Non-disclosure revolution
Presently in the UK, an 18th century law places the onus on the consumer to provide all necessary personal information to an insurer in order for the insurer to accurately calculate the risk posed by the individual. Daniel Scognamiglio explains, however, that there is about to be a fundamental change to the law that governs the way in which travel insurance claims are assessed in the UK
First published in ITIJ 133, February 2012
Presently in the UK, an 18th century law places the onus on the consumer to provide all necessary personal information to an insurer in order for the insurer to accurately calculate the risk posed by the individual. Daniel Scognamiglio explains, however, that there is about to be a fundamental change to the law that governs the way in which travel insurance claims are assessed in the UK
For some time, there has been a disparity between the way a claim is assessed in law and the way a claim is assessed by the regulator (the Financial Services Authority) or Financial Ombudsman Service (FOS). However, there is currently an attempt underway to bring existing law up to date and in line with what happens in practice.
The law in question dates back to the 18th century and was codified in 1906; and it allows claims to be rejected if the claimant neglected to provide any particular relevant or necessary information to an insurer when purchasing their policy – information that might otherwise have altered how the insurer calculated the risk posed by the customer. Today, however, this law is often disregarded in favour of treating customers fairly. Thus, a Bill – the Consumer Insurance (Disclosure and Representations) Bill – has been put before the UK parliament that, if it becomes law, will place the onus more squarely on the insurer to gather the information needed to calculate a risk. If/when this Bill becomes law, it will become vitally important that insurers ask relevant, clear, and compliant questions – pre-contract.
The Act would only concern consumer insurance; however, a legal definition of 'consumer' is always a tricky concept. In this case, we anticipate it will be where the policy was bought for personal rather than business or trade use – or at least mainly unrelated to trade or profession.
The Bill tries to reflect the approach taken by the FOS and promote insurers asking better questions pre-contract or at renewal.
Despite everything else going on in the world, it does seem as though these changes are moving through Parliament with great speed – at least relative to the pace other legislation passes through parliament. The Bill was introduced to Parliament on 16 May 2011 via the route for uncontroversial Law Commission Bills. It was more recently considered in the House of Lords at Committee stage – on 11 and 19 October 2011. Even if minor amendments are made to the Bill it will still substantially change how travel insurers enter into contracts with consumers, what pre-contractual information they will require from consumers entering into the insurance contract, and also how disputes will be assessed. This will hopefully address the disparity (and understandable confusion) between the law, industry statements, FSA rules, and FOS discretion and codes of practice.
Impact assessment
By way of further background, the Marine Insurance Act 1906 currently requires the insured person to disclose every matter that would be material to the decision of the 'prudent insurer' to insure. This is a catch-all that in some cases allowed insurers to decline the whole claim and treat the insurance contract as if it had never existed on the basis of relatively minor information not having been disclosed. In an attempt to ameliorate the effect of the 1906 Act, institutions such as the FSA, the FOS and the trade body the Association of British Insurers (ABI) published several series of codes and guides that attempted to codify insurers' responses.
An impact assessment has been commissioned to see what the effect of the new Consumer Insurance Act would be on the industry – according to which, the increased cost of processing any additional information would be an increase to premiums of 0.025 per cent to 0.1 per cent, or £5 million to £20 million across general insurance. They considered this was outweighed by the wider benefits that they saw, including improved peace of mind for consumers and improved clarity of questions in the underwriting process. Optimistically, they also considered that the changes would reduce the cost of dispute resolution as the parties would better understand where they stand.
All change
The Bill tries to reflect the approach taken by the FOS and promote insurers asking better questions pre-contract or at renewal. The intention of the Bill is clear that if an insurer were to decide to ask very few imprecise questions, they will have difficulty relying upon non-disclosure by the consumer.
The present duty to volunteer information to the insurer pursuant to the Marine Insurance Act 1906 will be abolished for consumers. A consumer’s duty will be limited to making sure it answers questions raised by insurers honestly and reasonably, and only consumers who make reckless or dishonest statements or claims will not be honoured. This goes much further than the present law – in favour of the consumer. The Law Commission, the statutory independent body that keeps law under review in the UK, considered the present law a trap for consumers, as they may be unaware that such a duty to disclose information exists, and if they did know, they may not be aware of what information is relevant to the insurer.
Furthermore, the draft Bill distinguishes between mistakes that are ‘reasonable’, ‘careless’, or ‘deliberate or reckless’. If a consumer acts honestly and reasonably, the insurer will have to pay the claim. Where a consumer acts honestly but ‘carelessly’ or ‘deliberately or recklessly’, any misrepresentation would be considered a ‘qualifying misrepresentation’ and the test would be what the insurer would have done had it known the full facts. This will determine whether the claim is paid or what proportion of it is paid.
So, under UK law, the remedy for non-disclosure at the moment is to void the whole policy. The Law Commission believes this is appropriate for the dishonest or reckless policyholder, but not the careless policyholder. An insurer will only be able to refuse to pay a claim if a consumer acts deliberately or recklessly in making misrepresentations. This is a difficult test for an insurer to apply; however, if a misrepresentation does not pass this test then it would be a ‘careless representation’ and the insurer would then have a compensatory remedy based upon what the insurer would have done had the consumer taken care to answer the insurer’s question(s) accurately.
The Law Commission states that 'if the insurer would have excluded a certain illness, for example, 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'. This means, for instance, that where a higher premium would have been payable if the insurer had known the full facts, a certain proportion of the claim would still need to be paid to the consumer based on the premium apportionment.
The insurer will need to prove that a consumer made a deliberate or reckless misrepresentation, or did not care whether it was or not; and that they knew the matter was relevant to the insurer, or did not care whether it was or not. There is a presumption in favour of the insurer if the question is relevant.
Intermediary matters
If the intermediary is an appointed representative of the insurer they will be considered as acting for the insurer. In all other cases, the intermediary will be presumed to be acting for the consumer and will therefore be subject to the same provisions relating to qualifying misrepresentations.
Other important clauses
- Insurers cannot contract out of the effect of the Act
- For group schemes, if one group member makes a misrepresentation, this will only have consequences for that particular individual and not for the group as a whole
- In order to allow insurers to make sufficient provision for the changes, the earliest the Bill will come into force is one year and one day from the date the Bill is passed
What should insurers be doing?
The Bill abolishes the consumer's wholesale duty to disclose and to volunteer material information. Rather, the consumer's duty will be to take reasonable care not to make any misrepresentations during any pre-contractual process. So, it is worth reviewing any pre-contractual questions, and keeping those questions under review. Remember, though: the changes will only apply in relation to individual consumers, not businesses or people looking to insure their trade or business activities. Thus, the Bill is restricted in its application to certain types of policy.
In addition, the maxim ‘prevention is better than the cure’ must be applied. To avoid more claims pay-outs, insurers will benefit greatly from anticipating the introduction of the Bill and improving the pre-contractual questions posed to consumers now in order to guarantee a seamless transition from the current law to the future law. Renewals of insurance contracts should be subject to greater scrutiny from insurers and consumers should ideally be asked the usual pre-contract questions again in order to check no material changes have taken place.
As the law comes into line with practice, it is hoped that the FOS, for example, will provide more consistent decisions
Furthermore, medical screening questions should be tightened up. The duty of the insurer is increased and they should, therefore, ask precise questions, preferably requiring specific answers. While screening questions can start with an open question such as 'have you received medical treatment in the last two years?', there should follow questions regarding what the treatment involved and whether any ongoing treatment is necessary. All case handlers and customer service representatives should be trained as soon as possible so they know the exact series of questions an insurer must ask before making the decision to decline a claim, and which provisions must be borne in mind when a consumer enters into a contract. The differentiation between a consumer who makes deliberate, reckless and careless misrepresentations must also be explained to staff working as case handlers or customer service representatives. No doubt insurers will also need to draw up internal guidelines as to their interpretation of what a deliberate, reckless or careless misrepresentation is and give appropriate examples.
Settling in
It does seem that the law is just about to catch up with the regulatory provisions already imposed upon insurers. As the law comes into line with practice, it is hoped that the FOS, for example, will provide more consistent decisions. Inevitably, there will be some litigation while the new law beds in. This is an important change to a law that has stood for hundreds of years, and it is very likely to continue to be subject to challenges in the courts and through the regulatory regime. For consumers, the only price to pay for this greater protection could be increased premiums.