New proposals published by the Law Commission in September could be crucial for the protection industry. Nick Kirwan hopes they will boost lacking consumer confidence
The Law Commission's Review of Insurance Contract Law, published on 28 September this year, makes very interesting reading for the protection industry. The proposals are a welcome development for the industry and, most importantly, consumers. The Association of British Insurers (ABI) has already taken important steps trying to make application forms clearer and agreeing principles with the Financial Ombudsman Service (FOS) and the industry is already starting to see the effects of this. The Law Commission's proposals build on these changes and take them to another stage.
Particularly exciting is the effect these proposals, if implemented, will have in boosting consumer confidence in protection. Despite the ABI's recent developments, declined claims still get negative media coverage, particularly surrounding unrelated non-disclosure.
Shift in responsibility
Let's take a closer look at the proposals. Under current law (ignoring industry codes, Financial Services Authority regulations and FOS practice) the legal responsibility falls on the applicant to disclose all material facts - those that would affect the decision of "a prudent underwriter".
The Law Commission proposals reverse this, putting the legal obligation on insurers to ask appropriate questions. They also introduce the concept of a "reasonable consumer" in considering whether questions are answered appropriately. This means insurers could not decline a claim due to non-disclosure if they had not initially asked for the information, or if a reasonable consumer would not have disclosed that information in the circumstances.
A side effect for intermediaries acting on behalf of their client under agency law would be that they would no longer be jointly responsible with a client for their disclosure of information. In day-to-day practice, of course, intermediaries would still have responsibility to act in "utmost good faith" and convey the importance of completing all paperwork carefully and to the best of the client's knowledge and belief to ensure the policy pays out when the client expects it to.
This proposal, while making good sense, is unlikely to have a widespread impact because this approach is already enshrined in industry codes and FOS practice. It may, however, have some effect on the few cases that end up in court - for example, because the case falls outside the scope of regulation or the FOS limits.
No gain, no loss
The proposals introduce the concept of "no gain, no loss" for all cases other than fraud. In other words, unless the policyholder has acted fraudulently, the insurer should aim to put the applicant into the same position as if the correct information had been disclosed. This follows industry practice except in cases currently treated as "clearly reckless" by the FOS, where the claim would currently be declined. Under the new proposals, a "clearly reckless" policyholder would be treated in the same way as an "inadvertent" policyholder is now. This means the insurer would make a proportionate payout if the non-disclosed information would have resulted in a higher premium and the claim would only be declined if either an added exclusion would have applied to the claim, or if the application would not have been accepted on any terms.
This should go a long way to restoring consumer trust by ensuring that claims would be paid in cases where insurers may currently be perceived as acting unfairly. In particular, cases where the non-disclosure is not related to the cause of claim - for example, if an insurer declines a breast cancer claim because the applicant failed to disclose a bad back - are understandably something of a media hot spot.
One question to consider is whether the increase in claims being paid would result in an increase in premiums and what the consumers' reaction would be. It would appear the increase in consumer trust would more than outweigh any potential increase in premiums.
Non-contestability
One of the most significant proposals is to introduce a 'three-year maximum' look-back period, sometimes called a "non-contestability clause", for all cases other than fraud. Put simply, unless the policyholder has acted fraudulently, the insurer would not be allowed to avoid paying a claim on the grounds of non-disclosure or misrepresentation after a policy has been in force for three years. Of all the proposals, this is likely to have the most far-reaching implications and is likely to give the biggest boost to consumer confidence.
It is also likely to see the end of re-broking. A declined claim during the new three-year period may cause the client to question the advice to replace the policy. As a result, policies may well stay in force for much longer. This effect would put downward pressure on premiums and could be enough to cancel out, or perhaps even outweigh, any potential premium increases from increased claims.
The bad news is that it may also become harder to get cases on the books in the first place. If insurers are unable to decline claims after three years for non-fraudulent misrepresentation or non-disclosure, extra checks at the outset may become the norm instead.
Third parties
Another proposal with far-reaching implications is that insurers would not be able to decline a claim for either errors or omissions in disclosure if the customer expected the insurer to check the details with a third party, like for example, the customer's GP.
If the insurer asks for consent to obtain information from the applicant's GP, the consumer could reasonably expect the insurer to follow this through to check the medical details. The insurer would not then be able to decline a claim due to a lack of information, or even incorrect information, from the applicant.
For insurers, the implication of these proposals may result in the need for many system and underwriting changes. Application forms may need to be rewritten and underwriting systems updated to accommodate these proposals.
So when will all this happen and when should we start thinking about making these changes?
The Law Commission paper gives no indication of when the proposals may come into effect or whether they will apply retrospectively to existing policies. Even if the new law applies only to new policies taken out after a certain date, it is likely to be impractical to decline a claim on the basis that different law applied to older policies.
This means that, in practice, the proposals are likely to apply to policies being taken out now. Accordingly, insurers need to start thinking about this now to be ready so the proposals may start to have an effect on the industry straight away.
There is no doubt that the Law Commission proposals will tip the balance firmly in favour of consumers. However, there is still some way to go before the proposals become law. Until then, it is imperative that everyone does what they can to address the ongoing challenges surrounding non-disclosure.
There are five key points that, if followed, should ensure intermediaries and their customers can rely on a protection policy to pay out first time, every time, when they expect it to and, just as importantly, could help protect them from an unwelcome brush with the FOS if a claim goes wrong.
Checklist
They are as follows:
1. Explain why it is important. Make sure the customer understands that full disclosure is essential so they can rely on their policy to pay out when they need it to.
2. Fill in the form carefully. Make sure the client fills in the application form carefully, to the best of their knowledge and belief and check it is complete.
3. Let the underwriter decide what is important. It is the underwriter's job to decide what is and is not important, not the client's or intermediaries - so give them all the information possible.
4. Avoid vague answers and use the additional space on the application form or ABI supplementary medical questionnaire to give further detail where needed - this will help to get the policy on risk sooner.
5. Put it in writing. Write to the customer (enclosing a copy of the completed application) to remind them about the importance of getting the information right, and ask them to check the application details and tell the intermediary or insurer about any information that has since come to mind. This letter could protect intermediaries if a client later alleges that they gave information that was not passed on.
Some insurers may say that their process does this for intermediaries but there is no harm in having some records in place - after all, it could be the intermediary in the firing line who may not want to have to rely on an insurance company to offer the means to defend themselves.
Nick Kirwan is chairman of the ABI Protection Committee and protection market director at Scottish Widows
