Q: There is a lot of coverage of the Mortgage Market Review and its implications but what changes are currently happening in the protection space that advisers should be aware of?
A: You’d be forgiven for having missed it given how little coverage there has been, but earlier this year saw a change in the law that fundamentally alters the underwriting foundation of general insurance for insurers, consumers and intermediaries alike.
The Consumer Insurance (Disclosure and Representations) Act 2012 came into effect on the April 6 this year. At its heart is the abolition of the duty on consumers to volunteer material facts when applying for, or renewing an insurance policy. The consequences are huge.
The old law required consumers to volunteer any information which would ‘influence the judgment of a prudent insurer’ in fixing the premium or deciding whether to take the risk. The problem has been that most consumers have little idea of the scope of information that might influence a prudent insurer.
The penalties for failure to disclose information to insurers can be harsh – even where that omission is the result of perfectly logical assumptions and a reasonable interpretation of the questions asked.
For example, until now, if a consumer discloses only those instances of prior loss or damage that they actually claimed for and omits losses that they didn’t claim for, their new insurer could deem that to be material information.
They could treat the policy as if it does not exist and refuse all claims under it – including those claims that would have been covered had the material facts been disclosed. Although most reputable insurers don’t use such extreme tactics, the FOS and the government have been sufficiently concerned to update the law and remove that option.
Effectively the new act redefines ‘utmost good faith’ in the context of consumer insurance as the requirement to honestly answer any questions asked, with a duty to take reasonable care not to misrepresent.
The primary impact of this will be a more onerous application and renewal process adopted by the insurer in order to ensure that there is no ambiguity in their questions and to ensure that they are very clear in the way the questions are asked. Rolled-up or ‘catch-all’ questions will have to be completely unpacked making the process longer and more complicated. As brokers the responsibility will fall on you to ensure that you have clearly gone through the appropriate questions and disclosure statements with your client.
There is no doubt that the act is good news for consumers as it replaces their duty to disclose material facts with a duty to ‘take reasonable care not to make a misrepresentation to the insurer’.
By placing a legal duty on insurers to ask customers all relevant questions at point of sale, consumers should know exactly what they need to disclose upfront. Insurers will, however, still be able to decline a claim if it is found that a customer deliberately or carelessly gave incorrect or incomplete information about their circumstances.
If in doubt, will the insurers just pass the buck?
The British Insurance Brokers’ Association (BIBA) has raised its own concerns around the liability issue, foreseeing the situation where insurers would look to pursue brokers if they felt there was a chance that the broker hadn’t played its role and made their client fully aware of what should be disclosed.
BIBA is urging brokers to ensure their insurance partners are complying with the new regulation and that their customers answer question truthfully to avoid potential disputes.
