One hundred and five years is a long time to wait for clarification of basic business practice but the moment has finally come for the insurance industry.
The new Consumer Insurance (Disclosure and Representation) Bill introduced on May 16 will replace the Marine Insurance Act 1906, so that consumers will no longer be refused a claim if they have accidentally omitted information when applying for insurance.
The new rules, due to come into effect in 2013, will set out a clear difference between consumers who act fraudulently and those who act carelessly. Those who mistakenly omit relevant information will receive a “proportionate remedy” based on what the insurer would have done had the consumer disclosed the information. This can range from the insurer refusing the claim and returning the premiums or reducing proportionately the amount paid out.
The changes were motivated by recommendations from the Scottish Law Commission and the Law Commission and aim to extend the work previously done by the Association of British Insurers on clarifying disclosure rules.
ABI policy adviser Judith Crawford says: “We support the bill, which brings together existing industry good practice guides, regulation and Financial Ombudsman Service guidance.”
Although the commissions said the ABI did not go far in eliminating in curing the defects in disclosure law, IFAs acknowledge the ABI has made some headway.
Plan Money managing director Peter Chadborn says: “The ABI has already been quite effective in elucidating when something has been reckless non-disclosure. By and large, the criteria the bill lays out are already happening.”
Bright Grey and Scottish Provident propositions director Roger Edwards agrees that the new bill is more of a firming up than a creation of disclosure rules.
He says: “The bill brings completion to a process that has been going on for many years. Protection providers worked with the ABI to effectively implement these proposals several years ago, and, as a result, the number of claims being turned down through non-disclosure has already significantly fallen.”
The bill can also be seen as part of a wider push for fairness in financial services.
Chadborn says: “It is along the lines of treating customers fairly. Nowadays, insurance companies have to think along those lines. You cannot just say, I am not paying out for your cancer claim because you did not tell me about your bad back. That is technically non-disclosure but we all have to work against the backdrop of TCF, so let us be fair about things.”
But that is not to say the industry regards the Consumer Insurance Bill as surplus to requirements.
Edwards says: “The standards agreed by the ABI and ultimately used by the FOS in their adjudication of claims are still open to interpretations as they are just guidelines. By passing the rules into law, it gives a level of certainty to consumers and providers because at the moment there is potential for the guidelines to be interpreted variously.”
Chadborn agrees that standardisation will improve consumer and insurer confidence in the claim process. He says: “There most definitely needs to be more trust in the insurance and protection industries.”
He believes that although the ABI has been looking at disclosure rules for some time, its work is not necessarily recognised by consumers. “The ABI represents the interests of insurers rather than consumers and consumers do not have confidence in what a trade body does, so the bill is not a waste of time.”
Edwards considers that public perception of insurers as a group that will do anything to avoid paying claims is still widespread even after huge leaps forward in recent years.
He says: “Perceptions take years to change. But by making application questions completely unambiguous, providers can help consumers disclose the relevant information.”
The new law will make insurers’ position clearer when it comes to disputed claims but it will not remove the obligation on the part of the consumer to take reasonable care.
Crawford says: “For example, greater care would be required of the consumer if the insurer told them to take an hour to check their records before completing the application than if the insurer advertised it as ’quick to complete’.”
But insurers will also be responsible for ensuring reasonable care is taken. Although they will not have to consider particular characteristics of the consumer, such as their mental condition, when assessing if a misrepresentation has been made, the specific characteristics of that particular customer which are known or ought to be known by the insurer will be taken into account.
Under the Marine Insurance Act 1906, insurers are able to quantify the information they need to accurately underwrite a policy by saying that the information a customer needs to be provide is what would be needed by “a hypothetical prudent underwriter”.
Under the new rules, insurance companies will no longer be able to apply this general standard but will be limited to information that company specifically needs, or needed, to accurately underwrite the insurance contract.
Providing proof for decisions made about consumer misrepresentations may also increase insurers’ administrative duties but Edwards does not think this will prove too troublesome for insurers.
He says: “We should only be getting information pertinent to the claim cause anyway. If someone claims for a heart attack on a critical-illness policy, we should not be spending time looking for evidence of undisclosed cancer tests earlier in their lives.”
He adds that the question of formulating proportionate remedies for accidental non-disclosure claims should also not be difficult.
Edwards says: “We have been doing this for many years since the ABI introduced the guidelines, so things will continue as normal.”
Crawford also points out that the bill offers guidance on this and says: “It includes a calculation showing that an insurer should reduce a claim by the same proportion that the premium paid over what it should have been.”
Chadborn agrees that the industry should not find the new bill difficult to implement. He says: “We will have no problems enacting proportional remedies. I think standardisation in terms of dealing with accidental misrepresentation is no bad thing. If insurers are not pleased about this bill, then they should take a look at themselves.”
How proportionate remedying will work
Under the new law, if an insurance company is able to prove that a policyholder who makes a claim had omitted or misrepresented relevant information at the time of quotation, it has to be able to prove this was done deliberately or recklessly to be able to avoid paying the claim.
If it is unable to do so, the insurer must assume that any error was careless and it cannot automatically dismiss the claim.
Instead, it has to demonstrate that either it would not have entered into the contract if it had the information at the time of quotation and any premiums would be refunded.
If it would have entered into the contract but charged a higher premium, it may reduce the amount paid out. So, if it charged £1,000 for the premium but would have charged £1,500 if the consumer had revealed all relevant information, and the current claim is for £30,000, the consumer would receive £20,000. If the insurer would have imposed specific terms, the contract can be treated as if those terms had been revealed by the consumer.