, then we should be horrified that advisers are recommending policies which may pay benefits based on a doctor's diagnosis of terminal illness to individuals who (god forbid) live more than 12 months! Clearly this is the adviser's fault. How dare people live longer than 12 months from diagnosis. ...this is followed up by a lawyer recommending we indemnify ourselves from our advice. I honestly find this disgusting. For those of us that actually believe in what we do, and believe we actually make a difference to our clients (and their families') lives, this is insulting. I take responsibility for my actions and my advice. I am accountable for every piece of advice I give - that's my job, and I take it seriously. If I screw something up then I am liable. I will personally put my hand in my pocket and recompense. If something happened that was bigger than my pockets, I have PI insurance. I would advise clients to sue me for damages. I know many advisers (who take what they do seriously) share this view.

    Ok. Rant over.

  • Leanne on 22/05/2013 10:22:40 AM

    4 Million Terminal Illness Claim Denied
    May 21, 2013
    An appeal against an insurance company which declined to pay out a $4 million terminal illness claim has been dismissed by the South Australian Supreme Court, because the client survived for over 12 months.
    The insurance policy in question was originally obtained on the life of its Managing Director in February 2011 and cancelled in November 2011 by the owner. In December 2011 the life insured was diagnosed with advanced metastatic melanoma, and in April 2012 he lodged a claim for terminal illness with the insurer. The claim was denied on the grounds that the life assureds condition was not diagnosed until after the policy was cancelled.

  • Leanne on 22/05/2013 10:20:02 AM

    Melbourne Excutive I can assure you it is the media who have a issue not insurance companies. As an adviser I have personally experienced two clients receiving a pay out for terminal illness. The first lived for 3 years after the claim. The second is still alive 2 years later but his wife phoned last month to advise us that he is back on treatment and it is only a matter of time. Both are/were in their late 40's and I can assure you the money put in their hands during such a time of need made an enormous difference to their spouses and young children. My understanding from other press releases was in this instance the policy was cancelled before diagnosed as per Paul's earlier reponse. Sad for them but if we could all claim on a cancelled policy. Who funds it?

  • Paul on 21/05/2013 4:50:14 PM

    Apparent facts of the case...
    Policy granted 23.02.11
    Policy cancelled "accidently" by Employer 11.11.11
    Insured had check up on 27.12.11
    and diagnosed on 28.01.12.
    Retrospective terminal illness claim made on 27.04.12

    The policy was cancelled and prior to the policy cancellation, the insured was neither dead nor diagnosed as being terminally ill. Also possible non declaration re previous melanoma. Seems like a reasonable decision.
    Moral - dont be half smart, get advice.
    Unfortunately a $4m lesson in this case.


    - Could have had a check up before cancellation
    - Could have chosen to remove payment details and lapse the policy after 3 more months instead

    Policy granted

  • Alan on 21/05/2013 2:02:48 PM

    "Claims should never have to go to court...", quite correct Sue. If a claim has to be the subject of litigation, there is something seriously wrong with the policy wording such as ambiguity etc. In that case the company should get their solicitors to thoroughly re check the wording and intent. Pity the poor adviser in this case.

  • John on 21/05/2013 11:41:43 AM

    You should all get the facts correct before you comment. There are other circumstances around this, like policy cancellation before the claim!

  • Tim on 21/05/2013 10:30:19 AM

    I dont actually understand the issue with this. I take it the client is appealing becasue they didnt get paid a terminal illness benefit yet they were still around after 12 months to see the appeal so effectively the insurance company was proven correct not to pay the terminal ilness benefit. How can the adviser be required to tell a client upfront about each and every disease and the likely outcome of a terminal illness claim. As Simon rightl says the family will get paid upon death. Also surely as the disease worsened and the client deteriorated further there was a right to be reassessed and claim again under the terminal illness benefit.

  • Sue Laing - the risk store on 21/05/2013 10:13:47 AM

    This is the second press article by a lawyer in recent weeks which is in my opinion a complete fabrication of a story and certainly a sensational way to get attention for the author. Not to say that the facts are a lie. Just that there is no story in the context of this being a "warning to advisers". Let's look at a few obvious facts we can draw from reading between the lines. Fact 1: the only reason this could have been in court for the judge to have made any decision at all would be because the insurer was denying the claim. Why? If there was some issue with cover or other extenuating circumstances around the claim then maybe they chose this word to fight the claim on, as a tool. If they were simply trying to deny a claim when a client was indeed terminal, then I would be majorly concerned about the insurer and their claims philosophy - nothing to do with an adviser's knowledge. Fact 2: if this was a terminal illness claim and this was the only legitimate way to deny it, then the claim will have to be paid out when the client dies - terminal illness is only an extended benefit within a term life policy after all. That $4 million will be paid out. Period. As long as the client is properly advised to keep paying the premiums!
    And I agree with Mark S that the reason any judgement was made was because it went to court. Claims should never have to go to court - mediation and negotiation are always the ideal mechanism for claims disputes.
    I find it laughable that advisers are suggested to disclaim their recommendation on the basis of clients reading/"investigating" policies themselves - the world has gone crazy. I say to Melbourne Executive: I can understand on the face of it where your comment arises, but please take this whole story with a grain of salt. The life insurance industry paid out over $4 billion in 2012 alone. Denied claims are estimated to be about 2-3% and are in the majority due to proven non-disclosure by applicants which occurs around the globe. Shame you aren't told these facts by the industry itself and I apologise on behalf of our industry which fails to tell the right story, year in and year out.

  • jason on 21/05/2013 10:11:54 AM

    ooh, watch out, the adviser smiled the wrong way!!!! he is going to be sued now, the ISN network is going to put adds on prime time having a go about commisions and fees now, Bill Shorten will make up some new regulation on when and where a adviser can open their mouth. What a boring industry this has become.

  • Simon on 21/05/2013 9:58:22 AM

    Struggling to see how the adviser is liable for recommending death cover to a client who has not died, but is likely to die and a $4 million benefit will be paid when they do. Seems like the client received great advice!

  • Melbourne Executive on 21/05/2013 9:50:06 AM

    ...and you wonder why so many people remain under insured or have no insurance. The industry still lacks credibility and is not there when you need them!

  • Mark S on 21/05/2013 9:37:34 AM

    Whilst I agree that it's important for advisers to be aware of policy definitions, it is impossible for an adviser to determine what a court will decide is the "meaning" of a word. This is tested at claim and/or litigation stage. If anything, this case highlights the need for the adviser to have recommended adequate Trauma cover, having explained to the client that it is often more difficult to obtain a Terminal Illness claim due to the possibly ambiguous nature of the medical condition they are suffering and differing doctors opinions.

WP forum is the place for positive industry interaction and welcomes your professional and informed opinion.

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