The core philosophical precept to insurance is the legal “doctrine of utmost good faith”. This is an artefact of contract law. Most contracts do not work this way, applying instead the principle of “caveat emptor” in which the seller only needs to disclose what she is asked.
But an “utmost good faith” contract, in contrast, requires both sides to disclose every fact relevant to the contract. If they do not, particularly when the insurance company has been induced to provide the policy because the buyer had kept a material fact hidden, the contract is made invalid.
This makes a lot of sense in commercial insurance. If I want to insure a ship that that is travelling across the Atlantic, I should honestly disclose what that ship will be carrying. The insurer also has a duty to explain the contractual terms clearly, describing when it would or would not pay out.
If I have knowledge material to the nature of the risk and fail to disclose it, the contract is, in the legal terminology “avoided”. All premiums are repaid (unless there was active fraud by the client) and both parties continue as if the contract never existed. This is irrespective of what eventually happens to the ship during its voyage.
This approach is important because insurance is fundamentally about pooling risks. If one policyholder induces the insurer to take on risks they otherwise wouldn’t, it comes at the expense of all other policyholders because the financial position and risks of the pool have been weakened.
But in the life insurance market, things are different. Consumers approach the contact from a deeply emotional perspective in which they are trying to protect themselves and their loved ones from devastating risks. Had Momentum properly understood this, it would have approached the Ganas case differently.
Ganas died during a botched hijacking and violent crime is clearly a highly emotional issue for consumers. Momentum’s refusal to pay out seemed heartless, particularly because the nondisclosure by Ganas was unrelated to the cause of his death. Momentum’s treatment of the Ganas case was confirmed by the insurance ombudsman. He saw it the same way Momentum did — there was material nondisclosure that induced the insurer to take on the contract. Therefore the contract was avoided.
Momentum and the ombudsman clearly were not aligned with a consumer perspective. Insurance companies are being invested with a deep responsibility to care for beneficiaries. Was Momentum living up to this duty of care?
Around the world, insurance regulators have been trying to force insurance companies to think about this duty of care more than they currently do. This is part of the treating-customers-fairly approach that regulators in banking and insurance have applied to firms. This implies that insurers look at a claim from their customers’ perspectives.
No insurer should be expected to pay out when they have been induced to cover a risk about which the consumer has deliberately hidden information. But if someone has died through an unrelated cause, insurers can “reconstruct” the policy as if the disclosure had been made.
That is effectively what Momentum has done. It has created a new side cover for violent crime in the event that there is material nondisclosure. So now there are effectively two contracts — if one is avoided through nondisclosure, the other will pay out in the event of a death from violent crime. This adds some risk to Momentum, but the number of such cases it is likely to face is small.
Momentum was forced into this because the PR was so damaging. It allows it to pay out in the Ganas case, while still insisting on the importance of proper disclosure at the start.
But the event gives occasion for the life industry and its regulators to think more clearly how treating customers fairly should work. Arguably, less work has been done on this compared to banking or short-term insurance. The industry is given a deeply personal responsibility by its clients to care for those they love. That has to be squared with the important principles of contract law that apply.
The newly created Financial Sector Conduct Authority is imbued with a responsibility to protect financial consumers. The Ganas case provides an avenue for it to robustly engage with the life industry on how it should treat customers. The Ganas family may have done all consumers a favour.
• Theobald is chairman of Intellidex.