The Australian Financial Complaints Authority (AFCA) has carefully detailed how it evaluates complaints over variations of life insurance cover, such as retrospective exclusions, after finding this was a main cause of claim disputes.

In an AFCA member forum on Friday, ombudsman Anne Maree Howley said there had been increased use of the variation of contract remedy for non-disclosure or misrepresentation in life insurance claims permitted in section 29 (6) under the Insurance Contracts Act.

AFCA has outlined for insurers a “useful and illustrative example” of the type of evidence that it seeks in new guidance that will soon be issued on this issue.

In dealing with these complaints, AFCA crucially establishes if the insurer’s proposed varied position is “not inconsistent” with other reasonable and prudent insurers.

Ms Howley detailed two determinations with different outcomes related to cover variations.

In one case, AFCA ruled partly in favour of the complainant, a woman who claimed for income protection (IP) for depression and total and permanent disablement (TPD) for depression, anxiety and chronic fatigue under an insurance policy issued by TAL.

TAL declined both claims, saying she misrepresented her history of depression when she applied for cover and it had varied the policy by adding a mental health exclusion pursuant to section 29(6) of the Insurance Contracts Act.

AFCA found TAL was entitled to vary the policies but that its exclusion was inconsistent with what other insurers would have imposed. TAL was given an exclusion with different wording it could use and not required to pay benefits for depression and anxiety but told to re-assess the chronic fatigue claim.

In another case, AFCA found a woman who held TAL TPD and IP cover through her superannuation had misrepresented her medical history.

TAL said it would have applied a mental health exclusion on her cover had she not misrepresented her history and decided to exercise its rights to vary the terms of cover and apply the proposed mental health exclusion from the commencement of cover. TAL said the TPD and IP claims should be denied as a consequence of this exclusion.

AFCA agreed she had misrepresented her medical history and it was fair and reasonable for TAL to vary the terms from the commencement of the cover.

In that case, AFCA found the wording of TAL’s proposed mental health exclusion was “not inconsistent with other reasonable and prudent insurers”.

Overall, AFCA received 1623 complaints related to life insurance in the year to June 30, made up of 575 income protection, 290 term life, 180 total & permanent disability, 169 funeral plans, 115 trauma and 115 whole of life claim disputes.

Only 239 reached the decision stage, with 31% resolved at registration and referral.

The top five life insurance complaints received by issue were incorrect premiums, denial of claim, delay in claim handling, service quality and misleading product or service information.

Of 1409 complaints closed, 57% were resolved by agreement or in favour of the complainant. More than $14 million in conversation was awarded to life insurance policyholders.

The average time to close the complaint was 124 days, compared with 88 in general insurance and 74 across all financial services.

See the two AFCA variation of cover determinations here and here.