The Declined Critical Illness Claim
Priya, 41, took out a level-term assurance policy with a critical illness (CI) rider three years ago. The application asked: 'Have you ever had, or been investigated for, any disorder of the heart or circulatory system?' She answered 'No'. Last month she was diagnosed with a stroke and claimed. The insurer obtained her GP records, which show that two years before the application she attended A&E with palpitations and was referred to a cardiologist for an ECG and 24-hour Holter monitor. The records note 'benign ectopic beats, no treatment required, discharged'. She genuinely believed palpitations were stress-related and did not connect them with the question. The insurer is minded to decline and void the policy for non-disclosure.
1. Analyse whether the insurer can lawfully avoid the policy, applying the test for misrepresentation and the proportionate remedy framework.
Read the worked answer
The insurer must show (a) a misrepresentation, (b) of a material fact, (c) that induced it to enter the contract. The question was clear and the cardiology referral falls squarely within 'investigated for any disorder of the heart'. Her answer was therefore inaccurate.
However, avoidance is not automatic. Under the proportionate remedy regime (Insurance Act 2015 for non-consumer, and the Consumer Insurance (Disclosure and Representations) Act 2012 for consumers), the insurer must first ask what it would have done had it known the truth. CI underwriting for benign palpitations with normal investigations is commonly accepted, often with a cardiology exclusion or a small loading, not declined. A deliberate or reckless misrepresentation permits avoidance; an honest but careless one triggers a proportionate remedy. Priya's belief was honest but arguably careless, so the likely remedy is to put her in the position she would have occupied: e.g. pay the claim subject to an exclusion or a reduced sum, not void the policy. The insurer should reassess on that basis rather than defaulting to avoidance.
2. What conduct risks does the insurer's stated intention raise under Treating Customers Fairly, and what should it do next?
Read the worked answer
Jumping to avoidance without applying the proportionate remedy is an unfair-treatment risk: Outcome 1 (consumers confident they are treated fairly) and Outcome 4 (advice/claims handling is fair). The customer was honest, the condition was benign and disclosed in her records, and the insurer has not yet tested what it would have underwritten.
The insurer should: (1) obtain an underwriter's opinion on what terms would have been offered; (2) apply the proportionate remedy accordingly; (3) explain the decision clearly and in plain language; (4) signpost the Financial Ombudsman Service and its own complaints process. It should also check whether its point-of-sale question was overly broad - a question that captures a benign investigation without context may itself be unfair, and the firm should consider whether the wording needs review.