Are you exposed if your client lies to you?

A recent Manitoba Court of Appeal decision raises the question: What obligation does a broker have to make sure their clients aren't lying to them about 'material facts'?

A recent Manitoba Court of Appeal decision raises difficult questions about the extent to which brokers have an obligation to guarantee the accuracy of their clients’ information to insurance companies.  

“Those are always tough ones, because as an agent, how can you guarantee that your client is telling the truth?” said Erin Pearson, executive director of the Insurance Council of Manitoba. “You can ask the questions, and you can use your experience and whatever other knowledge you have with respect to the client, but you’re not a mind reader either.”

In Badenhorst v. Great-West Life Assurance Co., the appellate court concluded that Lynette Badenhorst had failed to disclose material facts in her various applications for disability insurance with the Great-West Life Assurance Company.

Badenhorst had made the application through an insurance agency, although the broker's role did not figure at all in the court’s decision. Pearson noted that the case was more about who was responsible for determing what counts as a 'material' fact -- the insurance applicant or the insurance company?

But as an intermediary between the two, the broker does have an obligation to make it clear to the applicant that they must tell the truth to their insurer, broker regulatory bodies say. However, if a broker's client does lie, the regulations are silent about the extent to which brokers need to guarantee the veracity of their clients' claims. The regulations speak only to the broker's responsibility to speak up when they know their clients have provided inaccurate information.

The Appeal Court found that Badenhorst had contacted a psychiatrist at MD Care for marital counselling, and had 16 sessions between 2006 and 2007. The couple separated in September 2006.

On November 27, 2006, she started seeing a doctor related to symptoms of depression. Two weeks before, she applied through her insurance agent for disability insurance with Great-West Assurance.
During an in-person meeting, her agent read questions from Great-West’s application form. Badenhorst answered ‘No’ to the following questions:

•    Have you ever received treatment or counselling for or had any known indication of burnout, chronic fatigue, anxiety, depression; or any psychiatric disorder?
•    Have you taken any prescribed medication or received any treatment or therapy in the past year?
•    In the past 5 years have you had a consultation with a physician, chiropractor, psychologist or therapist not mentioned (above)?

Badenhorst told the court she thought the questions didn’t pertain to her marital counselling, but rather to her health counselling. As a result, she was justified in not disclosing the marital counselling.

The lower court agreed and ruled Great-West Life had inappropriately declined coverage. But the Appeal Court found that it is up to the insurer to decide a material risk to be disclosed.

“What is and what is not a fact ‘material’ to the insurance risk must be considered…from the point of view of the insurer, rather than from the viewpoint of the insured,” the court ruled. “The insured is not competent to assess elements of insurability, and thus cannot omit from their representations matters which they may feel have no bearing upon the risk.”

But what happens if a client lies to the broker? Is the broker in trouble?

Pearson said Section 375.1 of Manitoba’s Insurance Act requires the broker to disclose – to both the client and the insurer – any statement made by the client that the broker knows to be incorrect. Specifically, the regulations can sanction brokers for “misrepresentation, fraud, deceit or dishonesty.”

Plus, the Code of Conduct requires brokers to ask the necessary questions to determine “product suitability.”

But the rules are silent when insurance brokers are not aware that their clients have lied to them, Pearson said.

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