How Your Duty of Disclosure Can Affect Your Life Cover

Published: August 30, 2018

One of the biggest reasons life insurance claims generally get denied is because of non-disclosure and misrepresentation.

Not fully complying with your duty of disclosure, particularly regarding your medical history, can potentially lead to your insurer voiding your policy.

In this article, we’ll discuss your responsibilities as the policy owner and insured person, as well as the consequences of non-disclosure in insurance.

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Duty of disclosure insurance definition

According to the Insurance Contracts Act 1984 (ICA), an insured person has a responsibility to disclose every matter they know to be relevant to the insurer, including all things which a reasonable person could be expected to know as applicable, which may influence the insurer’s decision to accept the risk of insuring the customer and the terms with which they’ll provide coverage.

The test of a reasonable person: What someone with the same experience and circumstantial knowledge as the insured person would do, if they were given the same opportunity to react to the same facts and circumstances (Kaplan Education, 2017).

The insurance contracts act for duty of disclosure requires that the life insurance company (insurer), the policy owner and the customer (insured) be completely honest when applying for a life insurance policy.

Any omission of relevant information can make your policy invalid, leading to your policy possible being cancelled, avoided or altered. 

What is the purpose of a disclosure statement in a life insurance policy?

Many factors influence your policy premium and the terms under which you’ll receive protection.

Insurance policies are contracts between yourself, as the insured, and the insurer, based on ‘utmost good faith’, meaning both parties have a legal obligation to one another to act in good faith.

When applying for your life insurance policy you have a duty to disclose all matters concerning your health, lifestyle and occupation, so the insurer can assess your full situation and make an informed decision about whether they’ll accept your application and on what terms, before offering you a policy.

The information you’ll need to provide in your application

When assessing your application for life insurance, companies generally take every question on your application form into consideration, for example, your:

  • Gender and age,
  • Smoking status,
  • Height and weight,
  • Medical history,
  • Family history,
  • Financial history,
  • Occupation, and
  • Sports and pastimes.

This information enables insurers to assess your application according to the risks you may or may not be exposed to and ensures that you pay a premium appropriate to your circumstances.

Take note; Every life insurance company has their own underwriting guidelines and application questions might differ from insurer to insurer.

What happens if you lie on your life insurance application?

As part of your application, you are usually asked to sign a declaration stating that the information you provide is honest, complete and correct.

Life insurance companies make their assessments based on the answers you provide. If for some reason an insurer has cause to query the accuracy of the information you provided at a future date, for example, when you lodge a claim, and non-disclosure is revealed, it could result in your cover being invalid.

It is therefore essential that you ensure the accuracy of the information provided at the time of application. Once a guaranteed renewable policy is issued, any change that occurs will not affect your cover, and as long as you continue to pay your premiums, you will continue to be insured until the policy expires.

How will my insurer know if I’ve been honest about my medical history?

You might be wondering ‘if the insurer didn’t ask for my medical information or blood test when I applied for the policy, how can they check my medical history?’

When applying for a life insurance policy, whether retail, group or directly from the insurer, you’ll typically be asked to provide authorization permitting the company to access your medical records.

When you lodge a claim, life insurance companies will generally cross-check the information you disclosed on your application with your medical records. The insurer will usually be able to get more information by:

  • Writing to Medicare and Pharmaceutical Benefit Scheme (PBS) requesting a list of your medical consultants, including prescribed medications you’ve been provided, and
  • Contacting your doctors requesting that they expand on your medical history, and
  • Reviewing your social media profiles to look for any discrepancies.
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Consequences of non-disclosure in insurance

If the insurer finds that something in your personal or medical history that would have otherwise denied you getting a policy, even when it’s not related to the claim you’re making, they have the right to decline your claim due to non-disclosure and cancel your policy.

The insurer can also go back and decide under which terms, if any, they would have insured you for and then adapt your policy accordingly. This is called Retro Underwriting.

When you have failed to disclose a fact, which might have impacted the insurer’s decision to provide you with coverage the insurer may apply the following remedies:

  • Avoid your contract: The insurer has the right the take the policy back to inception and refund your premiums. It’s like the contract between the insured and insurer never existed.
  • Deny your claim and cancel your policy without refunding any premiums paid.
  • Alter your policy based on the information which should have been provided at application time – retro underwriting.
  • Unbundle the policy: Allowing the insurer to separate combined policies, for example, life and TPD cover, potentially altering one, while leaving the other unchanged.
  • Reducing the amount of cover to what the insurer would have paid had they all the information from the start.
  • Change the date your policy will expire. If you did not provide your correct date of birth at application time, the insurer has the right to change the date when your life insurance contract will end based on the correct information.

Take note; the above remedies are dependent on whether you committed fraud or non-fraudulent non-disclosure

When can a life insurance contract be avoided?

Under the insurance contracts act regarding your duty of disclosure, there are 2 primary grounds upon which an insurer can avoid a life insurance contract:

  Fraud

Deliberately misleading or concealing something by providing answers which you know to be false and dishonest, for example when you answer “no” to a medical history question which the insurer asserts should have been answered “yes”.

However, the onus of proving fraud is on the insurer. Meaning, the insurer will have to demonstrate the elements of fraud as it relates to whether the insurer would have entered into the contract and on which terms had the matters been represented correctly in the first place.
Take note; if your failure to disclose was intentional or deemed fraudulent, the insurer can cancel your policy, and they do not have to return any of the insurance premiums you paid.

  Misrepresentation

Any time after a TPD, trauma or income protection contract has been entered into, the insurer can avoid the contract if you misrepresented yourself or failed to disclose material facts; this includes non-disclosure or representations made honestly or unintentionally; it does not need to be fraudulent.

However, for a death benefit, if more than 3 years have passed, the insurer is no longer entitled to avoid the contract under these terms and must prove fraud.

When you misrepresent yourself on your life insurance application, the insurer has the right to decline your claim or offer the policy on different terms. Examples of common misrepresentations include:

  • Leaving out pre-existing conditions, like severe asthma
  • Denying or understating your use of tobacco products
  • Leaving out family history, especially cancers
  • Minimizing your use of alcohol or drugs, past or present

To avoid a contract under section 29(3), the insurer must show that a reasonable person in your circumstances could be expected to know that:

  • the matter, which was not disclosed, was relevant to the company’s decision to accept your risk; or
  • the misrepresented statement would have been relevant to the insurer’s determination of whether to accept your risk

What happens if I failed to disclose information on a combined life insurance policy?

As of 28 June 2013, if you have more than one type of cover bundled under a single policy, for example, life and TPD insurance, the insurer is allowed to “unbundle” your plan and treat them as two separate policies. Your life cover and TPD policy can thus be split so the insurer can avoid the TPD cover, without voiding the life cover.

How to prevent your life insurance claim being denied due to non-disclosure

  • Ensure you obtain a policy that is fully medically underwritten at the time of application vs time of claim.
  • Make sure you meet all your disclosure obligations by providing full and complete details of your health, medical history and lifestyle to the insurance company.
  • Review your policy schedule and inform the insurer of any spelling or administrative errors.

Frequently Asked Questions

Do I have to disclose pre-existing conditions?

Yes, your past and present medical history are critical to disclose, so that the insurer can make an informed decision regarding whether they can provide you with the type of cover you’ve requested and on which terms.

Generally, life insurance companies exclude pre-existing conditions or add a loading to your policy because of your increased likelihood of claiming.

What if you can’t remember all my medical information at application time?

If you cannot recall specific details about your history, inform your life insurance broker and supply the names and contact details of any medical practitioners whom you may have consulted in the past. Depending on the condition and the life insurance company, the insurer may then obtain further information in relation to your medical history, as authorised by you within the application form.

When does the duty of disclosure cease?

Generally, your duty to disclose relevant information stops at the time your policy is issued, and you receive your policy documentation. So, if you have a guaranteed renewable policy and you become ill or injured after your policy started, you do not have to contact your insurer to inform them. However, if you experience a medical condition while your policy is being assessed and underwritten, you are obligated to continue with your duty of disclosure and inform the insurer of any changes in your health, this includes if you’ve recently taken up smoking.

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