Down – and out

Down – and out

Some insurers won’t cover people who are bankrupt, and consumer groups don’t think that’s fair

By John Deex

Arecent ruling by the Australian Financial Complaints Authority (AFCA) has brought the issue of how insurers treat bankruptcy into the open.

The ruling went against a person with a Hollard motor policy, whose claim was denied for non-disclosure of a part 9 debt agreement under the Bankruptcy Act.

Had she declared the agreement, Hollard’s underwriting criteria would have deemed her an unacceptable risk – and on that basis AFCA ruled that the claim could be denied and the policy cancelled.

The motorist was asked directly during her online application for cover whether she was currently bankrupt or subject to an agreement under part 9 or part 10 of the Bankruptcy Act, and answered no. She was also made aware of her duty of disclosure.

The claimant argued that it was an innocent mistake. She said she was a victim of domestic violence and had entered the agreement during a “traumatic and highly stressful” period of her life. For this reason she was unable to fully understand the consequences.

She says she was aware that it came under the Bankruptcy Act, but not that it was “part 9”, so she believed she was answering Hollard’s questions correctly.

While the claim appeal failed, it highlights a case being argued by the Financial Rights Legal Centre that aside from the issues around disclosure, it makes no sense to close the door on insurance to those affected by bankruptcy. Policy and Communications Officer Julia Davis tells Insurance News that such blanket policies are discriminatory.

“The car insurance stuff is particularly infuriating, because the irony is [that] not having car insurance can lead to bankruptcy,” she says.

“You drive around without car insurance and you run into a Mercedes and before you know it you owe $50,000 that you cannot pay and you’re bankrupt.

“This is someone trying to make a responsible decision for themselves as well as for the rest of us. We don’t want to get run into by someone who doesn’t have insurance.”

Ms Davis says she would even question such blanket underwriting criteria for business insurance.

“I could see how you can make an argument that it’s a bit more relevant, but we deal with people who end up bankrupt for all kinds of reasons that have nothing to do with their inability to manage their finances or lack of business acumen or moral failing.

“People end up bankrupt for lots of reasons that they have zero control over.”

Ms Davis flags the COVID-19 pandemic as an example of circumstances that could leave people in financial ruin through no fault of their own.

“We just saw a lot of people in industries like travel who just went through a whole year with no international tourists. And, of course, they are going to go down; they are going to have debts they cannot pay, both in business and in their personal capacity.

“So the idea that there is just some blanket rule that if you’re are a bankrupt you can’t get coverage – I find that so discriminatory.

“Where’s the data backing up that risk decision? If you’ve dug even a tiny bit deeper and the reason they’ve gone bankrupt is because of medical bills, or something like that, how is that relevant to their ability to run a business?

No uniform industry approach: a bankrupt who applies for insurance isn’t necessarily inept or irresponsible

“It entrenches people in hardship. People are just trying to be responsible, to get insurance in place. That is a responsible financial management decision. Why are we making it so hard for them to move on with their lives after a period of hardship?”

Ms Davis says one insurance company told her it has made an ethical decision to drop creditworthiness from underwriting guidelines.

“Obviously some insurers have done some ethical analysis and thought, ‘is this relevant to our business or does it just hurt people?’ If some insurers have decided it’s not relevant, it’s not equitable, why can’t they all do it?

“We would argue insurance is supposed to support positive social ends and a policy that discriminates against people who have been bankrupt or have a debt agreement just embeds that financial hardship in society.

“It’s devastating when tragedy strikes and someone doesn’t have insurance.”

WEstjustice, which provides free legal help to people in the western suburbs of Melbourne, agrees.

“We believe that there needs to be more insurance products made available which are affordable and do not exclude customers who are bankrupt or under a debt agreement, in order to provide greater accessibility to insurance cover for customers in financial hardship,” Acting Legal Director Matthew Martin said.

While the issue is handled differently by insurers, it’s unlikely the industry will address a uniform approach anytime soon. The Insurance Council of Australia says how bankruptcy is treated in underwriting is a matter for individual insurers.

A spokesman for IAG told Insurance News the group has no specific underwriting guideline relating to bankruptcy for personal lines customers.

“Generally, for our business or commercial customers, it is a consideration on a case-by-case basis,” the spokesman said.

“In certain products, additional terms or conditions may be put in place, which may impact cover for customers while they are subject to insolvency or bankruptcy processes, including whether cover may be excluded.”

IAG says it recognises the extraordinary circumstances some customers have experienced during the COVID-19 pandemic “and the deep impact it has had on people, businesses and communities – financially, socially and emotionally”.

“We believe insurers play a critical role in supporting people when they face financial hardship.”

Allianz says it removed bankruptcy exclusions around five years ago for motor and home policies and “as such, we don’t ask any questions or impose any conditions on bankrupt customers”.

Suncorp also has no such exclusions for personal lines policies, apart from the Shannons motor insurance brand. QBE would only say that it “considers all the circumstances before we make a decision to decline or accept the risk”.

Hollard declined to comment on its underwriting guidelines in relation to bankruptcy.

“Hollard adheres to the General Insurance Code of Practice when dealing with policyholders who are experiencing financial hardship at claims time,” a spokesman said.

“Our support options include fast-tracking advanced payments and assessing claimants for urgent financial need of benefits.

“Any AFCA determinations are reviewed to understand the implications for future underwriting.”