BIBA response to Law Commission’s consultation on insurance contract law
22nd November 2007
The British Insurance Brokers’ Association (BIBA) is the UK’s leading general insurance intermediary organisation. We represent the interests of insurance brokers, intermediaries and their customers, and have partner members from the leading companies in the insurance industry.
We are pleased to have the opportunity to respond to the Law Commission’s consultation on insurance contract law, and have concentrated our response in the three areas of misrepresentation, warranties, and where intermediaries could be deemed either partly or wholly responsible for misrepresentations or non-disclosures. We are responding on behalf of our collective membership who have contributed to this submission, although certain of our members may also respond individually.
Reform is long overdue for the benefit of the insuring public (consumers and business) in order to bring insurance contract law in line with the 21 st century, maintain the UK’s worldwide competitive position and to clarify the confusing and often onerous duties on the insured and brokers. In this regard, the need for clarity is paramount. We will comment on the perceived problems and proposals as follows:
(a) For consumers
BIBA considers that longer proposal forms could be required in order to capture all the information. This will inevitably result in more time for the broker/proposer to complete, or the broker would be expected to anticipate relevant information. In this case the broker will be liable to the insurer as agent if mistakes are made. It is not unusual for brokers to receive confidential financial information such as that involving takeovers, reorganisations, acquisitions and mergers.
To disclose these may contravene Stock Exchange regulations and we feel this area of disclosure should receive further consideration.
Further clarity is also required on disclosure questions in order to direct the customer properly. We would suggest including a phrase such as “by this we would mean the following examples”. The wide variety of distribution mechanisms in the insurance market such as direct writers versus the broker channel, also requires further consideration in this respect. BIBA believe that adequate explanatory notes for the customer is the key.
Insurers now share records and information and we consider that an invitation to insurers to “consult their records” could be an acceptable response on proposal forms, subject to the proviso that the form has been completed to the best of the proposers knowledge and belief.
(b) For business
If the duty to disclose is remaining, any new law must address “what is reasonable”. Larger businesses will generally have the support of larger brokers but smaller business will not. The remedy for negligent misrepresentation should be dependent upon how the insured has behaved. An example might include whether a global company would be expected to know what is relevant locally.
BIBA recommends due consideration be given to previous proposals and/or warranties applicable at the previous renewal being supplied at the subsequent renewal for clarification and negotiation.
Although BIBA agrees that a duty of disclosure remains, brokers will continue to have an errors and omissions exposure. Private individuals may be unwilling to pursue a claim against a broker due to costs, but insurers may well take a different view if, for example, the broker did not pass on some information. BIBA considers that a possible capped liability solution be explored. BIBA fully accepts however, that if a broker is at fault and in breach, then they should be liable for the loss that flows.
There will also be conflicts where the broker is agent of both the insurer and the client (similar to the estate agent dealing with both buyer and seller).
BIBA believes that market forces should prevail in these circumstances although it is the commercial reality of the relationship between insurer, broker and client that we are trying to achieve.
BIBA considers that an appropriate mechanism to deal with these issues of agency could be through the Financial Ombudsman Scheme(FOS) where claims at present are limited to £100,000, and companies up to £1m turnover also included.
Insurers at present can refuse all claims even if a warranty breach is unrelated. BIBA agree with the suggestion to abolish “fact warranties” but feel that “basis of contract” clauses should remain for added insurer protection e.g. an architect may state that he does not undertake valuation work, but in effect 50 per cent of his work may relate to valuations.
BIBA agrees that the policy should be voidable but only if the breach is material and connected to the loss.
(a) For consumers
In terms of repudiated claims consumers should be protected partly by a combination of Financial Services Authority (FSA) rules, FOS practice and Unfair Terms in Consumer Contracts (UTCC) regulations. The preferred option is to follow FOS practice. BIBA believes that both brokers and consumers need to be fully aware of the consequences. There is concern that this method could have a negative effect on premiums unless the number of repudiations are relatively small. There are no reliable statistics on the number of repudiated claims.
(b) For business.
BIBA believes that there should be freedom to negotiate contracts to provide for claims being paid where a breach has not contributed to a loss and the insurer given the right to terminate cover in the future.
It is suggested that insurers should not be permitted to rely on implied warranties if this renders cover substantially different from what the insured reasonably expected. The onus should be on the parties to agree specific or express terms.
BIBA feel that this may be acceptable at inception but should not raise itself at the time of claim. This also raises questions of the brokers role as agent of client or insurer.
Under existing law the insured bears the consequences of mistakes by the intermediary, and for whom the intermediary is acting is not always clear. The proposal is for the intermediary to be the insurer’s agent for obtaining pre-contract information unless the intermediary is wholly “non-tied” and is conducting a full market search for the client. Single and multi-agents will be deemed agents of the insurer with remedies for fraud or negligence against the intermediary.
BIBA believes these expressions require clear interpretation and definition in terms of FSA clarity.
Brokers can only market search within their available markets. These will be different depending on the broker. They may not be able to access the entire market.
There is also the difficulty where perhaps five policies have been arranged where four have involved a market search, and one has been execution only.
The duty of care lies with the broker and this exposure falls under the broker’s professional indemnity insurance. The duty of care and relationship can also change between arrangement of the policy and dealing with a claim.
This also requires clarification.
The proposal is for this section to no longer apply, or the avoidance remedy be replaced by recovery of damages from the intermediary.
Removal of this section is BIBA’s preferred option.
where an intermediary is the insurer’s agent, they remain such when completing a proposal form for their client. If an error is made and the policyholder signs, the test will be whether the policyholder has been unreasonable, careless or reckless.
BIBA considers further discussion is required with confidential/sensitive information (see comments under misrepresentation/non disclosure above). This may also expose brokers to claims by a losing party, particularly from the insurer, rather than the client. Further clarification is also required in the scenario where a broker is sacked by the client and another broker is appointed. The newly appointed broker may not have an agency with the particular insurer. In these circumstances BIBA believes that the broker could be the agent of the insured; the insurer is unable to deal with the broker, the policy is in frustration, and consequently the client is at liberty to place the business with another insurer with whom the broker holds an agency. The original insurer should then return premium on a gross basis with the original broker having a “claw back” on his commission.
The existing position is confusing with FSA, FOS and UTCC regulations. The BIBA preferred option is to widen the FOS jurisdiction, which basically works well, to create clarity throughout.
Group and co-insurance
The preferred option is for misrepresentation/non-disclosure by a group member, to be treated as if the group member was an individual policyholder. The same rules should apply to co-insurance. BIBA agrees with the proposal on group insurance, but in terms of co-insurance is concerned that the law of unintended consequences may operate to give economically strong entities, e.g. financial institutions/large leasing companies an advantage, whereas alternative protections are available such as contingency insurance.
BIBA would welcome the opportunity of responding to the second consultation paper in this respect.
Overall, BIBA supports the Law Commission’s aims to seek fair balance for consumers, with the mandatory regime being based around FOS guidelines, and for business with the new default system being based on accepted good practice.
Insurers “standard cover” should be reasonable.
Thank you for taking the time to consider our response. The BIBA Executive would be keen to meet with your team to discuss in more detail if required.