Last week saw a change in the law that will fundamentally alter the underwriting foundation of consumer insurance, with potentially far-reaching implications for the intermediary channel.
The Consumer Insurance (Disclosure and Representations) Act 2012 came into effect on 6th April this year as an amendment to the Marine Insurance Act of 1906, and at its heart is the abolition of the onus on consumers to volunteer material facts when applying for or renewing an insurance policy.
The foundation pillar that is being changed is Uberrima fides – a Latin phrase meaning “utmost good faith”. It is the name of a legal doctrine which, for over a century, has governed all insurance contracts by requiring that all parties to such contracts must deal in good faith, making a full declaration of all material facts in the insurance proposal.
What seems like a hundred years ago, when I was taking my Licensed Insurance Adviser exams, Uberrima fides was the first lesson in insurance law and it is this that is being changed in order to bring the law up to date – or so the Government tells us. I think it is yet another step in the imposition of the nanny state our regulators seem to be intent on creating.
Now don’t get me wrong. Something needed to be done. There is plenty of evidence of consumers failing to understand either the obligation to disclose material facts or the full range of facts that can be deemed material by an insurer; and of insurance companies exploiting these failures to turn down perfectly reasonable and honest claims. However, I believe changing this law is a case of using a sledgehammer to crack a walnut.
How did we get here?
The Marine Insurance Act 1906 is based on 18th and 19th century principles. The law imposes a duty on consumers to tell insurers anything which would “influence the judgment of a prudent insurer” in fixing the premium or deciding whether to take the risk. Seems fair enough, doesn’t it?
The problem has been that most consumers have little idea of the scope of information that might influence a prudent insurer. Yet the penalties for failure to disclose information to insurers, even as a result of perfectly logical assumptions and a reasonable interpretation of the questions asked, can be harsh.
For example, if a consumer discloses only those instances of prior loss or damage that they actually claimed for on an insurance policy and omits losses that they didn’t claim for, their new insurer could deem that to be material information and treat the policy as if it does not exist and refuse all claims under it.
In recent years there has been a creeping dependence by insurers on such vague get-outs when assessing a claim, and while most reasonable insurers don’t use these spurious tactics, the Financial Ombudsman Service and the Government have been sufficiently concerned by the failings that they have felt it necessary to bring the rules up to date.
The Government argues that the underlying law is inappropriate for modern consumer insurance and operates harshly in practice. They have highlighted three main problems with the 1906 Act in its modern-day application:
• The duty to disclose may operate as a trap for consumers, who are usually unaware that the duty exists or indeed what is deemed to be material
• Policyholders may be denied claims even when they have acted honestly and reasonably
• The remedy may be overly severe. If the consumer has made a mistake, the insurer may refuse all claims, even claims which it would have paid had it been given full information
Instead of addressing these issues directly through the FSA/FCA regulatory framework by means of specific, targeted amendments to the rules and guidelines, the sledgehammer decision to change the underlying legislation has made over a century of settled case law obsolete, with as yet uncertain consequences.
What should we expect next?
Effectively the new Act redefines ‘utmost good faith’ in the context of consumer insurance as the requirement to volunteer information requested with a duty to take reasonable care not to misrepresent. The immediate effect 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.
The Association of British Insurers has produced guidance documentation for insurers setting the scene with:
‘We recognise there is consumer demand for a quick sales process. However, this must also be balanced against the need to gather accurate information about a consumer, price the risk accurately, and thereby reduce their opportunity to misrepresent, whether innocently or not, or to have a claim turned down’
What it means for you – the intermediary
The message is simple, know what the changes are and ensure you obtain clear answers from your clients especially to some of the areas deemed to be higher risk. These might related to previous medical conditions on life or critical illness policies, or in the case of general insurance, past damage irrespective of whether or not your client has made a claim, criminal convictions and flooding, subsidence or water damage.
Because this isn’t a change in regulation, but in legislation, it has made over a century of settled case law obsolete overnight, so you’ll want to make sure you’re on solid ground should you be unfortunate enough to get caught up in any of the inevitable litigation that will arise during the early operation of the Act to establish new precedents over issues such as:
– What is ‘honest and reasonable’ in terms of any misrepresentation?
– When is an intermediary to be considered an agent for the consumer or the insurer?
– Who is to bear the financial risk of any error by the intermediary?
