Insurance Act to usher in ‘grown-up’ risk transfer but could complicate claims: Cunningham Lindsey

“It seems to me that the general thrust of the Act is to say to the insurance industry you guys really are going to have to play nicely now because the courts are not going to help you. They are going to be there for the worst and most obvious breaches, failure to propose a risk properly and the most serious examples of fraud, but for anything in between the courts are not there for insurers now and the risk transfer industry is going to have to sort things out for themselves,” Mr Ford told Commercial Risk Europe. “The changes present a real opportunity for insurance practitioners to get to a greater standard of openness and fair dealing across the board: there will be more positives than negatives if we approach this well,” added Mr Ford. “I think therefore the message for insurers and buyers is very much one of collaboration and the need to work together and question each other. Collaboration must start at the proposal stage and follow through to the claims process.” For example, under the Act buyers have an obligation to propose and declare every material fact and make a fair representation of risk while the insurer has an expressed obligation to look at that proposal in light of what it should know, or should have reasonably known. Insurers also have an expressed obligation to question and query the proposal in light of any knowledge they have.hide“So the buyer makes his or her fair representation of the risk, the insurer receives that and then it is incumbent on the insurer to spot any obvious or feared missing information or inappropriate sums insured and raise questions. If buyers have any doubts when making their fair representation of risk they should be raised with the carrier. If the proposer asks a question there is a very clear obligation for the insurer to volunteer the information,” said Mr Ford. While we don’t yet know how the consequences of the act will play out, one possibility is that insurers might be obliged to use or volunteer information they hold in their actuarial databases, such as appropriate reinstatement values and other sums insured, added Mr Ford. “It can be difficult for buyers and their advisers to have up-to-date knowledge on appropriate sums insured for every class of business. This information interestingly is something carriers do have in abundance from their experience and is more in the gift of the carrier than the buyer,” he explained. If sums insured are proven to be inadequate there is the potential for legal disputes under the Act that Mr Ford speculates could be concluded in favour of the insured if a judge felt that the insurer ought to have questioned the proposal on the basis of its actuarial knowledge. “Some insureds may well say ‘that is something we expect a big composite insurer to have a much better understanding of than we do as a small manufacturing business’,” he said. The Act will mean that insureds and their carriers should spend more time upfront at placement stage to avoid complications in the claims process, said Mr Ford. “The valuation and sum insured aspect is pre risk work that is probably going to be more essential or likely to be required. I think that is likely to arise from a more collaborative proposal stage,” he explained. Although the Act is seen as a breakthrough for insureds because it introduces a greater presumption against insurers, Cunningham Lindsey believes it will introduce more subjectivity into coverage determinations and, as a consequence, more complexity into claims investigations where the carrier believes strongly that there is a potential coverage exclusion or limitation. “The Insurance Act removes a lot of legal certainties that governed the placement and claims process. For example, warranties don't really exist any more. So you have to consider the failure to comply with a policy term in a subjective way. Is it material first of all? If it is material to what extent is it material? Both of those are open to interpretation. So on the claims front you have to be much more nuanced in how you approach the investigation and the pressure is going to be ever greater to get to a very early determination of policy coverage,” said Mr Ford. This subjectivity ‘runs the risk’ of making the claims process more complicated than before and could potentially drag out settlements, he added. The challenge facing claims practitioners, together with insurers, adjusters and other experts, is taking the most ‘effective and prudent course through what could otherwise be an awful lot of prevarication’, said Mr Ford. Carrying out far more in-depth investigation of claims generally to get to a position of relative certainty, as some parties may feel necessary, is likely to be problematic and ‘intolerable’ for buyers and insurers, continued the loss adjuster. Therefore insurers will want to avoid this occurring in all but the most serious cases, he added. “The wording of the Insurance Act is almost designed to be a lawyer’s paradise. If people go down the road of trying to apply it or make certainties of it the lawyers are the only ones that are going to benefit. There is repetitive use of words like reasonable, or the words ‘presumed to know’ and ‘ought to know’ or ‘should have known’. All of those words reasonable, ought and should are music to the ears of lawyers,” said Mr Ford. Given the likely uncertainty introduced by the Act, particularly as it enters into force in August 2016, the pressure will be on all parties, including loss adjusters, to move quickly to determine potential problems in the claims process, said Mr Ford. “We will need to discuss very openly and very collaboratively with brokers, insurers and policyholders what concerns we have if any, and how they can be resolved,” he said. ‘Sophisticated buyers’ and advisers will be quick to recognise and gain advantage of the opportunities and benefits afforded insureds under the Insurance Act, continued Mr Ford. “At the moment proposal and acceptance is something of a daunting prospect at the best of times and at the worst of times is a confrontational process. I think the sophisticated buyer is going to be the one that recognises that the Act ought to remove that aspect of feeling intimidated and uncertain about the process. The sophistication comes in realising that actually under this new regime it is perfectly fine to say I am not sure about this and I need your help as a carrier to get this right. Then that is to be rewarded by the benefits you get and the realisation that carrier and insured need to resolve this subjectivity together,” he added. Insurers and insureds can agree to contract out of the Insurance Act, but Mr Ford suspects this is only likely to happen, if at all, for the most complex industrial risks. “It is going to be a brave carrier that puts its head above the parapet first and says we are going to select against certain risks benefiting from new protections. I can’t imagine a buyer welcoming that necessarily, but time will tell,” said Mr Ford. “One could see that on a particularly complicated industrial risk or some other single line of coverage where the insurer says, given the exposures involved that we are accepting, buyer and carrier together are going to have to agree that what we have signed up for is what we signed up for and we are not going to follow the Insurance Act on this contract. In other words we will go into it with our eyes open because we are big grown-ups. But I can’t foresee that approach being a general policy,” he concluded.

Insurance Act to usher in ‘grown-up’ risk transfer but could complicate claims: Cunningham Lindsey

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