A substandard underwriting offer, a pending colonoscopy and a request to backdate
Ms Wong, aged 55, is a self-employed caterer. She applies for a 20-year term policy with a death benefit of HK$3,000,000 to protect her mortgage. On the application she discloses type 2 diabetes diagnosed eight years ago and controlled with metformin, hypertension treated with two drugs, and a body mass index of 31. She also mentions that her doctor has ordered a colonoscopy next month because of a change in bowel habit, but the result is not yet known. The underwriter issues a counter-offer: the policy will be issued with an extra premium of 50% for the first five years, reviewable thereafter, and a lien under which the first HK$300,000 of any death benefit is not payable during the first three years. The agent wants to 'clean up' the file by asking Ms Wong to withdraw the mention of the colonoscopy so the case can be issued at standard rates before the examination. Ms Wong also asks whether the policy can be backdated to save age.
1. Explain the nature of the insurer's counter-offer and the choices open to Ms Wong.
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The underwriter has not accepted the application on standard terms. A counter-offer is a new offer: it replaces the original application terms and must be accepted by Ms Wong before a contract exists. She has three realistic choices.
- Accept the extra premium and the lien, in which case cover begins when the counter-offer is accepted and the first premium is paid, subject to the policy's terms.
- Decline and look for another insurer, although the same medical facts will have to be disclosed and are likely to produce similar terms.
- Negotiate or ask for review, for example by providing recent medical reports showing good control of diabetes and blood pressure, or by accepting a smaller sum assured.
The extra premium is a rating for the additional mortality risk; the lien is a different technique under which the insurer pays only the excess over the stated amount if death occurs during the lien period. Both are common and lawful responses to a substandard risk. The agent must explain clearly that the rating is reviewable, that the lien applies regardless of the cause of death, and that there is no cover until the counter-offer is accepted and paid for.
2. Advise on the request to withdraw the colonoscopy disclosure and the consequences of doing so.
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The proposal must not be withdrawn or edited to remove a known pending investigation. The duty of disclosure is a duty of utmost good faith and continues until the contract is formed. A change in bowel habit leading to a colonoscopy is material: a prudent underwriter would postpone the decision until the result is known, or would rate or exclude. Asking the client to withdraw the reference is an invitation to misrepresent the risk and could amount to fraud.
If the policy were issued at standard rates and the insurer later discovered the omitted investigation, it could rescind the policy for material non-disclosure, leaving Ms Wong without cover when her family needs it. The agent would face disciplinary action by the Insurance Authority for failing to act with integrity and due care, and for misrepresenting the risk to the insurer. The agency could terminate the agent, and the insurer could pursue remedies. The correct approach is to submit the application with the disclosure, explain that the insurer may defer the decision until the colonoscopy result is available, and help Ms Wong provide the report promptly so the case can be assessed on complete information.
3. Explain how the rating and the lien affect the benefit payable if Ms Wong dies in year two from a stroke, and whether backdating is appropriate.
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Death in year two from a stroke. The lien applies during the first three years regardless of the cause of death. The sum assured is HK$3,000,000, and the first HK$300,000 is not payable, so the death benefit is HK$2,700,000. The extra premium increases the cost of the policy but does not reduce the sum assured. The stroke is not excluded, and there is no causal link required for a lien. Any outstanding premium or policy debt would also be deducted.
Backdating. Some insurers allow a policy to be backdated within a limited window, often up to six months, to save age, subject to payment of back premiums and the insurer's rules. It is not a solution to a pending medical investigation, and it cannot be used to avoid disclosing the colonoscopy. Backdating also affects the start date for the suicide exclusion and any contestability period, and the client must understand that she is paying for a period before the policy was actually issued. The agent should not present backdating as a way to obtain standard rates; the medical evidence must be complete before any terms are finalised.