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Income protection insurance is worth considering for working people. It can pay a proportion of your salary if you are temporarily unable to work because of sickness or injury. When taking out any insurance policy, you should check carefully the terms and conditions, and also the way the key terms of the policy are defined. This helps to avoid disappointment or disputes with the insurer should an unfortunate event occur.

This article takes a look at a determination made by the Financial Ombudsman Service (FOS) in relation to a dispute over an income protection insurance policy.

FOS examines “offset” condition

In June 2014, the FOS issued a determination regarding a claim under an income protection insurance policy. At the commencement of the policy, and until he became disabled, the applicant jointly owned and operated a family business with his wife. When the applicant became totally disabled, the family business continued and made profits without the applicant’s participation.

The determination considered the insurer’s interpretation of a policy condition which stated that “the amount of the monthly total disability benefit will be reduced, where necessary, so that the total that month of: … the total disability benefit payment … and amounts payable from the insured person’s employer or business…does not exceed 75% of pre-disability monthly earnings”.

The FOS said the insurer did not dispute that the applicant was totally disabled. However, it applied the policy condition to offset the continuing profits of the family business against the benefits otherwise payable to the applicant. The financial services provider (FSP) said that it accepted the applicant’s application for cover on the basis that he was entitled to 50% of the profits of the family business, and said that it took this into account when calculating the applicant’s pre-disability monthly earnings. Therefore, the FSP considered it was entitled to apply the policy condition.

A FOS panel did not agree with the insurer’s interpretation of the policy condition. The FOS said the panel determined 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.

Talk to us

Like many things in life, the devil is in the detail, so it’s important that you understand what you are (or will be) covered for. It’s also important to consider seeking professional advice tailored to your circumstances. If you have any concerns or questions, please contact our office.