Changes simplify and enshrine best practice, says David Taylor
THREE is the magic number – or so the song goes – and Westminster has certainly pulled a rabbit out of the hat by producing not one, not two, but three reforms to insurance law in very quick succession.
The Third Parties (Rights against Insurers) Act 2010, the Consumer Insurance (Disclosures and Representations) Act 2012 (CIDRA) and what is likely to become the 2015 Insurance Act are all replacing laws that date back to 1906, when Edward VII was king, Sir Henry Campbell-Bannerman was prime minister and maritime insurance still ruled the waves.
One of the biggest drivers for change has been the massive growth in the use of computers. From the iPad on your lap to the smart television that you watch, IT has changed the way we live.
And insurance is no different. IT has had an enormous impact, allowing insurers, their brokers and their policyholders to grow into vast international operations. Underwriting a policy has changed from sitting down and having a conversation with your client to being driven by processes and systems.
Risk has also changed. The nature and type of risk being covered by the market have diversified. The Marine Insurance Act 1906 brought on to the statute books pieces of case law that had developed during the 18th and 19th centuries, when maritime insurance still dominated the market.
Developing the law through traditional methods – with court decisions helping laws to evolve – has been difficult because the 1906 Marine Insurance Act was written in very forthright terms. Nowadays, arbitration clauses in many polices have made the process even more difficult.
It might make good commercial sense to resolve your disputes behind closed doors, but it doesn’t help the courts to further develop the law. Alongside the growth in arbitration, the popularity of the Financial Ombudsman Service – with its “fair and reasonable” jurisdiction – has left the law sidelined in many cases.
All of these changes meant that many of those working in the insurance sector realised that their best practice and processes no longer sat comfortably within the rules set out by the 1906 laws. This in turn led to a joint report from the Scottish Law Commission and the Law Commission, with all three new laws being introduced into parliament using the procedure for “uncontroversial” bills – a far cry from the confrontational debates of the 20th century. The market has reacted well to the changes introduced by CIDRA, which mostly codified into law best practice in the consumer insurance market and some essential features of ombudsman decisions. Disputes about underwriting have significantly declined in some classes of business.
The Third Parties (Rights against Insurers) Act will simplify litigation procedures to save time and money and will introduce new rights to information that brokers in particular will need to note, with the Act being brought into force by regulations being made under the 2015 Insurance Act.
And it is the 2015 Insurance Act itself that is expected to bring about the most significant changes concerning the placement process and the duty to make a “fair presentation”, with guidance on what information should be provided, who should provide it and how it should be provided. Importantly it also now requires the insurer to review the information provided, raise a quizzical eyebrow and ask questions of the policy holder if appropriate.
The Act also introduces remedies should the policyholder fail to make a fair presentation of the risk – the current remedy of avoidance remains but where a policyholder has not been “deliberate or reckless” about the failure to provide information a court may impose the terms (or premium) that would have been applied to the policy and/or adjust the claim. Also, warranties will suspend rather than discharge cover and there will need to be a link between the risk that the warranty covers and the loss occurred.
The 2015 Act is destined to apply throughout the UK. Therefore the changes that are proposed are as important for the insurance industry and policyholders in Scotland as they are for the industry and customers elsewhere in the UK.
There will be an 18-month implementation period but that covers just one underwriting cycle, making it important for insurers, brokers and policyholders to prepare now to avoid any legal challenges. • David Taylor is a partner with BLM and member of the executive board www.blmlaw.com