Airmic backing for Law Commission proposals to ease disclosure burden on buyers

Airmic welcome for Law Commission report on insurance disclosure

Airmic has said it is “greatly encouraged” by the Law Commission’s latest publication on business insurance law, seeing it as proof that the tide has turned in its long-running campaign to ease onerous disclosure requirements.

The document, a summary of responses to the Commission’s third consultation paper on the subject, shows that much of the market has come around to the view that the UK’s century-old insurance law needs to be changed. 80% of those who took part agreed that the Marine Insurance Act (1906) should be reformed to clarify the duty of disclosure, with only 16% disagreeing.

Significantly, many insurers and their representative bodies see the need for changes to the law. In the past, the impetus has come overwhelmingly from those on the buyers’ side, most notably Airmic. Insurers themselves were mostly opposed to fundamental reform.

The ABI, International Underwriting Association (which represents London market insurers outside Lloyd’s) and the Lloyd’s Market Association all gave qualified backing to the proposed changes. For the brokers, LIIBA and BIBA also gave their strong endorsement. To quote BIBA: “The changes are necessary to maintain London’s pre-eminence in the insurance world.” LIIBA recommended that some of the proposals should go even further.

Insurance companies who supported reforms included AXA and Chartis. RSA observed: “In our experience, many in the commercial market (be they insureds, brokers and, indeed, insurers themselves) do not properly understand the … disclosure-related legal duties and rights that flow from them.”

Under the law as it currently stands, an insurer may avoid a claim if the buyer has failed to provide material information even when the information was never requested by the underwriter and may not have affected the terms of the policy.

Airmic also regards the rules on warranties as unduly strict. For example, if a factory owner warrants that they maintain a sprinkler system to provide fire protection, it is perfectly possible for the insurer to avoid a claim for an unrelated burglary, which would otherwise be covered under the policy, if the sprinkler system had not been maintained as warranted. Furthermore, some warranties are deemed to apply even when not explicitly written into the insurance contract (such as basis of contract clauses) leading to a lack of clarity over the insured's obligations.
 

"We are delighted that the Law Commission and the market as a whole have listened to reasoned argument and have made  the case for reform. This is not just about what is best for buyers, but the credibility of London as a market," said Airmic chief executive John Hurrell.

In Airmic's view, the current legal framework places too much reliance on the goodwill of insurers to overlook technical breaches and to pay claims where there might be a legal case for refusing to do so. However, as insurance companies become more compliance-driven, there is a fear that this informal approach is eroding which would negatively impact Airmic members and policyholders in general.
 

The Law Commission are proposing to introduce legislation that would clarify the rights and obligations of both buyers and their underwriters, and to protect policyholders from draconian penalties in the event of innocent non-disclosure. The aim is to get a statute passed before the next election in 2015. If this fails, then new laws are likely to be put back to 2016 or beyond. Airmic has said that, in that scenario, it would look at alternative ways to protect buyers such as model clauses for insertion into insurance contracts.
 

The law Commission report can be downloaded from www.lawcommission.justice.gov.uk/

“This is not just about what is best for buyers, but the credibility of London as a market” – John Hurrell