AIRMIC prepares to tackle ‘unfair’ disclosure rules with market

The association intends to secure agreements to changes in market practice and produce policy wordings for its members based on these discussions and best practice, its Chief Executive, John Hurrell, has told Commercial Risk Europe.

AIRMIC will produce a guide for its members, in the summer or early autumn, to address the issues surrounding disclosure, said Mr. Hurrell.

“The guide will say this is the position at law, this is what best practice looks like, these are the things you should be doing, these are things insurers have agreed to do and here are what we think some of the best wordings in town look like,” he explained.

AIRMIC believes that the Law Commission and ‘most of industry’ agree with it that the current law favours insurers over buyers, said Mr. Hurrell.

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It recognises comment made last month by the U.K.’s Law Commissioner for Commercial and Common Law, David Hertzell, at an AIRMIC live debate [see related story in last week’s newsletter].

Mr Hertzell stated that the current law that governs disclosure in the commercial insurance market favours insurers over buyers, but warned that any changes to the Marine Insurance Act that determines how such claims are governed remain ‘some way off’.

“We would love to see a change in the law however we recognise, as David Hertzell said, that with the best will in the world and with a following wind we are talking about five years maybe for that to happen. Will we get it done this parliament? Probably not,” said Mr. Hurrell.

“Therefore AIRMIC needs to take this on and we are going to try and get some agreement to changes in market practice, hopefully embodied by some policy wording. And, therefore by the time Mr. Hertzell is able to seriously get it into a change in the law, hopefully that law can reflect what has become market practice,” he added.

In a recent survey many of its members told AIRMIC that the current situation regarding disclosure is unacceptable and have negotiated individual clauses in their policies to address this, said Mr. Hurrell.

It is becoming an issue for members and therefore it is ‘absolutely on our agenda’, he continued. “It is the biggest issue at the moment,” he added.

“What we are trying to do is to look at best practice in that regard and make available all the knowledge as far as all members are concerned and what looks like best practice in terms of policy wordings,” he said.

Unlike the issue of reservation of rights, for which AIRMIC sought a single industry agreement and policy wording, the association believes that a single industry-wide solution is not feasible.

“I don’t think we would get there. If we waited for that we would be waiting for too long. So we are going to accept that if one insurer has a view and wants certain things and another has a different view then that is fine. As long as that is transparent to members they can make up their own mind as to whether they want to trade premium cover for a better wording or whatever it may be,” explained Mr. Hurrell.

Mr. Hurrell said that talks with the market have gone well and that it is being ‘very positive, very responsive and recognising the challenges and the problems’.

“In fact, from the insurers point of view they are saying that there are claims which they are legally entitled to turn down which they would like to pay. These days when you get a legal opinion that says you can turn this claim down they have a fiduciary responsibility to their shareholders to turn it down. It [the law] is putting them in a difficult position,” he added.

In a recent AIRMIC live debate experts from across the spectrum agreed, to various degrees, that the current law does favour insurers over buyers, [see related story].

According to Mr. Hurrell there are three reasons why the current law is unfair on buyers.

The definition of materiality is defined in the Marine Insurance Act as being that which the prudent insurer would regard as material and not which the reasonable insured would regard as material.

Modern multinational and complex organisations of today were not contemplated when the act came into force in 1906, making the full duty of disclosure almost impossible in the current operating environment.

And thirdly, the punishment for non-disclosure does not fit the crime. “If there is a breach of disclosure of material information, even if that is not related to the claim in question and even if it was innocent, the insurers are legally enabled, and therefore in many cases obliged, to not only decline that claim but actually void the policy ab initio,” he explained.

And, when compared with other jurisdictions the situation in the U.K. ‘appears to be the most draconian and onerous disclosure obligation that we have found anywhere,’ Mr. Hurrell added.

In terms of best practice AIRMIC has clear objectives that it would like to achieve.

“One is to make sure that innocent non-disclosure is not punished. And what goes behind that is what is the knowledge in the client organisations that is responsible for disclosing. The way that the act is written at the moment, if you have an organisation in fifty countries with fifty thousand employees and ten operating divisions the act says that anyone in the organisation has a duty to disclose to the insurer, which is completely impractical. So we are saying let’s define who in the organisation, is it the company secretary or is it the risk management department, is responsible for disclosure,” explained Mr. Hurrell.

If that person or department then fails to disclose material information then we can fully understand that insurers would need to make a difficult decision on disclosure, noted Mr. Hurrell.

“But if the information doesn’t get to that person after full and thorough discovery processes are undertaken, say somebody in Venezuela decides that this information wasn’t material, then the organisation shouldn’t be punished because that is what insurers are there to do. So we want to make sure that innocent non-disclosure is not cause for avoiding the policy,” he continued.

AIRMIC is also looking at the remedies to non-disclosure, explained Mr. Hurrell.

“On this we are trying to get back to what would the underwriter have done if that piece of information had been disclosed at the time of the underwriting. So if they would have increased the premium or if they would have applied a higher deductible it is fair enough for them to do so now with the benefit of hindsight. And, they would be compensated for that after the event,” he continued.

“If they would have written the policy at different terms is it fair and reasonable that they avoid the policy when this non-disclosure comes up? And, we are saying that is not fair and reasonable and they [the underwriters] are all agreeing with that. So we are saying how can you, the insurer, now create some language that you are happy to sign which will then give the insured that commitment that you will behave as you tell us now that you are intending to behave,” he added.