Canadians are paying billions of dollars in premiums for disability insurance coverage each year. Insurers continuously attract business by incentivizing independent brokers through upfront commissions, “contingent” commissions and other perks. In this context, there is an exigent need to highlight the responsibilities incumbent upon insurance brokers in their dealings with insurance applicants.
What is an Insurance Broker?
An insurance “agent” is authorized to transact insurance on behalf of an insurer. The essence of the inquiry is to ascertain whether the insurance “agent” is authorized to represent the insurance company.
Unlike an agent who is authorized by an insurance company, an insurance “broker” is authorized by an insured or prospective insured to transact insurance coverage with an insurance company. The primary obligation of an insurance broker is to represent the insured or prospective insured during the application process and to negotiate with the insurance company as the representative of the insured.
Insurance Brokers and Long Term Disability Coverage
Although insurance brokers might be engaged by employers or associations to secure group coverage, insurance brokers in the disability context are often engaged when individual or private disability policies are sought. Individual/private disability policies are distinguishable from group disability insurance contracts where there is no direct privity of contract between an insured individual and the insurance company.
Eligibility for group disability insurance is secured by virtue of an employment relationship or through membership of an association. The insurer will contract directly with the employer/the association and eligibility for insurance will be defined under the contract. The policyholder is the employer or the association. Unless there is an offer of enhanced coverage (i.e. coverage beyond a specified benefit maximum), typically there is no financial or medical underwriting that takes place with group disability insurance.
Individual insurance involves an individual contracting directly with an insurance company for insurance coverage. The policyholder is the individual insured.
Liability of an Insurance Broker During the Application Process
Financial and medical underwriting are commonplace with individual policies and the process commences with an insured disclosing information to an insurer. This allows the insurer to conduct investigations to determine coverage eligibility/insurability and the amount of premium to be paid by the insured to insure the risk, also referred to as the policy rating.
There is a duty on parties seeking insurance to make true and full representation of facts that are material to the insurance risk. To be material, a fact must be one which, if fully and truthfully disclosed, would have influenced a reasonable insurer to decline the risk or set a higher premium to take on the risk.
The process of applying for insurance involves a prospective insured providing answers to written questions generated by the insurer. Often the questions are posed to the insured through an intermediary such as an insurance broker. Insurance brokers have a responsibility to collect information as part of the underwriting process and a duty to educate their clients on the consequences of providing incorrect information or omitting information for underwriting purposes.
An application for insurance for the purposes of securing individual disability insurance coverage usually consists of more than one document. There may be multiple areas in which answers to several enumerated questions are required from the applicant. The insured often has to sign in several places attesting to the accuracy of the contents. The insurance broker has an obligation to ensure that the application is completed properly and accurately by the broker and by the insured.
Denial Based on Misrepresentation
It is fairly common practice for disability insurers to deny individual disability benefits claims on the basis of misrepresentation. Once a claim for disability benefits has been submitted by an insured, an insurer will frequently investigate the claim by requesting medical records that precede the date of disability. The insurer will then analyze those medical records to determine whether the insured fully disclosed their health history and if not, a claim will be denied on the basis of non-disclosure and misrepresentation.
Applications can be confusing and there may be ambiguities especially where questions relate to issues of health. The broker plays an important role in guiding an applicant through the application process.
Liability can ensue when the application process is completed without due care and attention to the applicant’s health history and status.
Timing and the Contestability Period
The insurance company’s ability to deny a claim based on material misrepresentation and to render a contract void ab initio takes on a different complexion depending on when the claim is submitted to the insurer.
After a policy of insurance is issued, there is a two year contestability period which starts to run from the effective date of insurance. This is set out in the Insurance Act. If a claim is made within those two years, the insurance company can deny the claim and void the policy based on a material misrepresentation even if the misrepresentation was innocent or negligent.
If the claim is made after the two year contestability period, the insurer must establish that the material misrepresentation was fraudulent. To constitute fraud, a material misrepresentation must have been intentional, made deliberately without belief in its truth or, made with a reckless disregard for the truth.
In either case, it is essential to carefully discern the broker’s involvement in the application process in order to analyze whether the alleged misrepresentation arose by virtue of the broker’s negligence or was contributed to by the broker’s negligence.
The details of the meetings held between the broker and the prospective insured/applicant should be examined carefully, the broker’s notes should be reviewed and the nature of the application process should be carefully analyzed to determine what steps the broker took. Considering whether for example, the broker explained to the applicant/claimant the importance of disclosure and the consequences of non-disclosure and misrepresentation.
There is a general misconception that undisclosed medical issues unrelated to the disabling condition would not be considered material. The issue is not whether the insured failed to disclose medical issues related to their disabling condition but whether the insured failed to disclose any medical issues that would have resulted in the insurer declining to issue the insurance to the insured.
A thorough examination of the broker’s involvement in the application process can facilitate the development of a theory of liability against the broker with the underlying assessment centering on whether the broker breached the duty of care that the broker owes to the applicant/claimant in relation to the application process.
Is Establishing Negligence the End of the Inquiry?
Once negligence has been established, issues of causation and damages must be considered. Often this requires an analysis of the insurability of the insured.
If the information that the broker failed to disclose on behalf of the insured would have rendered the insured uninsurable, arguably, there may be no right to compensation. If the information that was not disclosed would have resulted in a rated policy or would have resulted in coverage from a different insurance carrier, the insured has lost the opportunity to obtain alternative coverage and the valuation of that coverage constitutes the damages owed by the broker to the insured. An expert underwriting opinion may prove invaluable in these circumstances.
Failure of the Broker to Secure Adequate Coverage
The obligations of insurance brokers in relation to ensuring that an insured has adequate coverage has been dealt with in several contexts. In Fletcher v. Manitoba Public Insurance Co., Madam Justice Wilson refers to the decision of Fine’s Flowers Ltd. et al v. General Accident Assurance Co. of Canada et al. (1979), 9 Man L.J. 165 and states:
“In my view, Fine’s Flowers stands for the proposition that private insurance agents owe a duty to their customers to provide not only information about available coverage, but also advice about which forms of coverage they require in order to meet their needs…
…it is entirely appropriate to hold private insurance agents and brokers to a stringent duty to provide both information and advice to their customers. They are, after all, licensed professionals who specialize in helping clients with risk assessment and in tailoring insurance policies to fit the particular needs of their customers. Their service is highly personalized, concentrating on the specific circumstances of each client. Subtle differences in the forms of coverage available are frequently difficult for the average person to understand. Agents and brokers are trained to understand these differences and to provide individualized insurance advice. It is both reasonable and appropriate to impose upon them a duty not only to convey information but also to provide counsel and advice.”
Bronfman v. BFL Canada Risk, 2013 ONSC 5372 involved an action against insurance brokers who failed to secure adequate coverage on the insureds’ property and in particular on valuable jewellery stolen during a robbery. The court considered whether the broker failed to maintain the standard of care to be expected of a reasonably prudent insurance broker in the circumstances.
The court found that the broker fell below the standard to be expected of him as he made unjustified assumptions as to what the Plaintiffs needed and wanted; he failed to meet with the Plaintiffs to review in detail their personal insurance needs; he failed to attend at the Plaintiffs’ home to gain a full appreciation of the property and lifestyle considerations which would affect their insurance needs; he failed to advise them with respect to existing gaps in their coverage and failed to advise them that additional insurance was available or to make any recommendations to them with respect to adequate coverage for their possessions.
The court held that if the Plaintiffs had been advised of the deficiencies in their insurance coverage, they would have taken steps to procure additional insurance and would have obtained all necessary appraisals. The court awarded damages based on the coverage that the Plaintiffs likely would have obtained had they been properly advised.
Coverage in Individual/Private Disability Policies – Policy Riders
In the context of individual/private long term disability insurance where customization of policies is more commonplace, there is greater potential for broker’s liability. Usually customization in individual/private policies takes the form of an optional “Rider” which is essentially a benefit that can be purchased to provide coverage beyond what may be contained in the standard individual disability insurance policy. Some optional riders available for individual disability policies include Own Occupation Riders, Partial and Residual Disability Benefit Riders, Future Income Option Riders, Cost of Living Riders, Lifetime Benefit Riders.
- An Own Occupation Rider changes the definition of disability to relate solely to the insured’s occupation at the time a claim for disability is made. This is particularly important for professionals who acquire a specific skill set as part of their occupation. Not all Own Occupation Riders provide the same level of coverage. An Own Occupation Rider with a clause that stipulates that the insured may not be gainfully employed in an occupation other than their regular occupation may prohibit a claimant from working in any capacity after a disability claim has been filed. An “Own Occupation Rider” that allows for a claimant to be employed in an occupation other than their regular occupation would mean that the claimant would be entitled to work in something other than their own occupation and still qualify for disability benefits coverage.
- Partial and Residual Disability Benefit Riders allow for payment of disability benefits when an insured is still working in their own occupation (i.e. not totally disabled) but not at full capacity. Different insurers may word the Partial and Residual clauses differently and it is important to bear in mind that this may have significant implications for the insured depending on the nature of the insured’s business or practice model.
- Future Income Option Riders allow for the purchase of additional insurance over time. This is particularly important for young professionals and new business owners whose income is likely to increase over time. With this Rider, they are guaranteed the ability to obtain additional insurance to cover increased income without having to submit to a medical underwriting process each time they do so.
- Cost-of-Living Riders index the disability benefits an insured is entitled to receive over time. The indexing usually occurs annually and may be tied into the percentages set out in the consumer price index (CPI), or may be a set percentage.
- Lifetime Benefit Riders ensure that policies continue to be payable beyond the usual maximum end date of age 65. This is particularly important for professionals and self-employed individuals who have a tendency to work beyond age 65.
The existence of these optional coverage options gives rise to the question of whether an insurance broker advising a client on the purchase of an individual disability policy would be found negligent for failing to properly assess the client’s needs and provide for all eventualities.
Arguably, based on the current state of the law as it relates to other areas of insurance, where an insurance broker has failed to properly assess an insured’s potential needs and has failed to provide appropriate advice on coverage, and where the insured has sustained a loss as a result, a broker could be found to have been negligent.
For instance, the doctor working part-time and earning income supervising the office rather than running a practice as the doctor did previously, would sustain a significant loss if the Own Occupation Rider had not been offered to that doctor or if the Own Occupation Definition in the Rider prevented the doctor from performing work in any capacity.
Bringing a Claim for Negligence: Is it Worth it?
Whether the negligence of an insurance broker is assessed in relation to the application process or in relation to whether the broker secured adequate coverage, the analysis is always a contextual one. It is essential to carefully evaluate all aspects of the interactions between the claimant/applicant and the insurance broker in order to assess the strategic advantage of litigating against an insurance broker.
Although the duty of care owed by a broker is stringent, the viability of a claim for negligence against an insurance broker must always include an analysis of causation and damages. If a claimant was uninsurable or would not have purchased additional coverage even if that had been offered, the claim against an insurance broker may fail even if negligence can be established.
If you have an individual/private long term disability policy and your claim has been denied for misrepresentation or for any other reason, you should discuss your long-term disability claim with an experienced lawyer. MK Disability Lawyers LLP are experienced lawyers dedicated exclusively to the practice of disability insurance litigation and broker’s negligence. We would be happy to provide you with a free consultation. Please contact us online or by calling us at 844-697-4600.
The preceding is not intended to be legal advice. This blog is made available for educational purposes only as well as to give you general information and a general understanding of the law, not to provide specific legal advice. By using this blog, you understand that there is no solicitor-client relationship between you and the blog publisher. The blog should not be used as a substitute for competent legal advice from a licensed lawyer in your jurisdiction. If your disability claim has been denied and you require legal advice, contact a lawyer specializing in disability law.