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Fairer insurance law for consumers…

Comment 4th February 2016

Why do insurers have such a poor reputation?

Part of the reason is that some insurers are still relying on law which was established in 18th century commercial insurance cases, even when dealing with consumers.

For example, every time you buy an insurance policy – motor, household, life, whatever – you must tell the insurer everything which a prudent insurer might consider relevant to the risk.  This rule was set down in a commercial insurance case heard in 1766!  The insurer is not as a matter of contract law required to ask any questions to guide you, even in respect of those matters which it regards as typically relevant. 

Unless you work for an insurer, how likely is it that you will accurately anticipate everything which should be disclosed?

Yet the penalties are harsh.  If you fail to disclose a relevant fact and this failure induces the insurer to enter into the contract, it may on becoming aware of the true position set your policy aside from outset and reject any claim you have made.  This is so regardless of whether  you acted fraudulently, negligently or entirely innocently.  Nor does there need to be any connection between the alleged non-disclosure and the claim.  And once you have had a policy set aside you will have to declare this in all future applications making it harder to obtain cover at a reasonable cost.

This law may well have been appropriate for commercial insurance arranged in individual face-to-face transactions between equals in the 18th century. However it makes little sense for such law to be applied to modern-day mass-market consumer insurance policies, often purchased over the 'phone or the internet.

If a policy is set aside, consumers do have the right to complain to the Financial Ombudsman Service.  This is an invaluable option as the Ombudsmen make decisions on the basis of what is "fair and reasonable".  In insurance this frequently means ignoring the law.  However it may take months before a decision is made and the service is subject to restrictions.  For example, awards are only binding to £100,000 – a figure which has remained unchanged for 29 years!  For an example of  how woefully inadequate this limit now is, consider the case of Ms Michelle Barber which was widely reported last year.  Ms Barber's house was rebuilt by an insurer after a fire. Subsequently the insurer demanded that Ms Barber reimburse the costs of £241,000 after it discovered that when taking out the policy she had failed to declare a fine of just £150. 

Reform would also discourage several unacceptable practices.  At present some insurers:

  • defer until the claims stage enquiries which would more properly have been made when the initial application was received (for example, in Cuthbertson v Friends Provident, Lord Eassie suggested that "the only purpose of recovering the GP records was to see whether within those notes there was any entry which might give the defenders grounds for avoiding or invalidating the policy under which the claim was being made"),
  • allege non-disclosure as a technical means of rejecting a claim where the reality is that they suspect fraud but are either unable to prove it or unwilling to spend the time and money that a proper investigation would require,
  • adopt an unduly harsh approach to claims when financial pressures bite – indeed claims handlers may be assessed on their ability to "control" costs and it may even affect their remuneration.

The better insurers do not rely on the harsher aspects of the law and would gain from it being reformed.  First it would prevent their less ethical competitors from gaining a financial advantage by refusing claims on spurious grounds.   Secondly, reform would improve the reputation of the insurance industry as a whole.

Fortunately, all the necessary work for consumer insurance law reform has been completed by the Law Commissions, and reforming legislation has been drafted – the Consumer Insurance (Disclosure and Representations) Bill.  Amongst other provisions this Bill would abolish the duty of disclosure for consumers – if an insurer required information it would be obliged to ask a clear question.

Now all that is needed is swift implementation…

Why does this matter?

This idea is important because in abolishing archaic rules of consumer insurance law it will:

  • Secure a fairer deal for consumers and so help restore confidence in financial services.
  • Increase sales of insurance as a consequence of that greater confidence – benefiting insurers and reducing the potential financial strain on the State when losses occur.
  • Encourage good practice, with insurers given an incentive to ask questions when applications for insurance are received, not just when a claim is made.
  • Prevent insurers motivated by the need to cut costs following the credit crunch from unfairly taking a harsh line on claims.
  • Deter insurance fraud by obliging insurers to address dishonesty directly rather than relying on spurious technical defences to reject claims.

And, finally, if insurers wish to see further "risk management" issues moved into the private sector – healthcare, long-term care, income protection, pensions and so on – a pre-condition must surely be the proper protection of consumers through the abolition of unsuitable 18th century legal rules….

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