Analysis: Insurance Act 2015 puts onus on brokers, say Broker 50

The Insurance Act 2015 prompted strong and opposing reactions at the second Insurance Times Broker 50 meeting of 2015.

In the lively main panel discussion, the act was described variously as “an unmitigated disaster”, “the greatest threat to commercial brokers” and as containing “lots of opportunities”.

Broker 50 members gathered with representatives from sponsors Aviva, Davies, Enterprise Rent-A-Car and RSA to discuss the new insurance act at The Langham hotel in London on 3 June.

They also received presentations from the Financial Ombudsman Service on its latest complaints data, and from Insurance Times’s sister publication StrategicRISK on what the UK’s large corporate insurance buyers really think of brokers (see boxes).

Goodbye Marine Insurance Act 1906

It is perhaps not surprising that the new act triggers such impassioned responses. It replaces a 109-year-old piece of legislation – the Marine Insurance Act 1906 – and as such means big changes to both contract wordings and what is expected of brokers.

Therefore brokers will have to tread carefully to ensure they do not fall foul of the new rules, which will come into force in August next year.

One potentially troublesome part of the act is the duty of “fair presentation”. This requires policyholders to inform insurers of “every material circumstance” that the policyholder knows, or ought to know, in relation to their risk.

Brokers on the hook

The problem is that when a broker is involved, their knowledge is included in what the policyholder ought to know, and so brokers need to ensure they share the appropriate information with their clients, or risk being on the hook if something goes wrong.

Another tricky area for brokers is the provision for insurers to ‘contract out’. The act sets out a baseline standard for what policyholders should expect. But insurers can effectively opt out of this, and offer less favourable terms than afforded by the act, as long as they take “sufficient steps” to inform policyholders of any disadvantageous terms in the policy.

Where a broker is involved, the duty of informing policyholders about the disadvantageous terms rests with the broker, and the policyholder has no recourse to the insurer if the broker knew about those terms.

Cost to brokers

There are potential grey areas for brokers here, for example if a client wants a cheaper policy than the one a broker has recommended, and opting for this policy leaves the client underinsured.

In addition to the potential pitfalls within the act itself, there are concerns about the cost to brokers of implementing changes needed to comply with the new rules, and that it may be disproportionate to any benefits.

Despite the concerns about the act, there was also a sense among the Broker 50 that it was well-intentioned and that strong lobbying by Biba staved off a worse outcome for brokers.

For example, the association successfully lobbied for the re-inclusion of Section 11 of the act, which says an insurer cannot reject a claim for a breach of a warranty if the breach has no bearing on the size of the loss.

Boost for professionalism

There was praise for former law commissioner David Hertzell, who led the work on the new legislation.

The act could also make the industry more professional and forge stronger links between insurers and brokers. There were suggestions that brokers should pare down their panels of insurers to those they most trust, to avoid getting caught out by any disadvantageous policy terms.

This could weed out some of the more unscrupulous insurers who would try and hide these terms from the broker or policyholder, and poor quality brokers who would recommend such a policy without checking.

Brokers were urged to use the period until the act comes into force to review the terms of business agreements with clients and insurers.

The Insurance Act 2015 may be worrying and potentially expensive for brokers, but ultimately it could make the market a better place for the true professionals.

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