In the previous article published in the November/December issue, the authors discuss the subject of the duty on a life insurance applicant to make full disclosure of all material facts. This article will discuss some of the applications of the concepts discussed earlier. It will also canvass the role of the life agent in the discussion. This does not suggest that life agents have a liability target imprinted on their backs. This article will suggest practices that will allow life agents to demonstrate their professionalism and increase the chances that the financial plan will accomplish its intended result.
Role of the agent and materiality
Clients do not understand the meaning of many of the questions as seen from the perspective of the insurer. It is therefore up to the life agent to discuss with the client the significance of some of these questions. Consider these questions:
- “Have you ever had a headache?”
- “Have you ever suffered abdominal pain?”
- “Have you ever been treated for symptoms of depression?”
By the time people reach the age of 40, virtually everyone has suffered a headache, some level of abdominal pain and has undergone some treatment for fatigue, moodiness, or sleep disorder. Prescriptions for common medications abound. Some of these are now over-the-counter in various jurisdictions and are considered by the public (and drug regulators) to be trivial in nature. Clients often believe that a condition that is alleviated by treatment is not “material”.
Clients may also believe that conditions such as “depression” have a definition that excludes them. Virtually everybody has had periods of sadness and fatigue. These can be symptoms of depression. They can also be symptoms of daily life. How is a client to distinguish one from the other? This is true for other terms used in the application questionnaire.
It is up to the agent to explain to the client what is meant by these words and terms. Essentially, the agent has to explain the perspective of the insurer. The insurer wants to know whether the existence of the condition may increase the risk of the event that is insured. That is the underwriting criterion. The life agent should make sure that the client understands this. The agent should compare the facts known to the agent with the answers given by the applicant to ensure they are consistent, complete and accurate.
Respective obligations of the agent and client in materiality
Since the 1970s, another Ontario Court of Appeal decision, Fine’s Flowers v. General Accident, has made it clear that agents have a responsibility to explain to clients the options available, along with the risks and significance of decisions made. To quote from the decision, “If this requires him to inform himself about his client’s business in order to assess the foreseeable risks and insure his client against them, then this he must do.”
Again, this does not let the client off the hook of full disclosure. If the agent questions the client about chest pain, for example, the agent cannot be faulted should the client hide the facts. An example of this can be found in the 2001 Ontario Court of Appeal decision of Pusateri’s v. Prudential. There, the client applied for life insurance. After the application but before delivery of the policy, the client consulted a physician about serious chest pains, even applying for travel insurance benefits. The client had a discussion with his agent, but specifically told the agent not to disclose this to the insurer. The client died from colon cancer at the age of 43. The lawyer for the client’s beneficiary tried to argue that information given to the agent should be deemed to have been given to the insurer. The Court affirmed the duty of the client to make this disclosure and relieved the agent of the duties of agency because the client instructed the agent not to disclose.
As a side note, this decision makes clear that agents should keep good records of what transpires in their discussions with their clients. This agent prevailed because he was believed when he testified about the instruction not to disclose material evidence.
The duty of a client to make full disclosure remains front and center. Clients have to make full disclosure with respect to anything that matters. Life agents should make sure that clients understand what is meant by full disclosure. They should help clients deal with questions on the questionnaires that could cross the line between trivial and material.
In the next article, the authors will discuss the merits of the practice of life agents writing to insurers to explain discussions with the applicants.
The authors of this article are members of the Ontario Bar only. This article should not be construed as legal advice.