Insurance Financial Services Ombudsman – Difference Between Fraud & Non-Disclosure

September 26th, 2023

If you have a complaint, the first step is to work through your insurers’ complaints process before contacting the IFSO Scheme. You can find out more about insurers’ complaints processes here and about the IFSO Scheme here.

Fraud and non-disclosure – what’s the difference?

The Insurance & Financial Services Ombudsman Scheme (IFSO Scheme) exists to resolve complaints about insurance and financial services for customers of its participating insurers. The service is independent, fair and free for all New Zealanders.

The IFSO Scheme isn’t in the business of detecting, reporting and reducing insurance fraud. However, the IFSO Scheme does encounter insurance complaints where the suspicion of fraud and false statements are a factor leading to a claim being declined.

Fraud involves an insured customer deliberately misleading their insurer or withholding information in order to receive a benefit they would not normally be entitled to.

Non-disclosure is when customers neglect to give their insurers important information, something which can easily happen if people don’t know their disclosure responsibilities, or perhaps make a genuine oversight.

Below we will take a look at some examples of fraud and non-disclosure. Our intention is to raise awareness of the importance of making full disclosure when taking out a policy and the separate issue of insurance fraud to help people understand what insurance fraud looks like. Our goal in doing so is to both educate and lessen the likelihood that innocent customers end up falling under suspicion when they make a claim.

Consequences of non-disclosure

Non-disclosure can be a problem because insurers need certain information in order to decide on the insurance they offer, and any terms and conditions they might include in a policy. It can lead to insurance being provided when it might otherwise not have been, or under different terms and conditions, such as being priced at standard rates compared to what it would have been if all the facts were known. It’s easy to understand that an insurer would view the provision of cover differently if prior claims, speeding tickets, or convictions, were not disclosed.

When it comes to making disclosures, the way the law is currently written, it makes no difference whether someone has genuinely forgotten or has deliberately withheld information; if disclosure obligations have not been met for whatever reason, an insurer can treat the policy as if it never existed, decline a claim and refuse to offer further cover.  

Non-disclosure can also sometimes look suspicious and ring the fraud alarm bells, which can add stress and anxiety to already difficult circumstances.

Fraud case examples

The IFSO Scheme has two clear case studies where the insurer was able to set out how claims could reasonably be seen as misleading. One involves the timing of thefts and what was said to have been taken, the other involves pictures of items with data suggesting they were taken after they had been reported as stolen.

It’s reasonable to expect insurers to ask for proof that people owned an item before paying out on it. This is where photos, receipts and maintenance records can prove useful in the event of a claim.

The Insurance Fraud Bureau finds that it’s a common insurance fraud tactic for some policyholders to attempt to stretch the truth when they’re making a claim by padding it with items that weren’t lost and perhaps never existed. If an insured provides a list of lost items to their insurer and some of those items are not correct, the insurer can decline the whole claim, including any items that were actually lost, and cancel the policy.

This case investigated by the IFSO Scheme provides an example of dubious evidence of a loss, which resulted in the insurer declining the claim and the complaint not being upheld.

Non-disclosure case examples

One IFSO Scheme case resulted in a declined claim, because the customer had not disclosed that a prior claim had been declined and the insurance cancelled.

Below are other examples of cases seen by the IFSO Scheme where disclosure was an issue.

Sarah’s* car insurance policy was “avoided” when her insurer found out that Sarah’s son, who held a restricted driver’s licence, was the owner and driver of the car when it was written off in an accident. Sarah said she insured the car in her name as it was cheaper. Sarah’s son had to repay the loan on a car that he could no longer drive, because the insurer had no obligation to pay.

Bob* had his policy avoided when he made a claim for the theft of his car. His insurer found out he did not disclose his conviction for stealing a boat when he renewed his car insurance policy. Bob’s car was a write-off and, because of his nondisclosure, Bob’s insurance did not pay anything on his car.

Sue* had her policy avoided after her insurer found out that she had not told it about previous claims she had made (for a stolen wallet, bag and a lost ring) to another insurer, and the higher excesses imposed on her policy as a result of those claims. Sue’s insurer found out about her previous claims history when she made a claim, following the burglary of her house. Sue’s insurance did not pay for any of the items taken in the burglary.

Mary* made a claim to her insurer under her income protection policy, as she could not work after suffering a mini-stroke. On her application, Mary had not told the insurer about a number of consultations and referrals she had prior to the date of application, her history of OOS, depression, stress, and her increased alcohol intake. Her insurer did not consider her claim and avoided her policy.

* Not their real names

Tips for consumers

Disclose all information

Understanding what you need to tell your insurer when you take out an insurance policy is important. You need to tell your insurer everything about yourself, your circumstances and what it is you’re insuring. The insurance industry calls this your duty of disclosure.

The information you need to give is not limited to the questions on the application form. Legally, you must tell your insurer about anything that could affect its decision to insure you or the terms and conditions you will be offered.

What to disclose

1. Information you will need to share about yourself:

  • your insurance claims history
  • any criminal convictions all named policyholders may have
  • any traffic convictions you may have
  • if you’ve been declared bankrupt
  • your medical history

2. Information about the property you are insuring:

  • if you have tenants living in your house
  • if you live on a flood plain
  • if you have any security or alarm systems
  • if your car is secured in a garage or parked on the street
  • if your car has been modified

When do you need to give your insurer this information?

You need to give your insurer this information when you arrange your insurance and every time your insurance policy is renewed (generally every year for house, contents and car insurance).

Sometimes, insurers require you to tell them about any major changes during the year, and this will be outlined in your policy. For life insurance, income protection and health insurance, you also need to tell your insurer if your situation changes between completing your application and your insurance cover starting. 

Fraud v. Disclosure

To conclude, disclosure and insurance fraud are two different things that should not be confused. It’s important to differentiate between cases where there has not been adequate disclosure and where there is fraud. The two are different and fraud involves attempts to deliberately mislead the insurer to obtain a benefit to which someone is not entitled.

The best way to ensure you don’t fall foul of the disclosure requirements is to answer all your insurer’s questions fully when taking out your policy and to keep them up to date when things change.

Concerned about insurance fraud?

Insurance fraud is not a victimless crime; it’s a crime that all policyholders pay for.

It’s critical to tell the truth about what’s happened when making a claim. You can report insurance fraud anonymously on our website.