The Insurance Act – Professionalism and Standards

At a recent training event, I was speaking to a trainee underwriter about the quality of broker presentations and asked whether there had been any improvement since the introduction of the Insurance Act.

To my surprise, the answer was that there had been a noticeable deterioration in some of the presentations they saw. An example given was a broker submitting a copy of the existing policy schedule and asking for a [commercial combined] quotation by referring the insurer to the client’s website for additional information.

It would appear that the broker was under the illusion that by directing the underwriter to the client’s website, they had met the duty of a fair presentation of risk.

They had, it would appear, relied on the fact that they have provided the insurer with ‘sufficient information to put on notice that they (the insurers) need to make further enquiries to reveal those material circumstances’ and as such met the duty of a ‘fair presentation of risk’.

Such a position or attitude is, in my opinion, not only totally incorrect but is in fact dangerous, having the potential to leave the policyholder without valid insurance cover.

There is a good case to argue that such an approach is ‘deliberate or reckless’ in terms of the failure to meet the duty of a fair presentation of risk on the basis that the broker is an agent of the insurer. In these circumstances, insurers are entitled to avoid the policy and not pay any claim and can retain any premiums paid.

One of the intentions of the Insurance Act is to realign the bargaining position of insured and insurers by recognising that in many instances, the complex nature and structure of 21st century businesses is such that it is not always possible to disclose all material facts.

Previously, under The Marine Insurance Act 1906, non-disclosure of a material fact allowed insurers to avoid the policy ab initio (from inception) and therefore not pay a claim.

The Insurance Act 2015 affords a proportionate claims remedy in certain situations.

The duty of a fair presentation of risk is achieved by

a) disclosure of every material circumstance which the insured knows or ought to know, or (b) failing that, disclosure which gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances.

Providing ‘sufficient information…to reveal material circumstances’ is, in my opinion, a fall-back position only.

I do not believe that it is an alternative to not disclosing all material circumstances – the Act clearly states “failing that …” which I take to mean you should attempt to disclose all material circumstances in the first instance and only if that duty is not met can you then rely upon provided sufficient information.

Indeed, this would appear to be the logic behind the Law Commission who came up with the wording of the Insurance Act and in their consultation paper, they did make the following comment:

“However, we think that the courts would treat clause 3(4)(b) {sic provide sufficient information …]as an alternative only where the insured has tried but failed to comply with clause 3(4)(a) [sic disclosure of material circumstances] and shows that it has given the insurer a good base on which to make its enquiries.

…we do not think the courts would employ clause 3(4)(b) to aid an insured who intentionally disclosed a limited amount of information, hoping that the insurer would fail to make further enquiries to reveal the full picture.”

Over the past 15 months, I have spoken to several hundred insurance and legal professionals on the Insurance Act, the length and breadth of the United Kingdom.

So far as brokers are concerned, I believe the Insurance Act can be used to demonstrate professionalism and standards.

An understanding of the Insurance Act, providing a clear explanation to the clients as to what it entails – an educational process – as well as preparing a good risk/market presentation will surely show a client that this broker ‘knows their stuff’.

Many of you will have heard of the expression when it comes to disclosure of material facts – ‘If in doubt, disclose’.

I see no reason why this should not apply now that the Insurance Act is with us.

Providing as much information as is possible to an underwriter must surely be the right thing to do.

Using clever words and phrases and then justifying that sufficient information is being given to an underwriter to put them on notice make additional enquiries does not, in my mind, equate to professionalism.

It may well lead to cover being arranged at a lower premium but could have more devastating consequences as it is potentially leaving the client without valid insurance cover.

The Insurance Act is also designed to encourage a better quality of presentation by making it a requirement that information has to be presented in a way which is clear and accessible to a prudent insurer.

Referring an underwriter to a website is fraught with danger in terms of fair presentation of risk. Consider where the ‘material information’ is on the website – is it clear and accessible or does an underwriter have to click through several links before finding some material information?

The Insurance Act also states that:

‘A fair presentation of the risk is one in which every material representation as to a matter of fact is substantially correct, and every material representation as to a matter of expectation or belief is made in good faith’.

Consideration needs to be given to the fact that many websites designed to promote a business may contain information which is not necessarily an entirely honest or truthful reflection of the insured business but serves to embellish matters.

It therefore follows that if the website contains information which is not substantially correct, there could be a breach of the fair presentation of risk.

I am in total agreement that the underwriting of risks, as envisaged by the Law Commission, should be a collaborative approach between insured, insurer and broker. I have little sympathy for insurers who are still prepared to offer terms on what can only be described as sub-standard presentations.

Claims made under policies written on the basis of sub-standard presentation may well have to be paid by insurers and in some cases, paid in full. The previous ‘all or nothing’ regime is replaced by a proportionate remedy system based on what an insurer would have done and then only after it has been shown whether a failure to meet a fair presentation of risk is deliberate or reckless.

In terms of professionalism and standards, I would hope to see the end of lax or poor underwriting.

Unfortunately, I have enough experience to know that insurers will continue to be pressurised into writing risks based on ‘other commercial’ factors but such practice does no-one in the insurance profession any favours in terms of reputation or consistency.

Indeed, it could be argued that such an approach goes against the Code of Conduct which members of the Chartered Insurance Institute (CII) are obliged to follow.

Ultimately, it will be for the courts to decide on the interpretation of the Insurance Act but until then, all insurance practitioners should strive to enhance their professionalism and raise overall standards for the good of the insuring business community.

This is particularly so if they wish to be judged alongside other professionals such as solicitors or accountants.