A cure for rejected claims offers hope for those who fail to pass the medical cross-examination

As it issues new guidelines on health-related policies, James Moore asks if the insurance industry is doing enough to protect its customers

Stories like this can be heard in pubs and bars up and down the country – a friend of a friend, in his mid-40s and previously in good health, suffers a sudden heart attack. He has to give up his job and is horrified to find his critical illness cover won't pay out because he neglected to inform the insurance company that, back in his early 20s, he'd once had a bout of flu.

That may be something of an exaggeration but newspapers contain plenty of examples of insurers denying claims on the basis that a policyholder has failed to tell them about some long-forgotten ailment. This has prompted many to see critical illness insurance – designed to pay out following a range of serious medical conditions, where a policyholder is unable to work – as a waste of time.

Now the Association of British Insurers (ABI) is trying to do something to change that perception. It has launched a "non-disclosure initiative" to ensure policies are voided only "in the most serious cases of non-disclosure [of medical conditions]" – for example, saying you're a non-smoker when you're not – or where application forms show "a complete disregard for the accuracy" of answers.

Under the guidelines, the ABI says that even if someone is deemed to have been "reckless", their claim should not necessarily be disallowed. Instead the insurer should calculate a payout based on the amount of cover it would have offered for the premiums paid had it known about the condition.

The ABI gives the example of a 42-year-old heart attack victim who took out a £100,000 critical illness policy costing £40 a month while failing to disclose that he was on tablets for high blood pressure. Had he done so, the premiums would have been £80. The new guidelines say the insurer should offer him a reduced payment of £50,000.

Life insurance and health insurance policies are also covered by the initiative.

Nick Kirwan, head of health and protection at the ABI, admits that in the past "there were too many claims denied". However, he insists that the industry is making improvements. "We have been taking action and the number of denied claims has been falling. We have done work on several issues, making the questions on application forms more specific, for example."

But critics of the industry point out that while the number of declined policies has indeed been falling over the past two years, that is in part due to action by the Ombudsman following complaints from the public.

Do the new guidelines go far enough? No, say consumer groups. They argue that insurers are still allowed too much discretion when it comes to the cancellation of policies.

"Look, I don't want to sound negative," says Teresa Fritz, principal researcher for Which?, "but there is a get-out. Insurance companies can still void a policy if they decide they would not have offered cover had they known about something."

And she adds that there are no sanctions for those companies that fail to buy into the ABI initiative. However, Mr Kirwan at the ABI counters that the guidelines will make a difference because the Ombudsman will consider whether companies have followed them when adjudicating on claims.

Industry insiders have given the initiative a cautious welcome, saying, in short, that it is a step in the right direction. "We think this should result in less cases being referred to the Ombudsman and more policies being paid out on," says Matt Morris from LifeSearch, a broker specialising in life insurance. "There are some good things in there. For example, it says insurance companies should request information only on relevant conditions, rather than seeking a policyholder's full medical history from a GP."

But Which? is concerned that the guidelines could be used to head off legislation proposed by the Law Commission, which has recommended doing away with the requirement on the part of consumers to proactively "volunteer information that would influence a prudent underwriter". Instead, the onus would be on insurance companies to ask clear questions to elicit the information they need to know, in line with rulings made by the Ombudsman.

With such a legal requirement in place, Ms Fritz suggests that insurers would have rather less discretion in refusing to pay out, and even more cases might be resolved without recourse to the Ombudsman.

"What you have to remember," she says, "is that going to the Ombudsman can be a long and stressful process. You first have to complain to the company, then to the Ombudsman."

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