With the Law Commission's reform of insurance contract law almost complete - is the industry ready for change? Will the new law reflect the current industry practice and last another 100 years, asks Gill Salton?
Since 2006 the Law Commission has been looking to review the insurance contract law that currently dates back over a century. Various elements of the insurance law have been reviewed;
• Misrepresentation and Non-Disclosure
• Warranties
• Intermediaries and pre-contract information
• Insurable Interest, and
• Microbusinesses.
Consultation papers have been issued and the results accumulated and published, now as the review process is coming to an end, we await the issuing of the new Bill. These are exciting times, being able to be part of a major overhaul of insurance contract law, and the industry needs to make sure it is ready for the challenges ahead.
Likely implications for insurers with key impacts
• Non-Disclosure & dispute resolution
The Law Commission wants to act against dishonesty, although they still want to protect consumers from disproportionate penalties for any minor mistakes. The ABI Code of Practice does not allow for claims where there has been deliberate dishonesty with a minor impact to be declined, however the Law Commission is uncomfortable with this.
Another issue is with the ongoing duty of disclosure that often exists between the date of application and the date of the commencement. The Law Commission have commented in their summary of the responses document in May 2008 that an express term in the contract to cover the ongoing duty of disclosure will still be allowed.
• Classifications of non-disclosure
A definition of what constitutes ‘deliberate and reckless' non-disclosure is still under debate. In the consultation papers, the Law Commission do not make it clear what degree of recklessness is required to distinguish it from negligent behaviour and have not provided a definition for ‘negligent' non-disclosure.
• The role of the intermediary
One major area that has been discussed and which will undoubtedly form part of the forthcoming Bill is the area of the role of the intermediary when obtaining pre-contractual information. Various scenarios have been raised and discussed regarding when they could be deemed as acting for the insurer and when they could be acting for the consumer. This is a complex area and the use of modern information gathering techniques, such as on-line applications and tele-underwriting scripts, make this more difficult to decipher. The outcome of this could result in insurers needing robust procedures for collecting information and they may be responsible for the education of anyone collecting information on their behalf. Full audit trails of the process may also be required.
At claims stage, will the assessor be able to look at each individual aspects of the process and the relationship between the insurer, the intermediary and the consumer to ensure it is clear who was acting for who at the relevant steps in the information gathering process? It is hoped that the new law will provide some clear indications that are reasonable to adopt so this is not too onerous on either party and a fair resolution can be obtained.
• Tele-interviewing
Tele-interviewing at the underwriting stage can help in making the information gathering process clearer, especially where the intermediary is taken out of this part of the sales process and this is conducted by non-commissioned paid personnel. This approach is already widely adopted to some degree within the protection industry and other companies may wish to implement this as a best practice tool, or enhance their usage of this. It is unclear whether the Law Commission will make any reference to the use of tele-interviewing in the Bill, but either way, the benefits of this initiative will not only provide a reduction in non-disclosure, but also, if there is non-disclosure, this can be resolved between the insurer and consumer without the need to involve the intermediary, who may no longer be available for comment.
• Non-contestability
The Law commission originally asked whether there should be a non-contestability period where the insurer could not rely on a negligent misrepresentation once the policy had been in force for five years. This was not accepted by the industry as, although this philosophy is broadly in line with how insurers view non-disclosure, especially for death claims, it was felt that putting this into law could provide the potential for increased non-disclosure as a result of a change in consumer behaviour. This has now been removed from the consultation process.
Opportunities to be gained from new legislation
• Although the protection industry has been the victim of some harsh media coverage over the past few years, which in some circumstances has been deservedly so, we have gone a long way to amend the ways of the past. The media coverage of the new legislation will provide the industry with the opportunity to promote the fact that the law is actually being brought in line with current industry practice and it is not the fact that this is a new law that is being forced upon us to smarten up our act. We should be able to demonstrate that we have in fact been acting in more generous ways than the current law requires - this is a positive approach and demonstrates the industry's principle to treat customers fairly.
• Other marketing opportunities may arise if the proposals to amend the current law on insurable interest are adopted. This could potentially open up the market for insurance being proposed for siblings, grandparents and grandchildren. If this is the case, application forms and underwriting systems will have to be developed or amended to cover this eventuality.
Supporting the need for change
SCOR Global Life has always supported the need for reform of the current insurance contract law and has actively responded to the issues raised. The industry is in the position where the Law on which our products are written does not reflect the way in which they are currently administered and are not completely relative to new initiatives such as on-line applications or tele-underwriting. Also, if things go wrong, the Financial Ombudsman Service has adopted their own guidance for resolving cases on dispute resolution, whereas the Courts may decide on the case in line with the law - this could result in different decisions, which is not good for the industry or for consumer confidence.
Industry View
FOS are also supportive of changes in the law. They have commented in the Summary of Reponses document that they want ‘their decisions on what is fair and reasonable to coincide with the law'. This is an area where undoubtedly the industry will be looking to ensure that FOS is indeed assessing disputed cases based on what the law feels is fair and reasonable. The way in which the UK Ombudsman currently adjudicates its decisions is in contrast to the way in which the Irish Ombudsman currently works. The law and the Ombudsman in Ireland are clearly aligned and this works well to serve both the consumers and the industry. It is clear that FOS would support the UK in moving more towards this model from their further comments; ‘One advantage of law reform would be that it would be much easier to identify where the FOS had departed from what Parliament regarded as "fair", and to hold the FOS to account, through judicial review if necessary'.
There is not unanimous support within the industry for a change to the current law, the ABI has commented publicly that we have a Code of Practice for this purpose. However, there is a need for a law that reflects current industry practice and the Treating Customers Fairly initiative.
What Happens next?
The draft bill is due to be published shortly and is required reading for everyone within the industry. However, there are various views as to whether this law will actually become law, particularly as we approach the possibility of a new government as it is unclear whether time will be given to pass such a fundamental update. This in itself could result in further problems with the law and industry practice not being aligned. Also, the industry will clearly miss the opportunities that can be gained from this new law. If this does go ahead within the specification of the original consultations, this should be embraced by the industry and insurers should be prepared to be fully conver-sant with the terms of the law and update their philosophy and procedures appropriately.
Gill Salton is Senior Underwriting & Claims Developer at reinsurer SCOR
