Insurance Brokers’ Liability in Individual/Private LTD Claims

Canadians are paying billions of dollars in premiums for disability insurance coverage each year. Insurers continuously attract business by incentivizing independent brokers through upfront commissions, “contingent” commissions and other perks. In this context, there is an exigent need to highlight the responsibilities incumbent upon insurance brokers in their dealings with insurance applicants.

What is an Insurance Broker?

An insurance “agent” is authorized to transact insurance on behalf of an insurer. The essence of the inquiry is to ascertain whether the insurance “agent” is authorized to represent the insurance company.

Unlike an agent who is authorized by an insurance company, an insurance “broker” is authorized by an insured or prospective insured to transact insurance coverage with an insurance company. The primary obligation of an insurance broker is to represent the insured or prospective insured during the application process and to negotiate with the insurance company as the representative of the insured.

Insurance Brokers and Long Term Disability Coverage

Although insurance brokers might be engaged by employers or associations to secure group coverage, insurance brokers in the disability context are often engaged when individual or private disability policies are sought. Individual/private disability policies are distinguishable from group disability insurance contracts where there is no direct privity of contract between an insured individual and the insurance company.

Eligibility for group disability insurance is secured by virtue of an employment relationship or through membership of an association. The insurer will contract directly with the employer/the association and eligibility for insurance will be defined under the contract. The policyholder is the employer or the association. Unless there is an offer of enhanced coverage (i.e. coverage beyond a specified benefit maximum), typically there is no financial or medical underwriting that takes place with group disability insurance.

Individual insurance involves an individual contracting directly with an insurance company for insurance coverage. The policyholder is the individual insured.

Liability of an Insurance Broker During the Application Process

Financial and medical underwriting are commonplace with individual policies and the process commences with an insured disclosing information to an insurer. This allows the insurer to conduct investigations to determine coverage eligibility/insurability and the amount of premium to be paid by the insured to insure the risk, also referred to as the policy rating.

There is a duty on parties seeking insurance to make true and full representation of facts that are material to the insurance risk. To be material, a fact must be one which, if fully and truthfully disclosed, would have influenced a reasonable insurer to decline the risk or set a higher premium to take on the risk.

The process of applying for insurance involves a prospective insured providing answers to written questions generated by the insurer. Often the questions are posed to the insured through an intermediary such as an insurance broker. Insurance brokers have a responsibility to collect information as part of the underwriting process and a duty to educate their clients on the consequences of providing incorrect information or omitting information for underwriting purposes.

An application for insurance for the purposes of securing individual disability insurance coverage usually consists of more than one document. There may be multiple areas in which answers to several enumerated questions are required from the applicant. The insured often has to sign in several places attesting to the accuracy of the contents. The insurance broker has an obligation to ensure that the application is completed properly and accurately by the broker and by the insured.

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