Airmic offers solution to 'unfair' basis clauses

Airmic, the association for risk managers and insurance buyers, has produced a guide and model wording to raise awareness among its members and counteract the impact of “unfair and unnecessary” basis clauses, which can result in legitimate claims not being paid.

Basis clauses operate as a warranty that all information given by the insurance buyer at the time of placing insurance is correct, such that any minor factual error will discharge insurers from liability under policy – even if the error is unintentional and not material to the risk (see case study below).

The new guide includes a sample endorsement, drawn up for Airmic by law firm Herbert Smith Freehills, which negates any basis clause included in a policy. The endorsement expressly provides that any basis clause in the agreement will be of no effect, making it impossible for insurers to rely on a basis clause to reject claims.

“Our new model wording is a big step forward for any commercial buyer wanting protection against the possibility of an insurer avoiding a claim on purely technical grounds,” said Airmic chief executive John Hurrell. “Basis clauses are currently prevalent in the market, and we think they are unfair, unnecessary and not as well understood as they should be.”

“It’s important to stress that this clause does not remove the need for firms to produce honest and accurate proposals when seeking insurance cover and the rules of non-disclosure clearly still apply. It just injects a bit of common sense into the process. The insurers to whom we have spoken are mostly accepting of our initiative.”

AXA Corporate Solutions UK’s Paul Lowin said: “We welcome the new Airmic guide, which is in line with the Law Commission’s recent review of insurance contract law. Following that review, AXA Corporate Solutions UK has taken a proactive stance and we will be taking action to ensure that our property/casualty contracts do not contain any ‘basis clauses’, and that any existing clauses are removed. The Law Commission’s recommendations reflect our longstanding approach to the use of basis clauses in our UK wording.”

Basis clauses have been criticised by the Law Commission and no longer apply in relation to consumer insurance. The Law Commission is proposing, as part of its reconsideration of the law on warranties in insurance contracts, that they should be abolished in commercial insurance as well. The latest Airmic survey found the subject to be a top concern of one-third of its members.

“I would urge Airmic members to review their insurance arrangements, as any change in law for business insurance is probably still some years away,” said Herbert Smith Freehills partner Alexander Oddy. “If their policies are subject to basis clauses, whether through proposal forms or the policy wording itself, they should liaise with their brokers and insurers to discuss removing the clauses at the earliest opportunity.”