In the previous two articles, the authors discussed the obligation of an applicant for life insurance to make full disclosure of material facts to the insurer. This was followed by a second article which focused on the role of the life agent in this disclosure process. This article will discuss a good, but not so common practice of life agents.
At the time of the application, some life agents will write a letter to the insurer to explain information that has been disclosed by the applicant. For example, the weight of the applicant may be abnormal because of a high level of fitness, and not a weight problem. The applicant may have disclosed history of smoking, but the life agent can put this into context.
There are several issues that arise from these letters. The first is one of confidentiality. Insurance legislation contains a presumption against the life agent being declared to be the “agent of the insured”. If this is the case, does the life agent have the authority of the applicant to disclose information to the insurer? For an interesting twist on this, see the discussion in respect of the Pusateri’s decision in the previous article.
Life agents can disclose their discussions with the applicant regarding interpretation of the terms used in the questionnaire. As discussed in the previous article, some of these involve judgment calls. If the insurer is aware of the information that gave rise to the limited disclosure, the insurer cannot argue at the time of claim that it was caught by surprise.
The next question is whether life agents should send a copy of their letter to the applicant. Anything said to the insurer that has an impact on the application should be disclosed. If the applicant makes a request under the personal information disclosure legislation (PIPEDA), this letter has to be produced by the insurer.
It is a good practice to make this disclosure immediately upon writing. It demonstrates the professionalism of the life agent. The life agent can direct the applicant to look for inaccuracies in the letter, thereby avoiding any potential liability for misrepresenting what was discussed. It is best if the client specifically approves of the disclosure, its accuracy and its completeness.
Availability of records
Another factor to consider is the availability of records. Insurers often conduct minimal investigations at the time of the application, such as questionnaires and blood tests by a paramedic or nurse. At the time of claim, however, they conduct a thorough investigation of medical records and histories. Clients often ask why this investigation did not take place at the time of the application. These records and histories were available on request. Can the insurer rely upon them at the time of claim, having failed to investigate at the time of application? The answer, as of the present, is that insurers may not (currently) have to conduct these detailed investigations at the time of application. That is simply not the practice in effect today.
The availability of records is relevant to materiality. If the records were known to be available at the time of application, and the insurer chose not to request them, how could things disclosed in those records be material? The current state of the law suggests that this is not an inquiry that the courts are asked to impose on the insurer today. Therefore, the materiality argument will not arise. Nevertheless, this area of the law appears to be in a state of flux.
Clearly, the life agent plays an active role in the disclosure of information by the applicant to the insurer. As with all aspects of the practice of a financial advisor, life agents should “show their work” by keeping notes and records of discussions. Although the trial evidence in the Pusateri’s case has not been published, one could imagine that a note by the life agent confirming the instruction not to disclose material information to the insurer may well have saved the day for him.
Letters by life agents to insurers should be disclosed to the applicants. Indeed, applicants should be asked to confirm the accuracy of the information disclosed in these letters. This demonstrates that the applicant and the life agent are on the same side, trying to implement a financial plan that benefits the client.
The authors of this article are members of the Ontario Bar only. This article should not be construed as legal advice.