Something to declare?

Isn’t it about time the insurance industry set aside the 100-year-old law that allows insurers to refute claims based on potentially innocent non-disclosure? John Hurrell, chief executive of Airmic, the UK insurance buyers’ association, and a majority of his members certainly believe so.

Hurrell is spearheading an Airmic initiative to change the Marine Insurance Act of 1906, which imposes an obligation on buyers to anticipate what a “prudent insurer” deems “material” underwriting information. Insurers that can show there has been a breach in that duty, even inadvertently, can avoid the claim or even the policy itself.

“[Innocent non-disclosure] is a really important issue for our members. We’d underestimated how big an issue it was until we surveyed our members in March,” says Hurrell, speaking to Insurance Times ahead of the UK association’s annual get-together in Manchester later in June. In the March survey, over a third of Airmic members reported that they'd had a claim rejected in the last 12 months on the grounds of non-disclosure. Of that third, only a half of the risk managers said the claim was eventually settled satisfactorily.

The Airmic research coincided with consultant Mactavish’s project highlighting the problems insurance buyers face due to disclosure. Mactavish says there has been an unprecedented move in changing operating models in the wake of the economic crisis, but many of the firms quizzed thought that they had not fully disclosed those changes to their insurers.

David Hertzell of the Law Commission sparked interest in insurance law reform back in December when he published a report for the UK government that recommended clarification of the 1906 law. The report included draft legislation designed to replace the Marine Insurance Act, which was designed to protect merchant ship owners rather than modern-day businesses.

“We went back to David Hertzell and checked what his view was about law reform for commercial business,” Hurrell explains. “He said it is a long way off. When he first raised the issue, there was a lot of push back from the ABI on the grounds that the law wasn't broken, so why fix it?

“But that's not what our members are telling us and that's not what the reality would appear to be. If the law reform cavalry is not about to charge over the hill, then we need to take the issue up ourselves.”

Too much information

The legal framework, which requires policyholders to give information to insurers before they buy a policy, places an impossible burden on the buyer, he says. The current law requires consumers to volunteer information about anything that a “prudent insurer” would consider relevant. Failure to do so allows the insurer to treat the insurance contract as if it has never existed and refuse all claims under the policy.

Under the Marine Insurance Act, in the event of non-disclosure of any “material information” – as defined by the insurer not the insured – the carrier can avoid the policy in its entirety from inception.

Airmic members argue that it is just not possible for a complex organisation to ensure that they declare everything that an insurer might deem to be material at some later stage. Many large multinational businesses today have operations in 15 or more countries, with upwards of 10 operating divisions.

The problem for insurance buyers, Hurrell says, is that it can take between three and six months of every year to prepare the disclosure information that their insurers legally require. So the one thing these risk managers are absolutely certain of is that the day they submit their underwriting information to the insurer, it is out of date or may be incorrect in some way, he adds.

“The punishment does not meet the crime,” he says. If a piece of information that an insurer later relies on to refute the claim had been disclosed at the time of underwriting, it wouldn't, in most cases, have caused them to refuse to write the risk. It would have meant more premium or a higher deductible. “The way the law is framed means the underwriter can retrospectively underwrite the risk after the policy has been in force, or when the claim comes in, which is unacceptable.”

The UK has the most customer-hostile disclosure legislation in any major western country, Hurrell says, and it risks undermining confidence in UK insurance. If buyers have a choice, they may get a much better deal under US or EU conditions, so in one sense the rules are anti-competitive for the UK market. “The only reason most buyers are happy to go into the London market despite this is that they don’t really understand the implications of the Insurance Act 1906,” Hurrell explains.

The association hopes that, by making a song and dance about the problem, it will put pressure on the market to reform itself.

Playing fair

There have been some positive noises from the insurance market. But inevitably an issue that has been rumbling on for over 100 years will not be resolved overnight. “We've had preliminary discussions with a number of insurers and I think most of them accept that the dice are loaded too heavily in their favour,” Hurrell says. “They say that market practice dictates that they should behave reasonably. But that doesn't give our members the comfort that they require when they buy a policy.

“What we're trying to do is get an agreement from our partner market on prenuptial clauses, which will define materiality as far as possible, define the circumstances whereby the insurer can avoid the policy, and define certain other elements of both parties’ rights in terms of disclosure, so there will be clarity at inception.” The association will be sending advice to its members on many of these issues later in the year.

“We are all agreed on what needs to be done, but we won’t have a piece of paper to wave around at the conference,” Hurrell says. “My instinct is what will happen is what has happened on previous initiatives: we get a handshake and lots of support at the time of the conference, with a view to hopefully by the time of our annual dinner in December having something a bit more concrete.” IT