When presenting the Insurance Act, the Law Commissions of England and Scotland said their intention was to encourage professionalism. Bruce Hepburn and David Hertzell of Mactavish examine the implications for risk managers for the insurance industry.
No one would suggest that the insurance market is dominated by amateurs. Many underwriters, brokers and risk managers have professional qualifications and belong to professional organisations. New recruits are often encouraged to study as well as train on the job in order to advance their careers. However the law in the Marine Insurance Act 1906 provided no particular emphasis on the professionalism of underwriters, brokers or policyholders. Indeed it was observed by one Lord Justice in 1926 that the “proper line” for an underwriter was “absolutely to abstain from asking any questions” regardless. Quite what the underwriter was there to do was not elaborated.
Of course attitudes changed in more recent times and any underwriter who adopted a supinely passive role in the presentation process would be at risk and almost certainly would be regarded as unprofessional. However the Law Commissions' view, which Mactavish supports, was that professionally competent underwriters, brokers and risk managers should be actively encouraged by the law. Insurance is a major industry for the UK. Large sums are at risk and, indeed, in some instances the very survival of the policyholder will depend on an insurance policy that performs when required and as required. The Commissions did not consider that the insurance market was a place for unprofessional standards – an opinion with which Mactavish would strongly agree.
The Insurance Act encourages professional behaviour in several places. First, the very concept of a “fair presentation” suggests competence. Indeed that is reinforced by other provisions which specify who has to do what and how. The policyholder has to carry out a reasonable search and may not “data dump” material. Where relevant these obligations fall on the broker too. The Act confirms that the policyholder’s knowledge includes that of “senior management”, often in practice the Board. A competent risk manager will need to ask whether the board has relevant information and understand the business well enough to determine how widely this net need be cast.
The Insurance Act expects a professional approach too on the other side of the desk. The “proper line” is no longer for the underwriter to avoid asking questions. If the policyholder has provided sufficient information to raise queries in the underwriter’s mind then those questions should be asked. In addition an underwriter is expected to know what underwriters involved with that type of risk ought reasonably to know. The Commissions are conscious that “naïve capacity” underwriting can be very damaging to a market and to the parties involved.
It may be that in future insurance disputes the courts will apply professional standards to the participants’ behaviour when considering liability as well as contractual rules. However one thing has not changed. Insurance contracts remain contracts of good faith. Professionalism is not just a question of competence. It is also a question of ethics. Professionals, however competent, who seek to rely on sharp practice to take advantage of another, should find no support in the law.
The Commissions’ core intention was for policies to be written on the right terms and for the right price which then perform when called upon. Reinforcing professional standards was one of the key levers to achieve this goal. Mactavish has long championed this approach.
Bruce Hepburn is Chief Executive Officer and David Hertzell is a Special Advisor at Mactavish. David was previously Law Commissioner for England and instrumental in drafting The Insurance Act 2015.