It’s more than time to drag an age-old insurance law into the 21st century

It is time the insurance industry set aside a 100-year-old law that allows insurers to refute claims based on potentially innocent non-disclosure.

Airmic, the UK insurance buyers’ association, has launched a campaign on behalf of its members to change the Marine Insurance Act of 1906 that imposes an obligation on consumers to anticipate what a “prudent insurer” deems “material” underwriting information. Insurers that can show there has been a breach in that duty, even if it is inadvertent and unrelated to the claim, can avoid the claim or even the policy itself.

“[Innocent non-disclosure] is a really important issue for our members,” says Airmic chief executive John Hurrell. Insurance buyers are concerned because full disclosure is next to impossible to realistically achieve. It is hugely time-consuming with the average risk manager for a multinational company spending between three to six months every year preparing disclosure information to accompany an insurance request. And as soon as they submit their information, it is out of date or incorrect. This is even more true in the current climate, given the upheaval of the economic slowdown.

Insurers can refute a claim based on this innocent non-disclosure. But when they do – as is quite often the case – buyers become infuriated, say Airmic members. Insurers say that market practice dictates that they treat their customers fairly. Most insurers, however, accept that the dice are loaded too heavily in their favour, Hurrell says.

The authorities have taken an interest in the issue. In December, David Hertzell of the Law Commission published a report for the UK government that recommended clarification of the law. The report included draft legislation designed to replace the Marine Insurance Act, designed to protect merchant shipowners rather than modern-day businesses.

The current law requires consumers to volunteer information about anything that a “prudent insurer” would consider relevant. The Law Commission says that any failure to do so allows the insurer to treat the insurance contract as if it has never existed and refuse all claims under the policy.

UK rules are ‘anti-competitive for insurers’

It is also argued that the onerous UK rules are anti-competitive for insurers based on these shores. If buyers knew the extent of the problem, they would surely prefer to place their business in the easier European or US jurisdictions.

For this reason, they say, insurance law reform is in the interest of the London market. The UK has the most customer-hostile disclosure legislation in any major western country, Hurrell adds, and it risks undermining confidence in the insurance promise.

Airmic is keen to highlight the issue and pressure the market to reform itself. It’s unlikely that it will do away with such an established tradition overnight, but there’s no reason to expect that both sides of the insurance market can’t come to an acceptable agreement. Airmic is now working on supplementary clauses that could clarify the position for both parties so that it is clear what constitutes “material information” and on what grounds an insurer can refute a claim. You only need to look back a few years to the issue of contract certainty to see how age-old insurance traditions can be dragged, relatively quickly, into the 21st century.

Airmic hopes that it will have an agreement of sorts by December. It is in the interests of the entire market that this is achieved.

Key points

• Insurers and buyers should come to an agreement to reform the Marine Insurance Act 1906

• Insurers should not rely on technicalities to refute claims; it infuriates buyers

• Reform is possible – just look at the success of contract certainty