Airmic Head to Head: Insurance Act

Will the Insurance Act requirement for policyholders to present complex information in a ‘clear and accessible’ way place undue pressure on customers?

No - David Hertzell, legal consultant
The Insurance Act aims to bring UK insurance law up to date and it also creates a new duty of “fair presentation”. This means the policyholder must: disclose all “material circumstances” which it knows or ought to know or, failing that, provide sufficient information to put the underwriter on notice to ask further questions.

The insured cannot comply with its obligation by providing a ‘data dump’ of every possible fact. A fair presentation of a complex risk requires adequate signposting to draw the underwriter’s attention to the relevant facts, and policyholders will need to allow for this.

The insured knows what its senior management knows and what the people arranging the insurance know, and they ought to know what would have been revealed by a reasonable search. ‘Senior management’ is defined as the people who ‘play significant roles in the making of decisions about how the insured’s activities are to be managed’ – often this will be the board.

However, the definition is wider because some insureds will not be companies. The people arranging the insurance could include the insured’s risk manager or broker – although a broker is not obliged to disclose confidential information obtained through a business relationship unconnected to the relevant contract of insurance.

If a policyholder fails to give a fair presentation then the insurer is always compensated. If the failure was deliberate or reckless then the insurer can avoid the policy. Otherwise, the insurer is placed in the position it should have been in had a fair presentation been made. So, for example, new terms could be imposed and limits changed. In addition, if the insurer would have charged a higher premium then any claim can be reduced pro rata.

On consultation and in the House of Lords this approach was felt to be a fair compromise. The duty of fair presentation is not dissimilar to the existing law, but it is an objective standard. In return for more balanced remedies and obligations of professional competence imposed on the insurer, policyholders too are expected to behave in a professional manner measured against what would be reasonable for that type of business.

This part of the Act is concerned with businesses and there is no reason why competent businesses should subsidise their negligent competitors. Those organisations with adequate systems have nothing to fear.

Yes - Nick Young, partner at DAC Beachcroft
Policyholders cannot afford to be casual about the form of the presentation so, yes, the need for information to be presented clearly will add pressure on policyholders and brokers alike.

The requirement is intended to target, at one end of the scale, ‘data dumps’, where the insurer is presented with an overwhelming amount of information. An Airmic survey in 2010 showed 75% of respondents spent between two and six months preparing information to submit to insurers. At the other end of the spectrum, the requirement aims to avoid overly brief or cryptic presentations from policyholders.

The pressure comes from the need to digest and fairly present the information the policyholder ‘knows’ in order to enable the insurer to fairly assess the risk. As the Act applies in this area to all non-consumers – from micro businesses to FTSE 100 companies – the likelihood is the real pressure will grow in line with the size of the policyholder.

With clarification by the Act over the knowledge of the policyholder – including what is known to both senior management and those responsible for the policyholder’s insurance, as well as what should reasonably have been revealed by a reasonable search – it is easy to see that for larger businesses this could throw up huge quantities of data from a number of different sources, including those outside the policyholder. Electronic communication and technological developments have completely reshaped the landscape.

Practically, there is a need to re-examine the processes for obtaining information and then how that information is structured, summarised and indexed.
But surely this pressure is part of the reciprocal nature of the duties as reallocated
under the Act, balancing the burdens fairly between insurers and insureds. It is this co-operation and sense of fair play between the two contracting parties that will ensure good quality disclosure, creating a consistent standard through the market and leading to more reliable insurance placement. My question is, therefore, isn’t this pressure a good thing?