An insurer that applied an offset clause to a small business owner’s income protection benefit has been ordered to pay the claimant compensation, following a Determination by the Financial Ombudsman Service.
The ruling, which was handed down in June 2014, related to a dispute over an income protection claim lodged by a man who jointly owned a small business with his wife. The insurer initially denied the claim, saying that even though the claimant was no longer able to work in the business, the business remained profitable and he continued to receive a share of those profits.
The insurer did not dispute that the claimant was totally disabled
After the claimant referred the matter to FOS, in June 2012, the insurer offered to pay a reduced benefit to the claimant, based on its assessment of the claimant’s pre-disability monthly earnings, less amounts payable from the business.
The insurer did not dispute that the claimant was totally disabled, but said it had accepted the application for cover on the basis that the insured was entitled to 50% of the profits of the family business, and so took this into account when calculating his claim benefit.
A FOS panel considered the dispute, determining that the insurer was not entitled to offset the claimant’s benefit by the profits because the income was earned ‘passively’, and not through the insured’s personal exertion.
The Determination stated that:
- The insurer was only able to apply the policy condition to amounts which were referable to the applicant’s total disability. These did not include amounts which may have been payable to the applicant as a result of the profitability of the family business after he became incapacitated, and to which he did not contribute through personal exertion.
- There is no unfairness or inconsistency in taking into account business profits prior to disablement when the applicant was working full time but not after he became totally disabled when he took no part in the business. Ignoring pre-disability profits of the business that were due to the applicant’s activities would contravene the policy definition of pre-disability monthly earnings.
- When the applicant became totally disabled, he ceased to earn any personal exertion income. Any amounts subsequently payable to him from the business were ‘passive’ income, in the nature of dividends on a shareholding. These were not amounts referable to his disability, and were therefore not able to be offset under the policy condition.
As a result, FOS ruled that the claimant has been entitled to the full monthly benefit since November 2011. The regulator has ordered the insurer to pay the outstanding benefits, less any partial payments which have already been made, to a maximum of $7,500 (which is the maximum amount of compensation FOS can award in this type of dispute). The claimant is also entitled to interest on the benefits, and a return of any premiums paid from November 2011.
For more detail on this case, see: Case Study – FOS Determination – Income Protection Offset
As an adviser who recommends risk cover it amazes me that there are no courses which adequately help the adviser to truly assist at claim time. I believe that there should be specialist risk subjects which assist us to become experts in this complex area. Thanks to RiskInfo for publishing this article along with the extensive case detail too, very helpful.
So long as the life insured fully insures business profit along with remuneration I see nothing wrong with an offset, but when the life insured does not insure the business profit/dividend then it would be wrong to reduce the benefit.
In addition, how pathetic is FOS when it comes to determining an IP dispute capped at $7,500 per month. Yes, its free to lodge a complaint with FOS and the insurer is hit with a $10,000 fee, but where your clients have substantially higher monthly benefits then you might at well go straight to the Courts. The caps set on lump sums aren’t much better.
Comments are closed.