Practice - 
Advising clients on the Duty of Disclosure

March 2022

As the statistics for 2021 indicate, around 18% of complaints which the IA received concern disputes about whether a claim should be paid under an insurance policy. A small section of complaints included within this segment, involve situations where the insurer’s basis for declining to pay the claim is that the policyholder failed to disclose a “material” fact at the time he or she applied to buy the insurance.

With these types of complaints, often the sole issue in dispute is whether or not the fact was indeed “material” and should have been disclosed. Sometimes, however, the complainant’s allegation concerns the conduct of the licensed insurance intermediary and particularly the advice which the intermediary is alleged to have given to the complainant at the time the insurance policy was purchased.

For example, we have seen numerous complaints where the complainant asserts that he or she informed the licensed insurance intermediary of the “material” fact, but (for whatever reason) the material fact was not disclosed to the insurer in the application form. These cases serve as a vital reminder to licensed insurance intermediaries of the importance of their role in advising customers on the need to disclose all material facts at the time the customer applies for insurance and the importance of completing all information in the application form as fully and accurately as possible. This obligation is reflected in Standard and Practice 5.3 of the respective Codes of Conduct for Licensed Insurance Agents and Licensed Insurance Brokers.

A number of these complaints involve claims under medical insurance policies, where the dispute concerns whether the policyholder should have disclosed to the insurer a particular medical condition at the time he or she applied for the insurance. The discovery of the non-disclosure of the medical condition may only have been made by the insurer at the time a claim is submitted under the insurance policy (through the claims handling process). The policyholder may then raise the suggestion that the particular medical condition was indeed discussed with the licensed insurance intermediary at the time of the application (and on occasion may be able to produce saved contemporaneous messages exchanged through WhatsApp or WeChat which demonstrate this). The complainant may assert that, despite being informed of the medical condition, the licensed insurance intermediary (for whatever reason) took the view that the condition did not need to be disclosed (because, for example, the intermediary took the view that the medical condition was not sufficiently serious or the complainant had recovered from the condition).

Standard and Practice 5.3 in the Codes of Conduct

Disclosure in relation to a policyholder’s obligations

When a client is making an application for insurance with the assistance of a licensed insurance agent/broker, the agent/broker should explain to the client:

1. the principle of utmost good faith and remind the client that non-disclosure of material facts or provision of incorrect information to an insurer may result in the insurance policy being invalidated or avoided or claims being repudiated by the insurer;
2. the sort of material facts which ought to be disclosed by the client to the insurer; and
3. any declaration which needs to be made by the client in respect of the application and give the client the opportunity to review it before the client signs or makes the declaration.

Examples

Here are some examples of the types of complaints we have seen in this respect:

• When applying for insurance, a prospective policyholder informed his licensed insurance intermediary of treatment he had received in the past for a particular medical condition. The intermediary asked whether the treatment had finished and whether there had been any follow-up treatment. The prospective policyholder answered that all treatment had finished and he did not need to receive any follow-up treatment. On this basis, the intermediary concluded that the medical condition was not material to disclose in the application form. Later, the policyholder’s claim was declined because of the failure to disclose.
• A licensed insurance intermediary did not advise a prospective policyholder to disclose to the insurer, when applying for medical insurance, that her sons (the proposed insureds under the policies) had autism, because although they had been diagnosed with Autism Spectrum Disorder, they were high functioning and as such, in the intermediary’s opinion, this was not material. The insurer disagreed and the policyholder faced problems in recovering claims under the policy.
• A licensed insurance intermediary noticed that his client, when filling in an application for insurance, had quite severe problems with her eyesight. The intermediary did not ask about this, however, and did not follow up with the client when he noted that the client had not disclosed any information about her eyesight in the application form. Later the policy was avoided because it was discovered the client had a long-standing eye disease.

These examples show licensed insurance intermediaries exercising judgement and giving opinions on what are, essentially, medical and health related matters. Licensed insurance intermediaries, however, are not expected to be medical experts and should be wary of the limits of their expertise. As a matter of practice, licensed insurance intermediaries should always err on the side of caution, by advising clients that it is better to disclose medical conditions (rather than not disclosing them) when applying for insurance. This is especially the case as the consequences of not disclosing matters which are later decided to have been material, can be catastrophic and (in a worst case scenario) result on the policyholder’s insurance coverage being invalidated.

Insurer’s controls and procedures

Insurers also have a vital role to play in this respect, by:

• reinforcing, through training, the message to their appointed licensed insurance agents of the need to err on the side of caution, when it comes to giving advice to clients on disclosing material facts;
• clearly stating the obligation to disclose material facts in plain and visible language in their application forms;
• providing hotline support and enquiry services for licensed insurance intermediaries and prospective policyholders, so that questions on specific medical conditions and whether they need to be disclosed can be addressed in real time; and
• being aware of their responsibility (and liabilities) as principals of their appointed licensed insurance agents, in respect of matters disclosed to and advice given by their agents (particular reference should be made to section 68 of the Insurance Ordinance (Cap. 41) in this respect).

It is also incumbent on insurers to keep their underwriting guidelines, and the actuarial and other data on which they base their guidelines and underwriting decisions, up to date, as insurers need to demonstrate (to comply with legislation such as the Disability Discrimination Ordinance, for example) that it is reasonable for them to rely on such data when it comes to underwriting decisions and considerations as to whether certain medical conditions are material to disclose. As an example, in a case concerning a declinature based on autism spectrum disorder (being one of the examples mentioned above) it may be incumbent on the insurer to demonstrate that the data and research underpinning its underwriting guidelines is not out of date.

Finally, insurers’ attention is drawn to the “Paper on Conduct of Business Risk and Its Management” published by the International Association of Insurance Supervisors in November 2015 which contains useful guidance on positive indicators that show fairness, efficiency and transparency in claims practices. These positive indicators include where the insurer has in place a process to ensure that claims are assessed not only from a purely legal contractual perspective but also taking into account fairness considerations. It is these types of indicators that the Paper encourages supervisors like the IA to take into account when assessing an insurer’s approach to mitigating conduct risk and the strength of the insurer’s culture as part of the supervisory process.