Large claims still a battle despite Insurance Act

Despite the implementation of the Insurance Act and Airmic’s lobbying efforts, many buyers continue to be disappointed by their insurers when it comes to large, complex claims. Last August saw the long-awaited Insurance Act 2015 take effect. It was hoped that the new legislation would bring about greater levels of fairness and increased transparency in the business insurance market, where buyers have been complaining of unreasonable delays and challenges when settling large claims. While it is still early days to judge the success or failure of the Insurance Act, insurers are finding new legal defences under the legislation, while all parties have yet to substantially change the way in which complex insurance is placed, experts say. According to a report by Airmic, the Insurance Act has not yet resulted in levels of insurer and policyholder enagement envisaged when the legislation was conceived and drafted. The market’s response has been inconsistent, characterised by legal and contractual moves, it concluded. The settlement of large complex claims continues to be “adversarial”, according to Bruce Hepburn, chief executive and founder of insurance governance firm Mactavish. “The claims environment is very difficult for large and complex losses, and will continue to be so, as long as insurers remain in a challenging position,” he said. The market for claims is “hard” compared to the past, and the situation has not appreciably changed in recent years, according to Ian Martin, head of claims, client advisory services at Marsh. “The issues faced by insureds [when settling large claims] are part contractual and part behaviour. There is not an epidemic of poor behaviour, but sometimes a client might feel that an insurer’s behaviour is not consistent with its statements,” he said. Small claims are being settled quickly and efficiently, but larger and more complex claims are subject to more intense legal scrutiny, particularly in the soft market, explained Mr Martin. “Where a major claim is likely to have a significant impact on an insurer’s results, there will be a strong desire to review the contract,” he said. Mr Hepburn does not think insurers deliberately set out to unfairly deny claims on technicalities. But insurers are looking to strictly apply contract terms and conditions when it comes to settling large claims, he said. “The reality is that insurers have to make a profit and their biggest cost is claims. Premiums are down and large losses are more unpredictable, so when an insurer gets a large claim it will use the letter of the law,” Mr Hepburn added. John Hurrell, chief executive of Airmic, also believes insurers may be taking a tougher stance on claims in the soft market. “Routine claims are, in general, handled more efficiently and effectively than ever before. The problems, however, come with larger claims, which could be linked to the soft market,” he said. Insurers continue to routinely subject large claims to increased legal scrutiny and are now more likely to raise questions and challenges as part of the claims process, according to Mr Hurrell. “A relatively high number of Airmic members have faced challenges from insurers on large, high value claims,” he said. The last time Airmic surveyed its members on claims, back in in 2016, it found growing concern over “unjustifiable delays” in payments, rising from 8% in 2015 to 21% in 2016. Almost a fifth of survey respondents said a claim had been challenged, delayed, declined or reduced in the past three years. Even under the Insurance Act, which was intended to level the playing field between buyers and insurers, Airmic members continue to have claims challenged, according to Mr Hurrell. “Under the Insurance Act, Airmic members see claims challenged under breach of conditions precedent clauses, late notification and procedural issues,” he said. “Despite the Insurance Act, the world has not become an easier place for Airmic members. The hurdles and issues are just different,” said Mr Hurrell. There is an “inevitable” emergence of new legal defences under the Insurance Act, with an increased focus on post-loss conditions, according to Mr Hepburn. “The ways in which insurers challenge claims is changing. They will increasingly use the duty of fair presentation and post-loss conditions, such as late notification provisions and breaches of Section 11 (of the Insurance Act),” he said. Compliance issues are the principal challenge thrown up for buyers and brokers by the Insurance Act. Brokers are concerned about their clients’ resource to comply and their transition to the new legislation, said Mr Hepburn. “Many insurance buyers are doing the minimum to comply and will get a shock when it comes to a large claim,” he added. “Disputes under the Insurance Act are starting to come through and will become more apparent over the next year or so. They are likely to be around the duty of fair presentation and post-loss conditions, and Section 11 of the Act,” he said. For example, the recent Commercial Court and Appeal case of AXA Verischerung Ag v Arab Insurance Group (AIRG) considered fair presentation of risk under the Act. AXA said it would not have underwritten two marine energy reinsurance contracts, had ARIG disclosed loss statistics. AXA lost the case and the appeal on the grounds that it was unable to prove how the underwriter would have acted had the disclosure been available at the relevant time. Mr Hepburn believes that the failure of insurance policies to sometimes meet buyers’ expectations reflects shortcomings in the placement process and the working relationship between underwriter, broker and buyer. “It is wrong to equate not paying a claim with bad behaviour. If an insurer won’t pay, it is usually because the loss is not covered under the policy,” according to Mr Hepburn. “Insurers are not playing a sufficiently constructive role when selling commercial insurance. They need to take a more proactive role in understanding customer needs,” he told CRE. “Insurers tend to sit back and say it is the role of the broker and client to say what they need. But it should be a three-way conversation because the insurer has a better understanding of how their product works and will have insights that are not available to the broker or risk manager,” he said. A lack of satisfaction among risk managers over the performance of insurance contracts also reflects badly on buyers, according to Mr Hepburn. “This is not only down to insurers. There is still too great a focus on premium reductions and cutting broker fees by the buyer, and not enough focus on contract certainty,” he said. “There is a lack of proactivity on all sides. This is a system that only works when all three parties work together and it is within the gift of buyers to change it,” he added. According to Marsh’s Mr Martin, insurers do not deliberately set out to make the claim process anything but efficient, and the majority of claims are settled amicably and without delay. However, there is room for improvement and some aspects of insurers’ claims service are of ongoing concern, he said. Insurers’ claims behaviour does not always match carriers’ commitments to clients in claims policies and statements, he continued. “How an insurer engages with an insured is critical. It needs the right behaviour [and] a pragmatic approach to overcoming issues,” concluded Mr Martin.

Large claims still a battle despite Insurance Act

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