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Narrow policy wording excludes cover

When Eric borrowed money from a finance company, he also purchased loan repayment insurance that would cover him for “total disablement of the client from attending to employment as a result of accidental bodily injuries”. In September Eric fell off a ladder, injuring his back. The finance company started covering his loan repayments.

The following March, ACC stopped its payments to Eric because Eric’s doctor diagnosed him with a pre-existing back condition, known as Scheuermann’s disease, that Eric would have had for many years without even knowing. Eric’s doctor said it was not possible to establish the extent to which the accident or the pre-existing condition caused Eric’s injury.

In June the finance company discovered that ACC had stopped payments to Eric and, when it made further enquiries the finance company learned of Eric’s pre-existing condition. The finance company told Eric that it would stop paying Eric’s loan. This was because a policy exclusion which said: “No benefit shall be payable as a consequence of, or in any way attributable to any medical condition existing prior to the inception of this Plan.”

Eric advised the finance company that he did not accept its assessment and was challenging ACC’s decision. The finance company replied that if Eric was successful in his ACC challenge it would reconsider its position, but until then Eric was liable for the loan payments.

Eric’s loan payments stopped and he was uncontactable for about a year, but eventually the finance company located Eric and repossessed his car under the ‘at risk’ provisions in the Credit Contracts and Consumer Finance Act 2003.

Eric complained to FSCL that the finance company should have continued to cover his loan payments. If the finance company had continued to pay the loan, it would not be in default and his car would not have been repossessed.



Eric did not accept that his injury was caused by a pre-existing medical condition. He did not even know about the Scheuermann’s disease until after the accident. In Eric’s view, his injury was caused by an accident and should have been covered by the policy.

The finance company referred to Eric’s doctor’s letter that stated it was not possible to distinguish between the accident and the Scheuermann’s disease when determining the cause of the injury. The finance company submitted that it was entitled to decline the claim under the policy exclusion for pre-existing medical conditions.



We explained to Eric that the policy wording was very narrow and allowed the finance company to decline a claim if Eric’s claim was “as a consequence of or on anyway attributable to any pre-existing medical condition”. Eric’s doctor confirmed that Eric had had the Scheuermann’s disease for some time and that it was not possible to distinguish between the accident and the Scheuermann’s disease when determining the cause of Eric’s injury.

As the finance company was entitled to decline the claim, Eric was liable for his loan repayments. The loan had been in default for at least 18 months, and during that time the finance company had issued a repossession warning notice but was unable to find either Eric or the car. In the circumstances we considered the finance company was entitled to treat the loan as ‘at risk’ and repossess the car without following the usual repossession warning notice process.

Eric indicated that he may be able to refinance his debt with another finance company. We suggested this may be the best way forward for him.

Following our preliminary view, Eric went back to his doctor. Eric’s doctor changed his mind, and advised that the accident was the sole cause of his injury. We sent the doctor’s opinion to the finance company.

The finance company was surprised the doctor had changed his opinion, but said, in its view, it was still entitled to decline Eric’s claim. The finance company said its repossession agent had seen Eric working. In the finance company’s opinion, the accident was not preventing Eric from working, and cover under the policy was not triggered.



Although the finance company did not consider it was obliged to accept the claim, it was prepared to negotiate with Eric. Eric’s debt was about $20,000 and the finance company agreed to reduce the debt to $15,000 if he refinanced his lending elsewhere.

Without consulting us, Eric refinanced his debt with another lender and paid the finance company the agreed $15,000. Eric said he was paying the money on the understanding that he could continue to pursue his complaint.

The finance company agreed to accept the $15,000 in full payment and released its security over Eric’s car to allow the refinancing to go ahead.

We advised Eric that we considered the debt reduction was a reasonable resolution of his complaint and that it was our view that he should discontinue his complaint. We observed that when Eric refinanced the $15,000 with another finance company, he would have had to show that he could afford the loan repayments. This suggested to us that Eric was indeed working.

Eric did not respond, so we discontinued our investigation.


Insights for consumers

All insurance comes with limitations and exclusions. To know the extent of your cover you must read your policy. While you might think your insurer’s decision is unreasonable, an insurer is only obliged to pay what is due under the policy. In this case, the narrow policy wording allowed the insurer to decline a claim even though Eric had no knowledge of the pre-existing medical condition.