BIBA’s response to the Law Commission consultation on Post Contract disclosure
12th October 2010
The British Insurance Brokers Association (BIBA) is the UK's leading general insurance organisation representing the interests of insurance brokers, intermediaries and their customers.
BIBA membership includes 1,700 regulated firms. Insurance brokers and intermediaries distribute nearly two-thirds of all UK general insurance. In 2007, insurance brokers and intermediaries generated £1.5 billion of invisible earnings and they introduce £22 billion of premium income into London's insurance market each year.
BIBA is the voice of the industry, advising members, the regulators, the Government, consumer bodies and other stakeholders on key insurance issues. BIBA provides unique schemes and facilities, technical advice, guidance on regulation and business support and is helping to raise, and maintain, industry standards. BIBA works closely with the Chartered Insurance Institute to provide training to those working in the industry and actively participates in helping the industry and its customers deal with some of the major issues of the day.
BIBA members provide professional advice to businesses and consumers, playing a key role in identification, measurement, management, control and transfer of risk. They negotiate appropriate insurance protection tailored to individual needs and operate to a very high standard of customer service with the aim of ensuring peace of mind, security, financial protection and the professional advice required.
Our response to your questions are set out below:
8.1 Is the law on the remedies available for fraudulent claims unnecessarily complex? (Paragraph 7.4)
Yes we believe that the Commission make a valid point about the ambiguity over whether an insurer can avoid the whole policy or just the claim. In addition we should seek clarity on what should be done regarding previous genuine claims that have been paid prior to the discovery of a fraudulent claim.
8.2 Would it be helpful to introduce legislation to clarify the insurer’s remedy for a fraudulent claim? (Paragraph 7.5)
We agree with this position and think that it would be helpful if the law could be made clearer e.g. with codification in plain English. This would ensure that there cannot be different interpretations about whether previous claims can be unravelled. Different commentators have differing views and from comments made by the BIBA membership who teach students this aspect of insurance is very confusing and it can be difficult to put across the legal doctrines and market practice.
8.3 Should an insurance contract be based on mutual duties of good faith? (Paragraph 7.16)
We agree that the phrase ‘good faith’ is more in keeping with modern vocabulary, it does seem that the concept of utmost good faith does not sit well in the modern business climate in which we all operate. Any breach of the enshrined principle giving rise to the ability to avoid the contract may appear harsh in some circumstances. Recognising this, we think that market practice has evolved to temper the effects and introduce a degree of fairness. However, perhaps the test of fairness is a subjective one and there will doubtless be some Insured’s who do not think that they have been dealt with fairly when a claim or a contract has been avoided. It is easy to see that there is a desire to move to a contractual certainty. Perhaps it is time for the law in this area to be modernised. In doing that it is vital that there remains a strong deterrent against committing fraud, otherwise with little if anything to lose by introducing fraudulent devices to a claim submission we can expect increased numbers of fraudulent action for which all of us as the insuring public will ultimately pay.
8.4 Should we retain the current law that:
(1) the remedies for fraud may be extended by a clear, unambiguous express term, but
We agree but would again point out the ambiguity over whether an insurer can avoid the whole policy or just the claim. In addition we would seek clarity on what should be done regarding previous genuine claims that have been paid prior to the discovery of a fraudulent claim.
(2) a party may not exclude liability for his or her own fraud? (Paragraph 7.22)
We agree and think that the onus of ensuring that the agent is acting lawfully should be placed on his principal. It must not be made easy for an insured to attempt to hide behind someone acting on their behalf. That way there will be no uncertainty about the consequences of any fraudulent device being used should it be proven.
8.5 Should the parties be entitled to exclude liability for the fraud of their agents, if they so wish? (Paragraph 7.23)
This is a more complex argument and we would seek clarity on what lies behind the Commission thinking and what their aim is here. We are inclined to say yes we agree as far as the policyholder’s agents are concerned. But we would disagree in relation to the insurers agent and as such working for that company. The summary document refers to Insured's agents but then goes on to imply all. We think there is a different level of responsibility between policyholders and insurers with regard to agents. Most non-commercial policyholders may not be able to distinguish between a broker and an Insurer’s agent consequently they will need to be protected.
One option would be to have a get-out clause which would mean that if the broker or agent committed a fraudulent act without their knowledge then the other party would be protected. We would agree that the policyholder should be encouraged to use only a broker or agent who is a member of a professional body such as BIBA and who is officially registered with and authorised by the FSA or its successor. However the policyholder can not afford to be abandoned by the insurer and left to try and recover their unpaid claim from the offending broker or agent. It is right that the policy holders are not to be disadvantaged due to the fraudulent behaviour. An insurer, on the other hand, has the opportunity to vet brokers and other agents before accepting business from them or appointing them to perform a particular task on their behalf. They have industry knowledge to rely on, and the resources to bring the full weight of their legal might to bear on the fraudulent agent. Do insurers need similar protection? We would suggest not.
WHERE THERE IS NO EXPRESS TERM
8.6 Should policyholders be under a statutory duty not to make a fraudulent claim? (Paragraph 7.27)
We agree Insurance fraud is already a criminal offence and the comments made will of course also relate to statutory Insurance such as Motor and Employers’ Liability. Extending the law by putting the policyholder under a statutory duty not to make a fraudulent claim does seem to be one stage too far.
8.7 Should the definition of fraud be left to the courts? (Paragraph 7.27)
We agree that the courts should have the final say around the definition of what does and does not constitute a fraud. That way we have independent adjudication and case law to support further action
8.8 Should an insured who makes a fraudulent claim forfeit the whole of the claim to which the fraud relates? (Paragraph 7.33)
We believe the insured should forfeit the whole claim to which the fraud relates. That would make a real deterrent, and should prevent vexatious claims.
However, in the attempt of being fair a fraudulent claim should not affect previous, valid claims, whether or not they have been paid or not. Market practice suggests this is already in force, but the legal position is, for many, in doubt. We can see circumstances where, for example if underwriting fraud has been committed it might be desirable to go back to the start of the insurance contract and avoid from inception. Other than that perhaps it is reasonable to limit the avoidance to the current claim and give the option to cancel the contract from that point going forward.
A fraudulent claim should give the insurer the right to terminate the contract, but should not affect a valid claim arising between the fraud and the termination.We believe that once the fraud has been committed it is reasonable for the insurer to be released from future obligations due to a change in the moral risk associated with the client.
8.9 Should a fraudulent claim have no effect on previous claims, whether or not they have been paid? (Paragraph 7.35)
Codification as per 8.2 with accompanying but guidelines would be helpful. Hypothetically if there was a previous claim where the circumstances were suspicious, but where the insurer had either had to pay the claim because they lacked sufficient proof, then subsequently a fraud was detected after investigation it would seem equitable that previous claims could be affected. If we recall correctly in a Court of law a jury is not told of a defendant’s previous record but that if the accused is found guilty, when sentencing the judge may choose to take it into account. Albeit we are wary of any presumption of guilt and if the second claim can be proved as fraudulent, then the commission must have every sympathy with an insurer forced to pay out for the suspicious but unproven first one. Where there is no obvious link between the two claims and the first seemed genuine then the insurer must give the policyholder the benefit of the doubt and stand by a payment already made or due to be made.
8.10 Should a fraudulent claim give the insurer the right to terminate the contract, but have no effect on a valid claim arising between the fraud and the termination?
We agree as this does go to the core of the contract. However, the insurer must give the policyholder a reasonable notice of the intention of cancellation, for example 30 days written notice. If a fraudulent act is discovered then the insurer should be under an obligation to issue a notice of intent regarding the status of the insurance coverage. Failure to do so should mean that any subsequent valid claims must be met.
8.11 Should an insurer be entitled to claim damages for the reasonable and foreseeable cost of investigating a fraudulent claim? (Paragraph 7.42) 78
We agree and the entitlement should be there once the claim has actually been proven to be fraudulent.
8.12 Should damages be available only where such costs are not recouped from the insurer’s saving in retaining the legitimate element of the claim? (Paragraph 7.43)
Yes, although if it is restricted in this way an insurer may not be able to use damages as a deterrent when they would like to.
FRAUD BY A CO-INSURED
8.13 If a joint policyholder provides evidence that the fraud was not carried out on their behalf or with their knowledge, should the innocent policyholder’s share of the claim be paid? (Paragraph 7.47)
Yes, this would protect the third party such as financial backers and innocent parties.
8.14 Should the legislation provide that the recovery will be limited to the innocent insured’s own interest, and will only be payable if the guilty insured would not benefit from any recovery? (Paragraph 7.48)
Presumably by ‘recovery’ you mean ‘claim settlement’? If so, yes. However, the Commission makes a worrying comment: "where 2 or more people act together to insure their joint interests, there should be a presumption that any fraud committed by one party is done on behalf of all the parties." We are unsure as to why you feel this way. It does not sound equitable that it should be left to the innocent party to have to prove their innocence.
FRAUD IN GROUP INSURANCE
8.15 Is there a need to make special provision for fraudulent claims by group members, to give insurers similar remedies to those available where a policyholder acts fraudulently? (Paragraph 7.50)
We agree if the fraud is perpetrated by a group then they all should be jointly and severally liable. If one party is guilty of a fraudulent nature it should not disrupt the contract for the innocent.
OTHER ASPECTS OF THE INSURED’S POST-CONTRACT DUTY OF GOOD FAITH
8.16 Should clauses requiring the insured to notify the insurer about any increases in the risk be interpreted restrictively? (Paragraph 7.54)
8.17 Should the duty of good faith have no particular application to such clauses? (Paragraph 7.55)
Yes – we would prefer to keep the duty of good faith general across the whole contract and not made applicable only to specific clauses.
8.18 Are there any advantages in legislating for such clauses along the lines set out in the Principles of European Insurance Contract Law? (Paragraph 7.56)
No, let's keep EU law out of it for the time being. EU practice is different and tacit renewals are common (often a huge aggravation for an Insured and his new broker), whereas here most policies tend to be renewable annually. Chalk and cheese in many areas. Consultees on this project will be familiar with current English/Welsh and/or Scottish insurance practice, but will not necessarily be so with EU contracts. Best to stick with what we know.
8.19 Should an insured’s duty of good faith be confined to the duty not to make a fraudulent claim, or should it continue to have some general but unspecified
effect? (Paragraph 7.59)
General. It should not just apply to claims, but also to answers given to specific questions posed by an insurer.
Thank you for taking the time to consider our response. If you have any further queries please contact myself, Graeme Trudgill, BIBA’s Technical and Corporate Affairs Executive on 020 7397 0218 or on email@example.com or Steve Foulsham, BIBA’s Technical Services Manager on 0207 397 0234 or firstname.lastname@example.org
Head of Technical Services
Direct Tel: 020 7397 0204
Direct Fax: 020 7626 9676