Blacklisted policyholders could have their insurance claims rejected

The Ombudsman for Short-Term Insurance (OSTI) regards non-disclosure of a poor credit history as grounds for an insurer to reject a claim, according to a recent case study. A credit check of the insured, however, was only done at the claim stage and not before the policy agreement was entered into.

“As insurance is a balancing act of risk and premiums, having a poor credit history gives insurers the impression that the applicant is a higher risk client,” says Guy Eagle, spokesperson for www.Carandhomeinsurance.co.za.

Does that mean someone with poor credit history cannot apply for insurance? Deputy Ombudsman for short-term insurance, Hendrik Viljoen, says it's not that straightforward.

“The answer is not a simple yes or no. Did the insurer ask the client to disclose the blacklisting? Was the client aware of the blacklisting and was the blacklisting legitimate (that is, a result of a proper court order)?” The poor credit history, depending on the insurer, could be considered essential information required by an insurer to determine the applicant's risk. “The principle is that if the policyholder misrepresents his or her financial soundness, it may affect the underwriting of the risk, thus entitling the insurer to reject the claim.”

A blacklisted applicant is regarded as a financial risk. “While it may seem that an insurer only repudiate a claim if the insured actually defaults on payment, non-disclosure of any information that the insurer deems essential to determine the risk of the applicant can lead to a rejected claim,” adds Eagle.

“Any information with the policyholders knowledge that a reasonable person would regard as important for the underwriting of the risk [needs to be disclosed],” concurs Viljoen. “A blacklisting could qualify [as part of this information].”

“Most policies also require an ongoing duty of disclosure. If you change risk address, you also need to inform your insurer.” Credit status influences risk, if it changes the insurer must be informed. “If an insured is under debt review the application for insurance could be rejected, but that depends on the individual insurer,” adds Viljoen. Only if the debt review or blacklisting of the insured affects the risk of the insured can a claim be rejected according to the Short-Term Insurance Act.

Misrepresentation of information that is not essential in determining the risk or amount of premiums cannot be used as grounds for an insurer to claim non-disclosure. “The Short-Term Insurance Act requires that for a valid misrepresentation to be relied on, the insurer must show that a reasonable person would have realised that the information not disclosed would affect the assessment of the risk.”

Even then, it depends on the individual insurer and their underwriting process. What information they deem necessary to determine the risk of the insured would be required to be given without misrepresentation.

A credit check, according to Viljoen, is preferably done at the proposal stage of the insurance agreement if it is considered an important assessment criterion, but this is seldom or never done because of the volume of applicants. “There is, however, no legal duty on the insurer to do a credit check.” Certain insurers begin credit checks at underwriting stage, such as Santam (through PSG Konsult).

According to the Obmbudsman, a misrepresentation of information can only be considered as non-disclosure if the applicant truly did not know his or her credit status. In the case study mentioned at the outset, the Ombudsman ruled that the insured could not have been unaware of her bad credit history (because it amounted to R71 201 as a result of five separate instances). Thus it was decided that the insured intentionally withheld such information from the insurer, who would otherwise not have accepted the risk of insuring the applicant.