A Blank Proposal Form, a Cash Premium and a Rebate
Daniel has been an agent for six years. On a Friday afternoon he meets Mr Tan, 62, a retired teacher who wants to add a hospital plan. Daniel is double-booked, so his new assistant, who is not licensed, takes Mr Tan through the health questions from a crib sheet, ticking "no" to all of them; Mr Tan signs the blank proposal form, and the assistant later writes the answers in. Mr Tan smokes ten cigarettes a day but was recorded as a non-smoker. Daniel collects the first premium of $1,200 in cash, banks it into his personal account, and pays the insurer on Monday afternoon. To close the sale, Daniel tells Mr Tan to cancel his existing hospital plan with another insurer the same week, and offers him $200 "cash back" from the commission. Mr Tan is admitted to hospital in month three for a heart condition for which he had been treated two years earlier.
1. Identify the breaches in this scenario and allocate responsibility between Daniel, his assistant, Mr Tan and the insurer. Rank them by severity.
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Most serious: handling of client money. The premium is the insurer's money, not the agent's. It should be receipted, held in a designated client or trust account if the agency operates one, and remitted within the timeframe set by the insurer and the conduct rules. Banking it personally, even for two days, is a misappropriation risk and a reportable breach regardless of whether any money is lost. It also creates a false impression of cover dates if the insurer's records show a later receipt.
Serious: the unlicensed assistant. Advising on and completing a proposal is a regulated activity. An unlicensed person taking a client through health questions, and using a crib sheet of "standard answers," is both an unauthorised activity and the direct cause of the inaccurate answers.
Serious: the blank form. A client may sign only after the answers are completed and read back to him. Having Mr Tan sign a blank form destroys the evidential value of the declaration and puts the agent in the position of having written statements the client never saw. Daniel is responsible for the conduct of his assistant.
Serious: the replacement advice. Telling a 62-year-old to cancel existing hospital cover before the new policy is in force, without comparing the two, creates a coverage gap, restarts waiting periods and may leave a pre-existing condition excluded. That is a failure of best advice and a foreseeable consumer detriment.
Serious: the rebate. Offering $200 from commission is an inducement; it is prohibited in most markets, distorts competition, and here it also helped close a sale that should never have happened.
Shared responsibility. Mr Tan must answer honestly and check what he signs, so his smoking and the treated heart condition are his own non-disclosures. But a client cannot be expected to correct answers he never saw, and the agent knew about the smoking. The insurer's responsibility is limited to its own underwriting and to whether it imputes the agent's knowledge to itself.
2. The insurer investigates the month-three hospital claim. Explain the likely outcome and how it would differ if Mr Tan had completed the form himself.
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Two separate non-disclosures. Smoking status and a treated heart condition are both standard underwriting questions and both are material. The claim falls within the usual two-year contestability window, so the insurer can investigate and is not yet protected by any incontestability clause.
Possible insurer responses. For the heart condition, the key question is inducement: would the insurer have declined, excluded pre-existing cardiac conditions, or loaded the premium? If it would have excluded, the claim is refused because it falls within the exclusion. If it would have charged more, a proportionate reduction in the benefit is the likely modern remedy. Outright avoidance is available but increasingly treated as a last resort for innocent or merely careless cases.
Smoking. The insurer will ask what premium a smoker would have paid. If it is, say, 40% more, the proportionate remedy is to pay only the proportion the correct premium would have bought. Note the evidential point: an agent who met the client face to face and recorded "non-smoker" for someone who smokes ten a day has a serious explaining job to do.
If Mr Tan had completed the form himself. The insurer would rely squarely on the signed declaration. The agent's role would be limited to presenting the form and asking whether the answers were complete and correct. The remedy would still be proportionate or avoidance, but the failings would sit with the client and the insurer's position would be much stronger. Here, where the agent or his assistant wrote the answers, the insurer may face an argument that the agent's knowledge is imputed to it, or at least that it cannot rely on a declaration the client never read. The claim outcome is uncertain and the agent's conduct will be the focus of the investigation.
Worst outcome for the client. The old policy is cancelled, the new one is disputed, and he is uninsured for a cardiac admission. That is the real cost of the conduct in this file.
3. Set out the remediation steps Daniel's agency should take, and the likely consequences for Daniel.
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Immediate containment. Report the matter to compliance and to the insurer in writing, today. Do not attempt to correct the file quietly or contact Mr Tan with a rehearsed script. Establish where the $1,200 is, remit it properly with the correct value date, and document the trail. Withdraw the instruction to cancel the old policy if it has not yet been processed, and if it has, ask the previous insurer whether reinstatement is possible - usually it will require fresh underwriting.
Disclose to the insurer. Mr Tan's correct smoking status and medical history should be submitted so the insurer can re-underwrite. This may mean a revised premium, an exclusion or a declined application; the client must be told the consequences before he decides. If the cover is cancelled, he must know he has no hospital cover and must be helped to find an alternative.
Remediate the client relationship. Refund or cancel the $200 rebate, explain in plain language what went wrong, provide the policy documents and a written summary of what is and is not covered, and handle the complaint through the formal complaints process with a written response and a route to escalation.
Consequences for Daniel. Expect a disciplinary process: a formal warning at minimum, and suspension or termination if the client-money breach is confirmed. The regulator may impose a fine, conditions or revocation of registration, and the insurer may terminate the agency. The client may claim against the agency's professional indemnity cover for any uninsured loss caused by the cancelled policy. Cooperation, early reporting and a clean record are the only real mitigation.