Airmic campaign to abolish Basis Clauses winning market support
Airmic is urging members to lobby their insurers to remove all Basis Clauses from their policies to reduce the threat of legitimate claims being turned down. The association’s campaign, unveiled at the annual conference, appears to be gaining an unstoppable momentum with insurers coming forward to offer their support. A recent survey found it to be a top concern of a third of Airmic members.
Basis clauses have been described as ‘silent killers’. They operate as a warranty that all information given by the insurance buyer at the time of placing insurance is correct, such that any minor factual error will discharge insurers from liability under policy - even if the error is unintentional and not material to the risk.
Airmic has produced a guide and model wording to raise awareness among its members and counteract the impact of basis clauses. The new guide includes a sample endorsement, drawn up for Airmic by Herbert Smith Freehills LLP, which negates any basis clause included in a policy. The endorsement (see inset) expressly provides that any basis clause in the agreement will be of no effect, making it impossible for insurers to rely on a basis clause to reject claims.
AXA Corporate Solutions were the first major insurer to express their unconditional support for the initiative. “We will be taking action to ensure that our Property and Casualty contracts do not contain any ‘basis clauses’, and that any existing clauses are removed,” said senior executive Paul Lowin.
ACE soon followed suit with an announcementthat it will remove the basis of contract clause from UK wordings issued under their European Group stamp for new and renewed business. “This is an important initiative for us and one that is a direct result of feedback from our customers,” said David Robinson, Regional President, UK & Ireland.
In early July XL Group and AIG became the latest major insurers to distance themselves from the use of Basis clauses.
Chief executive John Hurrell says he has also had informal approaches from several other insurance companies. Although none has yet gone public, the Lloyd’s Market Association (representing all Managing Agents) has done so.
“The LMA in principle supports the Law Commission’s proposal to ban “basis of contract” clauses but this is subject to sight of the detailed proposals and draft Bill, which we will be discussing with the Commission in due course,” its director of legal and compliance, Kees van der Klugt, told Insurance Day.
“Basis clauses are currently prevalent in the market, and we think they are unfair, unnecessary and not as well understood as they should be,” said Hurrell.
“It’s important to stress that this clause does not remove the need for firms to produce honest and accurate proposals when seeking insurance cover and the rules of non-disclosure clearly still apply. It just injects a bit of common sense into the process. The insurers to whom we have spoken are mostly accepting of our initiative.”
Basis clauses have been criticised by the Law Commission and no longer apply in relation to consumer insurance. The Law Commission is proposing, as part of its reconsideration of the law on warranties in insurance contracts, that they should be abolished in commercial insurance as well.
“I would urge Airmic members to review their insurance arrangements as any change in law for business insurance is probably still some years away,” said Herbert Smith Freehills LLP partner Alexander Oddy. “If their policies are subject to basis clauses, whether through proposal forms or the policy wording itself, they should liaise with their brokers and insurers to discuss removing the clauses at the earliest opportunity.”
Case summary
A recent cautionary tale on the operation of basis clauses
The recent case of Genesis Housing v Liberty Syndicate Management provides an example of the potentially draconian consequences of basis clauses. A part of the Claimant housing trust group contracted with a builder, Time and Tide (Bedford) Ltd for the redevelopment of a block of flats. As part of these arrangements, Time and Tide (Bedford) Ltd was to procure insurance, including cover against its insolvency. Time and Tide (Bedford) Ltd contacted the Defendant insurers’ agents and they completed a proposal including a basis clause, which was signed on behalf of Time and Tide (Bedford) Ltd. The proposal mistakenly referred to another group company of TT Bedford, Time and Tide Construction Ltd as the builder.
The project ran into difficulties and Time and Tide (Bedford) Ltd became insolvent. The housing trust therefore sought to claim under the policy. The court found that the basis clause was effective, and that the statement as to the name of the builder was accordingly warranted in the policy. Since the warranty had been breached, the policy was void and accordingly there was no cover for the insolvency.
The Basis Clauses report can be downloaded here.
“I would urge Airmic members to review their insurance arrangements” – Alexander Oddy
Sample endorsement to dis-apply basis clauses
"The Insurer agrees, with effect from inception, that notwithstanding any other term of this contract, any provision in this contract of insurance or any other document to the effect that a statement or statements made by or on behalf of the Insured (including but not limited to statements made in proposals for insurance) form part of or are the basis of the contract of insurance shall be of no effect.
All other terms and conditions remain unaltered"
Drawn up for Airmic by Herbert Smith Freehills