Andrew Hooker deconstructs income protection insurance policies and finds some big gaps between expectations and coverage.

By Andrew Hooker* (email)

It is becoming increasingly common, particularly with the shortfalls in the Accident Compensation regime, for people to buy insurance protecting themselves should they be unable to work due to illness or accident. 

In very simple terms, the insurance company says that if you are unable to work, they will pay you until you can work again.  But, there are (of course!) fish hooks and fine print.  Two of the most common are:

1.  Indemnity versus valued policies.
2.  Own-occupation versus any-occupation.

Indemnity versus Valued

In very simple terms, it is possible to obtain an insurance policy that covers your income either for an agreed amount or for an amount calculated on your income immediately prior to your disablement. 

The agreed amount policies are called valued policies. 

If you are self employed, these can be quite difficulty to obtain and the insurance companies can be reluctant to offer these policies where, for example, your net personal income is reduced by allocated income to companies or trusts. 

So often someone who is self employed will end up with an indemnity type policy. 

The indemnity policy only pays you based upon what your personal income from your own personal assertion was in a period immediately for your disablement. 

Now, if you are a self employed tradesman, your personal income may be relatively low because, for quite legitimate purposes, you have split your income or draw a relatively minor salary with the remainder going to the shareholders being your family trust.  In those cases, you could be very disappointed at the amount the insurance company pays. 

These indemnity type policies appear to be reasonably common, depending upon how proactive your broker or insurance company were when you arranged the insurance, and they can cause enormous headaches when trying to claim later. 

Prudent people should check their policies to make sure that they have the right type of cover or obtain expert advice as to the adequacy of the cover they have.

Own Occupation / Any Occupation

There are three basic types of policies.  There are policies that:

(a) Will pay you while you cannot do your own occupation – that is the occupation you were undertaking before you became disabled;

(b) Cover you only while you can not do your own occupation or any occupation for which you are qualified by education training or experience;

(c) Are a combination of the above to depending on how long you have been disabled.

There are also some policies that cover you if you cannot perform a specified occupation, although these are relatively rare.

If you have the first type of policy, and you are covered if you cannot perform your own occupation, then that provides a good cover for you - although, these policies are increasingly rare. 

What is more common is the second or third category.  What that means is that either immediately or after a period of usually two years, the insurance company will assess whether you are able to in their opinion (and the policies often clearly say that it is their opinion that counts) to perform any other occupation for which you are reasonably qualified by way of education training and experience.

They then send you off to an occupational physician who discusses with you what you might or not are able to do.  This is where the insurance company tries to push a square peg into a round hole and convince you as, for example, a commercial photographer of 40 years experience that you could, notwithstanding your back injury, get a job in a camera shop or become a photography tutor.  This is a relatively common modus operandi for income protection insurers, and a well trodden path for most claimants.  "Come on Mr Jones, you’ve been using cameras for 40 years, you could easily teach someone else how to."

The Courts are fairly robust in dealing with attempts by insurance companies to shoehorn people into jobs. 

But it does not stop the insurance companies from trying. 

The occupational physician will interview the claimant at length, and then convince the unwitting person (like the farmer whose injuries prevent him from working on the farm) that they could possibly do another job like working for a stock and station agent or working in a stock food distribution outlet. 

These types of random decisions are not uncommon.  That is why it is important to obtain good advice or even seek an additional separate opinion from an occupational physician or doctors if you believe you are being shoe horned. 

So when you look at your insurance policy, even before or when you have a claim, be aware of these issues and don’t be scared to stand up for rights. 

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*Andrew Hooker a lawyer specialising in insurance law and a director of Claims Information Specialists Ltd, running an insurance information web site www.claimshelp.co.nz