James, 21, and his father Rick operated a substantial farming business. Rick and Rian (James’ mother) advised James of the benefit of obtaining income protection insurance. Mitchell, an insurance adviser, attended the farm to assist with the placement of cover for James on 19 April 2010. James’ application form was completed with Mitchell’s assistance. Mitchell then forwarded the completed application form to the insurer.
The insurer sought further information which Mitchell obtained during a phone call with James on 29 April 2010. James disclosed he’d recently injured his shoulder playing sport. This led the insurer to include a ‘football exclusion’ on the policy. After Rick, Rian, and James raised concerns, the insurer agreed to delete that exclusion and place a right shoulder exclusion instead.
Although James thought that he had injured his shoulder, he had actually injured his neck. This misdiagnosis may have contributed to James’ belief that he didn’t need to disclose the injury.
Two and a half years later, James injured his cervical spine (neck) and required an operation in December 2012. Mitchell assisted James to make a claim under his income protection policy. In April 2013, the insurer declined cover on the basis of material non-disclosure of a pre-existing medical condition (a neck injury), referring to James’ medical history prior to April 2010.
In June 2016, James engaged a lawyer to act on his behalf and the insurer agreed to pay his claim to the amount of $18,535.85. However, the insurer later confirmed it paid in error and maintained it was not required to pay the claim.
James complained to FSCL about Mitchell’s competency. He alleged Mitchell’s negligence had resulted in him incurring $29,000 in legal fees.
James’ view
James complained Mitchell was negligent by failing to provide adequate advice at the time of policy placement about the duty of disclosure.
James said his application form was completed with Mitchell’s direct assistance. James believed, at the meeting on 19 April 2010, he told Mitchell he had recent symptoms of a neck injury and had seen a doctor about this.
Both James and Rian were adamant they discussed these symptoms with Mitchell and Mitchell said that a recent visit to the doctor for a ‘minor’ neck injury did not need to be disclosed.
Furthermore, James said that Mitchell knew about a trip he had to a physiotherapist in March 2010 for a neck injury, a month prior to the application for insurance, and did not tell him to disclose this.
James and his parents were adamant Mitchell took an active role in completing the income protection application form. James was 21 at the time and expected to be guided through the process by his adviser. In their eyes, Mitchell hadn’t acted in James’ best interests.
James said a neck exclusion wouldn’t have been included in the policy even if the material information had been disclosed because James would have negotiated with the insurer to have it removed, as he had done with the football exclusion.
James believed the insurer’s assertion that it would not have paid his claim if he had fully disclosed was made with the benefit of hindsight, having realised the full extent of his injuries.
Further, James believed the presence of his parents at the initial meeting (where the non-disclosure occurred) and the lack of Mitchell’s contemporaneous file notes showed they were telling the truth.
Insurer’s view
The claim was declined on the basis of material non-disclosure because James had not told his insurer about his neck injury in March 2010. Had it known this the insurer would have endorsed the policy with a neck exclusion. The insurer stated the $18,000 that had been paid out was a mistake. Also, James hadn’t disclosed shoulder surgery which occurred in 2005, nor MRIs in 2007 and 2008. There was no dispute James and his parents did not tell Mitchell about these.
As a result, it was likely that, even if there were deficiencies in Mitchell’s processes, the claim would have been declined.
Mitchell’s view
Mitchell said James did not tell him about the neck injury and that he did not need to explain the duty of disclosure because it was contained in the insurer’s application forms. James had signed these saying he understood his duty.
Review
We said even if there had been full disclosure, James’ income protection policy would have been subject to a ‘neck exclusion,’ and he would not have been able to claim for the neck surgery. This meant that any complaint about Mitchell’s advice process was, to a certain extent, redundant because there was no claimable loss. James had wrongly stated that he had injured his shoulder in the month prior to the application for income protection insurance. He had actually injured his neck. This meant that he failed to disclose material information which would have changed the content of his policy.
Also, James had previously failed to disclose other material medical history, being his shoulder surgery in 2005 and the associated MRIs which he received in 2007 and 2008. There was also no guarantee that James could have negotiated a neck exclusion out of the policy had his full medical history been disclosed.
We did not accept that deficiencies in Mitchell’s advice had led to James’ loss because of the significant non-disclosure.
Could the legal fees have been avoided if Mitchell had done more at policy placement to elicit information from James about the neck injury?
James instructed a lawyer to act for him in pursuing the insurer to pay his claim. The legal fees were only incurred after receiving the insurer’s decision to decline the claim as a result of material non-disclosure. The legal fees were always going to be incurred challenging the insurer’s decision not to satisfy the claim. As a result, it was clear that the legal fees were incurred irrespective of any alleged flaws in Mitchell’s advice process. We did not think there was any ground to ask Mitchell to contribute to James’ legal costs.
Mitchell’s process
No contemporaneous file notes of the meeting on 19 April or the subsequent 29 April phone call created a ‘he said she said situation.’
There were discrepancies in what each party believed had occurred at the initial meeting. James and his parents were adamant Mitchell told them disclosure of the neck injury and a trip to the doctor was not necessary because it was minor, while Mitchell said although James told him about the shoulder injury he did not tell him about the neck injury.
It is best practice for an adviser to explain to clients the duty of disclosure or at least draw the client’s attention to it. Without file notes it is impossible to tell what was said at which meeting. However, although Mitchell could have done more to ensure James’ understanding of the insurance contract and to keep an accurate record of events (through file notes), his deficiencies did not contribute to James’ loss.
Key insight for consumers
Not disclosing material information at the inception of an insurance policy can lead to significant loss at a much later date. It is important to realise that although one may think they are ‘saving money’ by paying less in premiums throughout their policy (perhaps by not disclosing material information), when it comes to claim time they may stand to lose a lot more.
