Insurance law update - In Business Summer 2008

19 June 2008

As those of us in the insurance world know, in January 2005 the Financial Services Authority (FSA) took on the role of the General Insurance Standards Council. Consequently, the Conduct of Business Rules is, therefore, incorporated into and forms part of the FSA Handbook.

The Rules cover both insurers and intermediaries and divide the obligations under two headings, that is:

1. The Retail Customer; and
2. The Commercial Customer.

A brief summary of various sections of the Rules follows:

Product disclosure
The Rules provide for the provision to the insured of a policy summary; specific basic details that are required under various insurance directives; policy documentation; claims handling process; cancellation rights and any applicable compensation schemes. 

Renewals
At Common Law, there is no specific requirement for an insurer to advise an insured that an insurance contract is coming to an end. However, an Insurance Conduct of Business Rule (“ICOB”) provides that a retail customer must be given at least 21 days notification of the renewal date or alternatively, must be notified if the insurer is not offering renewal terms. This is distinguished from the commercial customer where the rules provide that notification should be given “in good time”. 

Policy summary content
The FSA specifically provide for a number of requirements, including:

• Significant features and benefits;
• Significant and unusual exclusions or limitations; and
• How to complain to the Financial Ombudsman Services. 

Claims handling
The ICOB repeat in fact what first appeared in the ABI’s self-regulatory Statement of Insurance Practice. In fact, that Statement was only available to private customers. ICOB would appear to have adopted a similar limited approach. In this respect, an insurer must not:

(a) Unreasonably reject a claim;

(b) Except where there is evidence of fraud, refuse to meet a claim made by a retail customer on the grounds:

• (i) of non-disclosure of a fact material to the risk that the retail customer could not reasonably be expected to have disclosed;
• (ii) of misrepresentation of a fact material to the risk, unless the misrepresentation is negligent;
• (iii) in the case of a general insurance contract, of breach of warranty or condition, unless the circumstances of the claim are connected with the breach; or
• (iv) in the case of a non-investment insurance contract which is a pure protection contract, a breach of warranty, unless the circumstances of the claim are connected with the breach unless:
   
• Under a “life of another” contract, the warranty relates to a statement of fact concerning the life to be assured and that statement would have constituted grounds for rejection of a claim by the insurer under (b) (i) or (ii) above if it had been made by the life to be assured under an “own life” contract; or
• The warranty is material to the risk and was drawn to the attention of the retail customer before the conclusion of the contract.

Further, insurers are required to settle a claim for a retail customer within five working days once an offer has been accepted.

The Independent Adviser

The Duty owed by the Independent Adviser
The duty owed in common law by the intermediary to the client, the insured, is to act reasonably with regard to his client’s insurance needs. Such needs will vary depending on what the intermediary should have known about his client and what the client had told the intermediary. 

It is important for the parties to be precise during the contract formation and arguably, especially at insurance policy renewal. The role of the broker in such circumstances is critical.

Utmost good faith
It is clearly fundamental for an insurance intermediary to explain to his client the importance of the concept (and it is frequently not so straightforward) of utmost good faith at the same time as explaining the full scope of the insurance policy and more specifically the effect of compliance with the insurance policy’s warranties together with the effect of exclusion clauses. In this respect, please refer to the following case, Fisk v Brian Thornhill and Son [2007] EWCA Civ 152.

In the case of Fisk, A had arranged insurance through B a retail insurance broker and B had arranged a policy through C, a wholesale broker.  The property had been wrongly described. The following year, C changed insurers but did not notify B nor did he explain that the new terms would apply. As you might expect, a loss occurred and the insurers refused to pay. Consequently, A sued B who in turn sought a contribution from C. 

The courts held that C should be held 25% to blame. The primary responsibilities, however, remained with B who was the broker of A. There are other relevant cases pertaining to this issue, such as Bollom & Co v Byas Mosely & Co [2000] Lloyd’s REP IR 136; William Jackson & Sons Limited v Oughtred & Harrison (Insurance) Limited [2002] Lloyd’s REP 230. 

If you would like information concerning any of these cases and potential liabilities which intermediaries may face, then please contact us.

For further information contact Gary Marshall on 01227 763939.

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