Intermediaries are bound by a code of practice to ensure their clients get a fair deal. Michael Connor explains how a terms of business document should be used

The main purpose of the General Insurance Standards Council (GISC) is to ensure that buyers of general insurance are treated fairly.

This dovetails with the legal principle that an insurance adviser should at all times conduct its business with utmost good faith and put the interests of its customer before all other considerations.

The use of a `terms of business' document ("the document") should assist in this. The GISC has recently issued guidance on such documents and, although not mandatory, intermediaries need to consider it before committing pen to paper.

A number of terms need to be defined to ensure there is a clear understanding of their use. What is a private customer? A private customer is anyone who buys insurance cover for his or her own benefit, for example motor and home insurance, travel insurance, and payment protection insurance for mortgages and other loans.

The code is the GISC's general insurance code for private customers. This requires members to provide enough information to enable customers to make an informed decision before buying insurance.

Commercial relationship

What is a business document? This is any letter or document provided to customers by the intermediary to explain the commercial relationship between them. The document will not by itself ensure compliance with the code. It is part of the customer's information package to be used with other written and spoken communications about the coverage offered.

Any information required by the code, which is not included in the document, has to be provided to the customer separately. There is no specific guidance on what that method should be, but it would normally be prudent to use another written document.

What should the document cover? It is for the intermediary to determine the scope and detail, but the GISC recommends that key areas should be covered, including:

  • the nature and extent of the service offered (for example, claims handling), the choice of products and services offered, and whether it acts for the customer, the insurer or another intermediary

  • information on charges, including for example, additional charges

  • information about its GISC membership or its agency relationship with a member, complaints procedures, dispute resolution facilities, and whether products or services offered are not covered by the code

  • a reminder of the customer's duty to provide the insurer with information before and during the policy period, particularly the need to make full and accurate statements on proposal and claims forms, and the consequences of failure to do this.

    If the intermediary might wish to withhold documentation (for example a lien against outstanding payment) this should be explained, setting out the circumstances under which documents can be withheld, as should customer rights to receive details of cover and any documents required by law.

    Confidentiality obligation
    Any rights to disclose customer information for example, in marketing or for credit referencing, should be detailed. The document should also explain the intermediary's obligation of confidentiality and the need for the customer's consent to disclosure. Rights of access to information under the Data Protection Act should be explained.

    Copies of the code should be stated to be available on request.

    The language, format and layout used should be clear, avoiding technical and legal jargon.

    Due to the variety of potential arrangements that intermediaries have with insurers, a standard wording is unlikely to be appropriate in all cases. In such cases the documentation provided to the customer should be prepared in such a manner that general explanations accurately reflect all variations, or that individual variations to general explanations are provided by means of a separate document Alternatively, a number of separate documents can be prepared to apply to different types of products or customers.

    Customers must be able to make an informed decision before committing to purchase insurance.

    The document should always be given to customers before commitment and customers given adequate time to read it. Intermediaries should steer clear of pressure-selling tactics.

    This applies to telesales and internet selling as much as to face-to-face insurance selling.

    If intermediaries want customers to agree to the document, the customer should first have an opportunity to read it and ask any questions. They must also be provided with a copy of the signed agreement.

    The `terms of business' document provides a great opportunity for intermediaries to assist customers in making an informed choice about the insurance products they purchase, but it requires a flexible approach to ensure that the customer (and GISC) is satisfied.

    A is an intermediary offering a range of insurances. B wants to obtain insurance for his new caravan, which he is taking to France for a holiday in two days' time. A gives B his standard terms of business agreement for car and caravan insurance to sign.

    Question 1
    A explains that if B does not sign the document tonight (it is 4.45pm and A's office closes at 5pm) he cannot guarantee that the insurer will cover the risk. Should B sign ?

    a. Yes, or he will not be covered for the trip

    b. No, A is not supposed to pressure or induce a customer into signing the document, the customer should have time to consider its contents in a suit able environment

    c.No, the document must be signed only after the cover is in place.

    Question 2
    A says the risk will be covered under a scheme he operates through one insurer for caravans, and that the terms of business document he uses is the same for all risks he places. Is this acceptable?

    a.Yes, B can rely on A's experience that this is acceptable practice as he is his agent

    b.No, A should have considered whether variations upon his standard business document wording are appropriate to reflect the differing arrangements he has

    c.Yes, because he is only an appointed agent of a GISC member.

    Question 3
    B says he finds the document difficult to understand as it is full of legalese. What should he do?

    a.Not sign, but take it to a lawyer who will explain it

    b.Sign, as A is his agent and knows best; and doubtless the wording is very important

    c.Require A to explain it, preferably in writing, in a separate document which forms part of the information package.

  • This week's CPD page has been contributed by Michael Connor, who is a solicitor with Reynolds Porter Chamberlain. He was formerly a principal regulatory officer in Lloyd's regulatory division.

    This CPD page is edited by RW Associates, specialists in training, competence and compliance.

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