Opinions on exclusion

Congratulations to all entrants to the CPD competition (14 March, Insurance Times). The standard was very high and left us with some difficulty in choosing the winner. The question which readers were invited comment on refers to the Contracts Act 1999. The question suggested that certain effects of the Act could be excluded from a transaction by inserting a note to that effect in terms of business between broker and customer. Readers were asked to express an opinion as to whether General Insurance Standards Council (GISC) rules and codes required a broker to explain that its terms of business incorporated such an exclusion. We have selected what in our view are two outstanding opinions. The winner will receive a bottle of champagne.

The Winner

Graham Skirrow
The GISC commercial code sets out a framework within which brokers are required to deal in a fair and open manner with their clients. Not only must a broker gain an understanding of its clients' requirements, but it must also provide them with sufficient information to enable them to make informed decisions about their insurance.

Brokers are also required to act in a professional manner and to be prudent in their business dealings.

It could be argued that it is prudent for a broker to include a Contracts Act exclusion within their standard terms of business.

It could also be argued that, provided the commercial customer is given a copy of the terms of business prior to taking out insurance cover, the broker has fulfilled its obligation under the code. Unfortunately, this view oversimplifies a very complex set of circumstances.

Until the broker understands what the client expects from its insurance, there is no way of knowing the level of importance that should be attached to this particular exclusion. If it is the client's primary objective to protect third parties, the exclusion will be of more significance than if the cover is to primarily protect the client.

Where the effects of the exclusion are likely to be of more importance, the broker is obliged to highlight the exclusion and to explain the effects of it in some detail. This will help rule out the possibility that the client did not understand the actual wording within the terms of business or that they would fail to appreciate the effects.

Failure to inform a commercial customer of the exclusion in circumstances where the broker knew of its existence and importance would amount to putting their own interests above those of the client.

Such conflicts of interest are dealt with within the code. In such circumstances the broker must inform the client of the potential conflict of interest, only then can the client decide on the best course of action.

Highly Commended

Michael Faulkner
In my opinion a member will be required under the GISC rules to explain the effect of any exclusion of the Contracts Act 1999.

The core principles of the commercial code state that members should:

1.2 Observe high standards of integrity and deal openly and fairly with their commercial customers

1.4 Take reasonable steps to give commercial customers sufficient information in a comprehensible and timely way to enable them to make balanced and informed decisions about their insurance.

The core principles are followed by practice notes. These are described in the code as representing statements of reasonable practice that members should follow in adhering to the core principles.

It must, therefore, be the case that in situations falling outside the practice notes it will be necessary to have recourse to the core principles to determine the necessary steps to be taken in order to comply with the rules.

Paragraph 8 of the practice notes is potentially relevant to the issue under consideration.

8. Members will provide adequate information in a comprehensive and timely way to enable commercial customers to make an informed decision about the general insurance products or general insurance activity-related services being proposed.

The first issue to consider is whether paragraph 8 requires an explanation to be given. In my opinion the term general insurance activity-related service is broad enough to include the actual service provided by the member as an intermediary. As such, an explanation of the exclusion may need to be given in order to meet the requirement pursuant to paragraph 8 to provide adequate information. Whether such an explanation must be given, depends, in my view, on whether the exclusion is significant or unusual.

The reasoning for this derives from paragraphs 9 and 10, which expand upon the requirement in paragraph 8. Paragraph 10 requires members to advise only on the "key features of the insurance proposed, including...any significant or unusual restrictions [or] exclusions".

I would argue that if there were a duty pursuant to paragraph 8 to explain any exclusion clauses in a member's terms of business it should not be more onerous than the duty contained within paragraph 10.

In my opinion, an exclusion of the Contracts Act 1999 is not significant or unusual. This exclusion is becoming commonplace in contracts; and its operation does not restrict the right of the customer to enforce the contract against the other party to the agreement - its limiting effect is only on secondary rights.

As paragraph 8 does not operate, the next issue to address is whether the core principles 1.2 and 1.4 outlined above require an explanation of the exclusion to be given. In my opinion the reasoning outlined in the proceeding paragraphs could be used to defeat an argument that 1.4 should operate to require an explanation. However, in my view, the duty under 1.2 to deal openly and fairly with customers is wide enough to require an explanation.

It is clearly an intention of the code to ensure that customers are properly informed. I would argue that it cannot be seen as fair dealing to insert exclusion clauses within a member's terms of business and not explain their operation, notwithstanding that the exclusion is not covered by the other paragraphs.

Michael Faulkner
In my opinion a member will be required under the GISC rules to explain the effect of any exclusion of the Contracts Act 1999.

The core principles of the commercial code state that members should:
1.2 Observe high standards of integrity and deal openly and fairly with their commercial customers

1.4 Take reasonable steps to give commercial customers sufficient information in a comprehensible and timely way to enable them to make balanced and informed decisions about their insurance.

The core principles are followed by practice notes. These are described in the code as representing statements of reasonable practice that members should follow in adhering to the core principles.

It must, therefore, be the case that in situations falling outside the practice notes it will be necessary to have recourse to the core principles to determine the necessary steps to be taken in order to comply with the rules.

Paragraph 8 of the practice notes is potentially relevant to the issue under consideration.

8. Members will provide adequate information in a comprehensive and timely way to enable commercial customers to make an informed decision about the general insurance products or general insurance activity-related services being proposed.

The first issue to consider is whether paragraph 8 requires an explanation to be given. In my opinion the term general insurance activity-related service is broad enough to include the actual service provided by the member as an intermediary. As such, an explanation of the exclusion may need to be given in order to meet the requirement pursuant to paragraph 8 to provide adequate information. Whether such an explanation must be given, depends, in my view, on whether the exclusion is significant or unusual.

The reasoning for this derives from paragraphs 9 and 10, which expand upon the requirement in paragraph 8. Paragraph 10 requires members to advise only on the "key features of the insurance proposed, including...any significant or unusual restrictions [or] exclusions".

I would argue that if there were a duty pursuant to paragraph 8 to explain any exclusion clauses in a member's terms of business it should not be more onerous than the duty contained within paragraph 10.

In my opinion, an exclusion of the Contracts Act 1999 is not significant or unusual. This exclusion is becoming commonplace in contracts; and its operation does not restrict the right of the customer to enforce the contract against the other party to the agreement - its limiting effect is only on secondary rights.

As paragraph 8 does not operate, the next issue to address is whether the core principles 1.2 and 1.4 outlined above require an explanation of the exclusion to be given. In my opinion the reasoning outlined in the proceeding paragraphs could be used to defeat an argument that 1.4 should operate to require an explanation. However, in my view, the duty under 1.2 to deal openly and fairly with customers is wide enough to require an explanation.

It is clearly an intention of the code to ensure that customers are properly informed. I would argue that it cannot be seen as fair dealing to insert exclusion clauses within a member's terms of business and not explain their operation, notwithstanding that the exclusion is not covered by the other paragraphs.

Last week's answers:
1C, 2 false, 3 false, 4A, 5C.