Insurance contracts and claim disputes

If the claim disputes can be minimized, selling insurance do not require advertisements as payment of claims itself act as a natural advertisement to boost the level of the public confidence.

Let us look at the sales process and the insurance contract to find out the main reasons for the claim disputes.

Insurance contracts are informal contracts. An informal contract is binding, because the parties to the contract have met requirements that relate to the substance, rather than to the form of the transaction.

There are two parties to an insurance contract; the insurance company and the client. There is another party who represents the insurance company – the agent and his representation has a great influence on the decision of the buyer as the requirement to the substance of the contract on behalf of the company is represented by their respective agents.

Most of the claim disputes arise either due to non disclosure by the client or misrepresentation by the agent who represents the company. Where do the insurance companies stand in this situation?

Interest of the companies;
All parties to an insurance contract must deal in utmost good faith, making full declaration of all material facts.
Let us look at the Utmost Good faith in detail which was also explained well by IBSL in a recent newspaper article. If I may quote part of it:

“It means that all parties to the insurance contract must deal in utmost good faith, making a full declaration of all material facts.”

Any material facts that are not disclosed or inaccurately disclosed or misrepresented, the beneficiaries may encounter problems in getting the claim till such non disclosures are investigated.

Therefore, if there is any material misrepresentation or non-disclosure by any party to the contract, it becomes null and void from the inception.

With regard to non disclosure of material facts by clients, the companies were secured with legal clauses well drafted to the insurance contract. If you observe well, above the signature space on the application form, there is a section called “Declaration and Authorization” under which the companies have taken necessary precautions in case of - - legal disputes in the area of non disclosure.

It is well and good to protect the interest of the insurance company. The companies should be protected to make sure that people do not take undue advantage of insurance and also for the interest of the industry as a whole.

Interest of the insured
With regard to misrepresentation of real facts by the agent during the sales promotional process, the victim is the insured. Who is responsible when the insured is the victim under such circumstances? It is sad to say, in such situation, the blame is not taken by any party as the agent is not a party to the contract. There are many material facts that are important for the prospective client to make the judgment, these are always discussed by the representative of the insurance company, the agent. The companies are not bound by all those representations, even though those facts that were disclosed by the agent could be “material facts” for the prospect to make the buying decision. Also advertisements published in the media by some companies can become very material for an ordinary person to make a buying decision. When there is a misrepresentation of material facts by the agent or by an advertisement, who will take the responsibility?

How is it possible to protect the client by all those misrepresentation that can lead to claim disputes?

It was not until recently that most of the industry pundits came to realize that the companies too have a major role in claim dispute of an insurance policy. It is amazing to have found that most Asian countries, one of which is Singapore, where insurance companies are well developed and established, realized that much of these misrepresentations were due to ignorance of the companies rather than that of agents. The agent, who is not trained well to represent correct facts, will always misrepresent.

The responsibility lies on the companies to train their agents well. That is why the insurance rules of certain countries spell it out clearly that the statements made by the agents are deemed to be the statement made by the companies.

Recently they have gone one step further by spelling it out in some of the insurance rules in Asian countries the consequences that they have to face for making misleading statements. It goes on to say, “Any person who by any statement, promise or forecast which he knows to be misleading, false or deceptive, by any fraudulent concealment of a material fact or by the reckless making (fraudulent or otherwise) of any statement ,promise or forecast which is misleading false or deceptive, induce another person to enter into or offer to enter into any contract of insurance with an insurer shall be guilty of any offence and shall be liable on conviction to fine not exceeding $20,000, imprisonment for term not exceeding one year or both.”

This section covers the insured interest and makes sure companies do take their statements and the statement of their representatives seriously, in marketing their products to the public.

Half truth advertisements by companies in order to entice clients to buy insurance policies which are not suitable for their requirement is also major reason for most of the claim disputes.

The government has a duty to protect the industry and general public who are very ignorant in insurance and the legality of how it works.

Insurance contract is a highly legal contract, signed by an ordinary individuals purely based on trust. There is no lawyer in between to explain the legal clauses therein, to the ignorant party, the client. So it differs from any other form of contracts. Therefore, companies need to be very transparent in their advertisements, an important element (material facts so to speak) that can influence public to put their signature on the dotted lines.

Case study:
It is worth quoting one real case study to show how companies can misrepresent facts in an advertisement and get away with the responsibility when it is time to pay the claim. It is also worth discussing what authorities should do in such a situation to make sure the industry and the client are protected.

There was a situation of an advertisement proclaiming full payment for an amount of unpaid bills of a default for an Export Credit Insurance Policy, by a leading insurance company. These attractive terms were printed in their brochures as well as widely advertised over TV. The explanation of the agent who sold the policy was also promised the full payment of all unpaid bills in case of a default.

To add to these gimmicks, it was printed in the front page of the policy that 85% of all unpaid bills would be met by the company. In reality this was not the case, when the policy was brought, to claim for the default in the payment. It was shocking how the company came out with a legal jargon, which was printed in the policy, that was delivered to the client long after buying it, that the claim would be restricted to 30 times of the premium paid. This is how the companies could do the wrong things in the right manner. This goes beyond the code of conduct of any insurance to make any declarations for any claims where premiums are related to the above, and if that was so, every company will levy lower premiums in order to pay lower claims. But once signed, the contractual document is the policy contract.

These advertisements have left the insured confused and what should have been proper was for the agent or the company to explain the legalities of the policy, before the insured decides to buy the policy as this was a very exceptional clause compared to all other insurance policies that had been selling at that time.

What has happened here was that the clause of the policy, what was written in the brochures and what was advertised did not complement each other. They are full of contradictions. There were many contradictions from the advertisement to the principal of insurance, to say their clause in the policy was unfair and was never highlighted to the client before buying the policy. This client suffered a severe loss in an export business, which he would not have incurred, had it not been for the misleading advertisement. I am sure he would have never undertaken to buy such a policy as expressed in the clause, if he was informed the correct facts. It is now well known that such erroneous advertisement was a clear attempt of the insurance company to woo the public into buying. This is a clear misrepresentation but not contractual.

After three long years of tedious arbitration, the verdict was in the favour of the clause in the contract due to the contractual terms as interpreted by the arbitrators. The client was paid only a fraction of the unpaid bills. Little consideration was given to the incorrect advertisement in the context of dishonoring and misguiding. This would not have been the case in most of the countries as the protection of the policy holder, confidence in the industry by the public and misrepresentation of any kind also would have been taken in to account.

This is a good case for IBSL to study. It is also a good case study for the public not to believe everything that is shown in well drafted advertisements. This shows that the process needs immediate attention by IBSL.

The authorities also should design the mechanism in such a way to include those representations in to the legal contract. They must have the right to ban those advertisements which are attractive, but yet distorted facts. The easiest way is to make advertisements that represent facts contractual so the facts need to be right or else the company needs to stand by what they have advertised. This is needed because in insurance you sell a legal contract, a promise not a product.

This only proves all the more why the process of insurance sale should be regulated with government intervention. But areas need to be identified without damaging the industry. It is my view that disputes with insurance companies should not be totally based on a clause in a contract. It is not the case in most of the countries. It will have to take into account the aggressive way in which a policy is promoted using methods of advertisements be it on TV, in the papers or by using sales representatives. The fact that so much money is thrown into “salesmen puff” type of advertisements by some companies vividly demonstrate the fact that they are still not trusted in the market.

Whether such advertisements are misleading, must be addressed by IBSL, the sole authority, for justice to be done. Therefore advertisements that promise to fulfill such terms, must be taken into consideration in claim disputes. In most countries the insured are well protected by laws passed in Parliament by an Act. I am sceptical if we have got a proper system in place. How can we best be protected and serve the people from such mischief?

The insurance industry survives on the needs of the public, so they must be well served by responsible companies, failing which the collapse of the industry will become more imminent.

The question here is whether companies deliver as they promise, or do they promise everything merely to increase their sales targets?

Insurance agents are reminded that we are all here to serve and not be served. It requires men of integrity and honesty to be in this business to serve with pleasure.

It is worth discussing each and every aspect of an insurance contract and the pitfalls therein, in order to improve the sales process and representation to the public. We have only discussed misrepresentation in this article with actual facts covered there in. There are many areas in an insurance contract that the public needs to be educated properly so they can buy the right insurance policy. It is only by educating the public that we can protect the industry.