Is critical illness cover the lifeline you expected?

When her partner Paul fell ill with a tumour in October 2005, Paula Maddax was comforted by the fact that they had arranged critical illness (CI) cover when they bought their new home in Coventry. With the prospect of paying off the mortgage on her wage alone, Paula, 26, a National Vocational Qualifications assessor, claimed on the insurance, believing the lump sum would at least ease her financial pressures.

Instead, however, her insurer refused to pay out.

The reason the claim was refused was what insurers refer to as non-disclosure. On the application form - completed by their broker - Paula is convinced that Paul mentioned non-cancerous tumours he'd suffered from in the past.

However, the insurer, when it checked his medical records later, claimed he'd failed to tell them about the tumours. "Why wouldn't he mention it? There's no reason to keep it quiet and he even showed the lumps to the broker," says Paula. "But it's our word against theirs."

Paula took the case to the Financial Ombudsman Service (FOS), which sided with the insurer because the relevant question on the application form wasn't completed - the fault of the broker, according to Paula - so she now has nowhere to turn, as she can't afford to take legal action.

While the insurer has the right to reject their claim, the fact that the information allegedly omitted had nothing to do with the illness Paul died of makes it all the more perplexing for Paula.

Sadly, Paula's story is all too common. The simple premise of CI is a tax-free lump sum if you're diagnosed with a serious illness that is covered in the policy. Over 12 million adults are currently covered by about five million policies that have paid out over £1.6 billion since 2000.

But for something that sounds so straightforward, CI has become increasingly opaque, as Paula tragically discovered.

Increased consumer mistrust

In recent years, it has cropped up regularly on TV programmes like the BBC1's Watchdog for all the wrong reasons and has helped fuel growing consumer mistrust. The big problem is that thousands of people who've taken out CI policies - roughly one in six policyholders - have suffered one of the illnesses the insurance covers, only to discover that their insurer has found a reason not to pay out.

Consumer organisation Which? claims these problems are partly down to application forms failing to prompt relevant information. "There's an element of consumer responsibility, but our main concern is that insurers don't make it easy enough to put relevant details down." says Alison Watson, a researcher for the consumer group.

In an effort to combat this confusion, most insurers now publish details of payouts in an attempt to illustrate why claims are rejected.

Figures published by insurers reveal that non-disclosure is the number one reason for rejecting claims, followed closely by claimants failing to meet policy definitions. These definitions are precise - if you fall ill, your condition has to exactly meet the wording on the policy. For instance, if you have a heart condition that doesn't affect the heart muscle, or cancer that is 'in situ' but not invasive, most plans won't pay out.

What makes matters more complicated is that definitions of illnesses are increasingly complicated, because medical advances have increased the chances of critical illness sufferers surviving.

Whose responsibility?

So, if you buy a critical illness policy, is it down to you to ensure the insurer cannot reject any claim you have to make? Or are insurers making applications too complicated and using any excuse to reject claims?

It's a bit of both. Insurers cannot be blamed for treating claims carefully - according to a recent ABI study, one in 10 UK adults admit to having cheated on an insurance claim. In total, the annual cost of insurance fraud is estimated to be around £1.6 billion, adding nearly £40 to the average premium paid every year by honest policyholders.

When an insurer gets a claim, it trawls through the claimant's medical records to ensure nothing was missed out in the application. As it stands, if there is something missing, even if it's unrelated to the condition being claimed on, the insurer is under no obligation to honour the contract.

On the application form, you currently have to declare any condition you may have or suffered from in the past and any missing detail is enough to cause the eventual claim to be rejected.

If the Law Commission gets its way, the updating of a 100-year-old insurance law would change these cases. Under the proposed reform - currently under consultation - claims would be met if a mistake wouldn't have changed the insurer's decision to pay out. If the error would have influenced the premium paid, a proportion of the claim would have been paid instead. The industry is sceptical about the Law Commission's proposal.

"When buying any type of protection product you need independent advice," says Alison Watson. "You should also speak to your insurer when you're completing an application if there's anything at all you're unsure about."

The advice minefield

While a plethora of websites offer cheap CI cover, it's a complex area where the risk of not getting advice is high. For example, without advice more people opt for reviewable rather than guaranteed premiums, but although they seem cheaper initially, costs can rise quickly. Similarly, those that buy with advice are more likely to buy the right level of cover and have the insurance written in trust to mitigate inheritance tax.

Also, if you buy direct and without advice, you won't be able to take any dispute to the FOS.

It's vital to be completely honest and thorough when you complete your application. When in doubt, disclose as much information as possible - any wrong, incomplete or missing information can invalidate your cover, regardless of how irrelevant you think it may be.

When comparing policies, take time to read the small print, especially the conditions covered and the definitions of these conditions as these will vary from insurer to insurer.

And if you find yourself in a situation where your insurer refuses to pay out a claim, the first thing to do is ask the insurer to review the claim and, if it upholds its decision, explain why it was rejected. If you're not happy with this, you can then take your grievance to the FOS, which will look at how clear the insurer was and whether you deliberately tried to mislead the insurer in the application process.

If it finds you didn't, there's a good chance it will ask the insurer to meet the claim.