Insurance World

Recent stories in the press have again lambasted the insurers over critical illness insurance. The core problem is that a critical illness claim is not as straightforward as, for example, a claim under life insurance. With life insurance it’s going to be hard for the insurance company to argue that you’re not dead!

By their very nature, critical illness claims are much more complicated. The insurer will need to satisfy itself that the claim is validated in three key areas before it meets the claim: -

Has the illness been correctly diagnosed?

Is the confirmed illness included in the schedule of insured critical illnesses covered by the policy?

Did the policyholder fully disclose their medical history and current state of health on their original application form?

On the first point, it’s obviously in the policyholder’s interest to verify the medical diagnosis - so there’s rarely ever any conflict between the insurance company and the policyholder on that issue. It’s the next two areas which the insurer needs to validate, where conflicts seem arise.

With constant development in the medical knowledge, from time to time there can be some situations where validation falls into a grey area – a policyholder will argue that their specific illness is insured whereas the insurer will argue that it isn’t. Insurance companies are aware of this problem and they often change the wording in their policies in an attempt to clarify the scope of the cover and eliminate areas for dispute. Nevertheless, disputes do happen all too frequently and sparks fly when a policyholder thinks his illness is covered but the insurer disagrees.

A case in point comes before the Courts shortly. Mr Hawkins from Staffordshire is suing Scottish Provident for Ј400,000 under the terms of his critical illness policy. Basically, his medical advisers believe his illness is insured whereas the insurers’ medical advisers disagree. If the Court find in favour of Mr Hawkins the press will have a field day - and the critical illness insurers will suffer further bad press they can sorely afford.

Another summons, filed recently in the High Court and again involving Scottish Provident, highlights the problem when an insurer considers that a claimant mislead them on his or her original application form. Our understanding is that if an applicant omits relevant information or provides misleading information on their application from, this amounts to obtaining insurance on false pretences. This summons has been issued on behalf of Thomas Welch from London who is suing Scottish Provident for Ј206,800. The issue goes back to 2000 when, a few years after first starting his critical illness policy, Mr Welch received confirmation that he was suffering from testicular cancer. The insurer refused the claim because of “non-disclosure alleging that Mr Welch had not been honest about his smoking habit. He does admit that he did smoke earlier in his life but is resolute in saying that he had long since given up when he applied for critical illness insurance. As such, Mr Welch believes that he did complete the application honestly.

We assume that the case will centre upon whether Mr Welch accurately answered the smoking questions on his application. Most insurers define “a smoker” as someone who has smoked, or has otherwise used, nicotine products within the previous 5 years. (Some insurance companies adopt a 1year cut off.) If Mr Welch had indeed smoked during the specified years, he would have been obliged to disclose such information on the application and the insurer would have priced his insurance accordingly. In this context, it is relevant to note that smokers are charged as much as 65% more for critical illness over than non-smokers. We anticipate that Mr Welch’s lawyers will argue either that he did not smoke during the period in question or he omitted the smoking information by pure oversight and in any event, his past smoking is not irrelevant to his testicular cancer. Interesting issues and we’ll let you know the outcome.

Mr Hawkins case is fundamentally different. It illustrates the problems that can arise if policy documents imprecisely describe an illness or if the technical diagnosis of an illness provides the scope for medical professionals to disagree. Either way the issues are entirely outside the policyholders control at a distressing time for them and their families and we must appreciate their anguish. The long-term solution must lie in improving the medical definitions within the policy. It is probable that this will result in more medical jargon that the average man in the street will find difficult to understand - but perhaps that is preferable to what Mr Hawkins is going through.

Mr Welch’s court case must stand as a clear reminder to everybody that applications for insurance must always be totally accurate and completed in good faith. We recognise that in some cases this may still leave room for dispute (and Mr Welch’s case may be an example), but if an applicant fails to complete the forms accurately, they are taking the great risk and any claim they make could be rejected.

Rightly or wrongly, the newspapers have a history of giving the insurance companies a hard time, casting them as heartless big business. This serves to reinforce the public’s feeling that insurance companies are devious and not to be trusted - especially it seems, in respect of critical illness insurance. This view is reinforced by the fact that around 20-25% of critical illness claims are rejected (although this rejection rate does vary between insurers). This issue is something that insurers must come to grips with – it’s bad for clients and undermines confidence in insurance - and that must be bad for the development of the insurance industry.

In fact to put no finer point on it, it’s a tragedy. As many as 1 in 6 women and 1 in 5 men will be diagnosed with a critical illness before their normal retirement age*. As such, critical illness insurance is vastly important for the protection of family finances. The problems we have highlighted are obviously contributing to a situation where almost everybody needs critical illness insurance, but fewer and fewer of us are taking it up.

(* Source: Munich Re.)

If you own your own business, you’ll have insurance in place for your buildings, stock and vehicles, and you will be likely to have public liability insurance. You may also be insured for professional indemnity and legal costs – but have you considered insuring your most important assets – your key staff?

In the UK there are 3.9 million small, often family, businesses with up to four employees – if one of those key staff were to die or fall seriously ill, it could mean the end of the business, and this goes for limited companies, partnerships and sole traders.

If you are one of those people then you should seriously consider Keyman Insurance, and here’s why. Keyman Insurance financially protects businesses from the effects of serious illness or death of staff who are central to the success of the company. It does this by providing cash when you need it most, so you can cover loss of profits, inject more cash into the business, or take on temporary staff.

There are actually four different types of Keyman Insurance:

• to help your business recover during the time that your key person is away from work, or to train/take on somebody new;

• insurance against loss of profits;

• to provide protection for shareholders or partnership interests; and

• for people providing businesses loans or banking facilities.

1 Protecting your business if a key person is away from work

Your key people are the ones who are an essential driving force in your business - the people who if they were away from work for a long period, your business would suffer greatly. This could mean a reduction of sales and profits, or it could mean your business is shaken to the core. Look at the Directors, Partners, owners, think about your senior managers – every business is different but the key people will soon become apparent to you.

Insuring these people will ensure that if they are ill or die, you will have the cash you need to take on someone new, or train a replacement.

2 Keyman Insurance to insure against loss of profits

Losing key staff can have huge ramifications, if they are central to the success of the business then their loss could leave you facing bankruptcy. It’s a good idea to insure against this possibility.

3 Keyman Insurance for Shareholders or Partners

In this case, the insurance will protect the company if shareholders or partners become seriously ill or die. Families may want to sell their share in the company which leaves the remaining members open to newcomers entering the business. Keyman insurance schemes can be used to provide capital to purchase the shares from the original shareholders or their estate.

4 Keyman Insurance insuring Guarantors

Many small and new businesses are required to provide a personal guarantee or a charge on their personal property when they take out a loan. This especially applies to small and new businesses. If one of these guarantors becomes critically ill or dies, then the lenders may decide to recall the loan. Keyman Insurance can protect you by paying off the loan and taking all the pressure off the guarantor/guarantor’s estate.

Most of the UK’s top insurance companies offer Keyman Insurance as a natural progression from their Life and Critical Illness Insurance provisions. They can advise you further on what type of policy would be best for you.

So, the question is, can your business really afford NOT to have Keyman Insurance?