Legalese_09-12

Jeff Green | Mar 26, 2009

By Susan Irwin, Lawyer/Executive Director, Rural Legal Services

The problem that comes to light from time to time is the insurance that people think they have on a loan or a mortgage - insurance they may even have paid premiums on for several years. The insurance is usually for payment of the debt upon the death of one of the borrowers, although insurance may also be sold for disability, unemployment, or the onset of a critical (or terminal) illness.

What people may discover is that an insurer in cases of consumer debt may just accept your application and your premium (sometimes paid in advance for the whole term of the loan and added on to the debt) without really looking into whether or not you are actually insurable.  If nothing happens for the term of the loan, then there is no problem, but if a claim is made, the insurance company will closely review the information you provided, or thought you provided, on your application for coverage.  Suddenly, the insurer will be very interested in your medical history, and the discovery of any medical condition that would be “material” to the risk, and may find grounds to deny coverage – even if you thought you had adequately described any health problems.  This approach is often referred to as “post-claim” underwriting; no decision is actually made on your insurability unless and until a claim is made.  Don’t confuse being accepted for loan insurance with actually being insurable; in many cases “accepted” simply means you have only been approved to start paying premiums.

However upsetting it may be to the borrower, there is nothing illegal in this, as the whole basis of insurance is “risk”, and collecting more in premiums than they pay out is how insurance companies make money. It does, though, illustrate the need for consumers to be extremely careful when it comes to insuring any loan through a lender. Renewing a mortgage or renegotiating a loan may require new insurance, and if medical conditions have arisen since you first borrowed the money, you may be surprised to learn that you are not insurable for the “new” loan. Don’t assume your original insurance coverage continues when a change has been made to the loan contract. Simply paying premiums does not necessarily mean you can collect on the policy if the need arises.

Consumers can protect themselves by making sure that they complete medical questionnaires as completely as possible. The application for insurance should always be considered an important part of the loan process, and given the attention it deserves. Read the fine print. Ask questions. Do not give vague answers. Never sign the form in blank. If you don’t understand the question, make sure you get a satisfactory explanation before you provide an answer, as often a single question may cover a broad range of medical issues. Remember that car salesmen, or loan officers, are generally not licensed insurance agents; they are usually just doing their best to help you complete the forms that will be forwarded to an insurance company. If the only medically relevant question on your application is something like “Do you consider yourself to be in good health?” (actually presented to me once), then alarm bells should go off.

Life or other insurance sufficient to meet your needs can be obtained directly from an insurance company not associated with your lender. You may get a better understanding of your insurability from a licenced insurance professional than from the nice man who just sold you a used pick up truck. It is especially important in these times of low interest rates, and an aging population, for borrowers to be aware of the problems that can arise with regard to these types of insurance policies.  For some further insight into this area of consumer affairs, you may want to look at a story with a happy ending, www.thestar.com/comment/columnists/article/605987, and stories that may leave you wondering about your personal situation at www.cbc.ca/marketplace  (click on the YouTube Playlist feature and you can see the episode broadcast on December 3, 2008, called “In Denial”).