Market practice has a long way to go before insurers, brokers and their customers take full advantage of the Insurance Act, ten months after it became law, according to a new report issued by Airmic at its annual conference in Birmingham. There are inconsistencies, uncertainties and potential shortcomings in the way the market and organisations have responded to the new regime, it says.
The report highlights several areas of insurance buying where more work needs to be done by the market. These include fair presentation of risk, proportionate remedies and conditions precedent.
"While the framework for the law is in place, establishing the new cultural norms and practices is taking time - in particular a common interpretation of the law is yet to emerge. This could have undesirable consequences and undo some of the benefits of the legislation, possibly creating unnecessary uncertainty around the outcome of claims." said John Hurrell, Airmic CEO when the report was published. "We urge Airmic members and the wider market to remember the Act's guiding principle - a greater understanding of risk by all players."
Fair presentation of risk
The report notes that brokers are adopting different approaches to achieving a "fair presentation of the risk" - a key pillar of the legislation - and underwriters are responding in different ways to these approaches.
In particular, a trend has emerged where brokers and insureds seek written agreement from insurers that a fair presentation has been provided. Airmic advises members not to place total reliance on such clauses, noting that the Act was designed to enrich the dialogue between the insurer and the insured, and lead to enhanced understanding of the risk by both parties. The report states: "Seeking sign-off without extensive discussion about what fair presentation means in the context of the particular insured and class of policy ignores these positive aspects of the Act."
The report comments on the changes being made available by some insurers to the provisions set out in the Act for proportionate remedies in the event of non-disclosure. In a competitive marketplace, insurers have been willing to alter these remedies to differentiate themselves. However, Airmic warns that insureds should take care when accepting remedies outside of the Act, noting that: "Some standard clauses available in the market are significantly less advantageous to the insured than the general law as reflected by the Act."
The report also notes a perceived increase in the use of "conditions precedent" in certain parts of the market. A condition precedent is a contractual term which, if breached, may entitle an insurer to reject a claim, regardless of whether prejudice is suffered, or may mean that cover never attaches. They can be extremely onerous obligations for the insured, and while legitimate in some circumstances, Airmic is urging members to ensure they are expressly stated and kept to a minimum.
First post-Act renewals
The Insurance Act came into force in August last year, and updated the Marine Insurance Act 1906 which provided the framework for all commercial insurance purchased under English Law for over a century. The new legislation is designed to offer greater protection and claims certainty for commercial policyholders.
With many businesses having experienced their first "post-Act renewal", the report reveals how the Act has changed the way insurers, brokers and buyers interact during the placement process, and provides guidance for members on how to ensure they are gaining the full benefits of both the Insurance Act and the more recent Enterprise Act.
The report, The Insurance Act - 10 Months On, was supported by Axa Corporate Solutions, Herbert Smith Freehills LLP and Mactavish, who shared their experiences with Airmic during the research. Download the report here.