The Consumer Insurance Act came into force on 6 April 2013. The Act deals with a consumer’s duty to provide information to an insurer when applying for insurance, and how the insurer will treat a claim if the consumer gets it wrong. Its provisions reflect what is generally already accepted by the industry to be good practice, and the approach taken by the Financial Ombudsman Service.
The previous consumer duty of “utmost good faith” has been replaced by one of “reasonable care”.
This effectively means that the consumer will no longer be required to volunteer information when applying for insurance, but only to respond honestly and with reasonable care to questions asked by the insurer or its agent.
The extent to which intermediaries are affected will depend on the relationships with the insurer and the consumer. In general, if the intermediary is an appointed representative of the insurer or has express authority to act on behalf of the insurer, then they are acting as an agent of the insurer. In all other circumstances, the intermediary is likely to be the agent of the consumer.
If an intermediary is acting as an agent for the insurer, that insurer is bound by the intermediary’s actions even if he/she exceeds its contractual authority.
If an intermediary is acting for the consumer – giving impartial advice, a fair analysis of the market and receiving a fee – the normal rules of acting as an agent apply.
In such a relationship, if the agent makes a deliberate or reckless misrepresentation, the consumer will be responsible and the insurer may avoid the policy, even if the consumer is not at fault. Of course this situation is likely to give rise to a complaint against the intermediary by the consumer.
How an insurer should deal with consumer misrepresentation if a claim is made is also set out in the Act.
If the misrepresentation was honest and reasonable, the insurer must pay the claim.
However, if the misrepresentation was “deliberate or reckless”, the insurer may treat the policy as if it never existed and may decline all claims. It will also be entitled to retain the premiums, unless there was a good reason why they should be returned.
Where the misrepresentation was “careless” rather than “deliberate and reckless” the insurer will have to consider what it would have done had the consumer taken care to answer the questions accurately.
For example if, based on the full information, the insurer would have excluded a certain illness, the insurer need not pay claims which would fall within the exclusion but must pay all other claims. If the insurer would have charged more for the policy, it must pay a proportion of the claim.
Apfa will be publishing a more detailed guide for members covering the Consumer Insurance Act 2012. We also have a technical helpline for members who would like to discuss the issues in more detail – 020 7826 9048.
Linda Smith is senior technical adviser at the Association of Professional Financial Advisers