Consumer insurance gets a shake-up

It has been eight years in the making, but it looks like the long-awaited shake-up of consumer insurance law will finally take place.

Earlier this week, City minister Mark Hoban announced that the government had given the go ahead to the Consumer Insurance (Disclosure and Representations) Bill. The legislation, designed to level the pre-contract disclosure playing field between consumers and insurance companies, implements a set of Law Commission recommendations published in 2009. The British Insurance Law Association (BILA) set the ball rolling as far back as 2003, when it set up a working party to examine the issue.

Under existing consumer law, defined by the Marine Insurance Act 1906, customers are required to volunteer information about everything that a “prudent insurer” would consider relevant. Instead, under the new bill, the onus will be on insurers to obtain specific information about the customer by asking questions.

The changes mean that insurers will no longer be able to avoid paying claims merely because of accidentally inaccurate or misleading statements by consumers.

Under the existing law, critics say, consumers are treated the same regardless of whether they withheld information innocently or fraudulently. This means that insurance companies can repudiate any claim that involved a consumer withholding information, even if that information may not have been asked for or may not have appeared relevant. The wording of the existing legislation, it is claimed, gives less reputable insurance companies an excuse to avoid paying reasonable claims.

Claims Experts director Richard Hanson-James, who chaired the BILA working party, welcomes the legislation. He says: “There has always been an imbalance in consumer insurance law between the rights of the two parties in the insurance business. A lot of the disputes are not because the customer has been telling porkies, but because the customer has not understood the question.”

In practice, however, the picture is not quite so black and white.

The legislation reflects existing industry practice, as laid out in the ABI best practice guidance and the ICOB rules. Most consumer disputes are adjudicated these days by the Financial Ombudsman Service (FOS), which does not follow the letter of the law in its guidance.

Pinsent Masons partner Alexis Roberts says: “One of the strange things about insurance consumer law for the past few years is that the strict letter of the law is becoming increasingly irrelevant because the FOS does not apply the strict requirements of the common law.”

However, the FOS cannot arbitrate all consumer insurance law disputes. For example, it cannot award more than £100,000 in compensation. In addition, it must decline cases that require witnesses to be cross-examined. If a consumer takes a case to court, the 1906 act still applies. The mismatch between the law governing consumer insurance and practice creates inconsistency.

Roberts says the changes outlined in the bill will effectively bring the law into line with the FOS guidelines. He says: “The existing legislation can lead to quite unfair results.” He also expresses disappointment that the government has not decided to press ahead with parallel moves to update the law surrounding commercial insurance, which could have much more wide-ranging impacts.

But shouldn’t the industry be worried about a move that will make claims harder to contest?

The ABI is sanguine about the changes on the consumer front. “We share the Law Commission’s desire that customers should be treated fairly. The insurance industry is committed to ensuring that customers understand their rights and obligations, and have their genuine claims paid quickly.

“We are pleased that the Law Commission recognises that best practice throughout the industry, supplemented by Financial Services Authority regulation and the approach of the Financial Ombudsman Service, already protects the consumer. The proposals give legal status to existing best practice, and brings them together in one place in a clear format.”

But Addleshaw Goddard professional support lawyer Caroline Bell acknowledges that the new legislation will make it more difficult for insurers to repudiate claims and that it will result in additional costs. She says: “If there is any reference to non-disclosure, they will have to amend the terms. The real costs to the insurers will depend on how closely they were following the FOS rules.”

Head of the policy coverage unit at Beachcroft Richard Evans says that the changes are a price worth paying for the benefits they will deliver in terms of improved customer confidence. He says: “While the industry will need to review its underwriting and pricing regimes in the light of these changes, there is widespread acceptance of the desire to remove disclosure obligations on the consumer, which extend beyond questions actually asked, and to make the remedy available to the insurer more proportionate and consistent with the actual effect of the misrepresentation made.

"As far as consumers are concerned, insurance law has now moved on from the 1906 Marine Insurance Act and entered the 21st century."