A guide to legislative changes affecting insurers, brokers and customers
With a number of legislative changes affecting insurers, brokers and customers we’ve put together some useful guides.
The Consumer Insurance (Disclosure and Representations) Act
The Consumer Insurance (Disclosure and Representations) Act 2012 creates a new legislation landscape for brokers and insurers selling to customers.
So what’s in the Act?
Firstly it is important to remember that the Act is solely targeted at consumer insurance and not commercial insurance. That is “a contract of insurance entered into by an individual wholly or mainly for purposes unrelated to the individual’s trade, business or profession”.
The Main Provisions of the Act
- Duty of Disclosure
The responsibility for obtaining material information moves from the consumer to the insurer. Insurers must ensure they ask for any information they need to assess the risk being insured. The insured will have to take reasonable care not to make any misrepresentations and to answer the insurer’s questions fully and accurately.
- Misrepresentation & Available Remedies
The Act distinguishes between “deliberate/reckless”, “careless”, and “innocent” misrepresentations, and details the remedies available to the insurer for each.
- Qualifying misrepresentations
The Act provides the insurer with a remedy following a misrepresentation if it can show that, without the misrepresentation, it would not have entered into the contract at all, or would only have done so on different terms and this is termed a “qualifying misrepresentation”. Two categories of qualifying misrepresentation are defined in the Act “deliberate/reckless” and “careless”. A qualifying misrepresentation is deliberate or reckless if the consumer knew it was untrue or misleading. A careless qualifying misrepresentation is defined as a qualifying misrepresentation that is not deliberate or reckless. In addition a misrepresentation could be innocent where the consumer has acted reasonably, e.g. where the insurer has not asked the necessary questions, however this is not a qualifying misrepresentation and the insurer has no remedy for it. If a consumer acts honestly and reasonably the insurer will have to pay any claims.
The categories of misrepresentation
- Innocent – the customer acted honestly and reasonably, the question asked may not have been clear enough or it was reasonable for the customer to have overlooked the omitted information.
- Careless – the question asked is clear and the customer should have known that the information given was incorrect and important to us. The customer may have acted honestly but they failed to match up to the standards of a reasonable customer. These cases are often the most difficult to determine.
- Deliberate – the customer knew, or must have known, that the representation they made in answer to a question was incorrect and knew, or must have known, that the information was relevant to the insurer.
- Reckless – it is clear that the customer had a complete disregard for the question or the accuracy of the answer when completing the application and must have understood that the information was required by the insurer.
An insurer will be entitled to avoid the contract, refuse to pay claims and retain premiums (except to the extent (if any) that it would be unfair to the consumer to retain them) if the qualifying misrepresentation was deemed to be deliberate or reckless.
Where a qualifying misrepresentation is deemed to be careless, the remedies contained within the Act are based upon what the insurer would have done:
- The insurer may avoid the policy and refuse all past and future claims (but it must return the premium) if it would not have entered into the contract on any terms.
- If the insurer would have imposed different terms (other than relating to premium), it may choose to treat the contract as if those terms applied.
- Where the insurer would have charged a higher premium, the insurer can cancel the policy, provided no claim has been made or apply proportionality to any future claims. Where a claim has been made under the policy the claim can be reduced proportionately. The insurer then has the option to cancel the policy after a claim has been made or apply proportionality to any future claims.
At LV= we’re going beyond the act and will not be offering proportionality going forward but instead we will offer your customers the opportunity to pay an additional premium to keep the policy in force (if a claim has not been made) or to enable us to settle the claim in full and then keep the policy in force (if a claim has been made). However, customers will still have the right to cancel their policy at any time.
Under the Act, an intermediary will usually be deemed to be acting as agent of the insurer if it is an appointed representative of the insurer, or is acting as the insurer’s agent. In most other cases the intermediary will be presumed to be acting for the consumer. The Act sets out the basis for deciding whether an insurance intermediary acts for the insurer or the consumer in respect of pre-contract information and entering into the contract but these rules do not apply to other areas such as collecting premium.
Basis of Contract Clauses
Insurers will no longer be able to convert representations made by policyholders in declarations (known as “basis of contract clauses” & usually found in proposal forms) into warranties and repudiate claims for the breach of such warranties.
What does this mean for brokers?
It all comes down to ensuring that the questions an insurer requires to be answered in order to assess a risk are answered fully and accurately by the policyholder. As one of our broker partners this may mean that you need to update your own scripts, question sets and website to ensure that you’re asking customers full and clear questions to avoid any innocent misrepresentation. The good news is that this shouldn’t be any different to what you’re currently doing.
Your customers should also be advised at the point of sale about the consequences of not taking reasonable care to answer all questions honestly. For example; “Please answer all the questions honestly and to the best of your knowledge. If you don’t answer the questions correctly, your policy may be cancelled, or your claim rejected or not fully paid”.
LV= are responsible for updating the Terms of Business Agreements and will be amending these in line with the terms of act. We will also be liaising with the software houses to ensure the recommended question set changes are made.
As you hold the relationship with the customers, it is your responsibility to ensure that the right questions are asked within the sales process and the correct information is gathered for the insurer.
We’re happy to help you review your documentation to ensure that it is in line with the Consumer Insurance Act 2012. If you require any advice or guidance simply contact your personal lines account manager.
Depending on the category (careless, reckless or deliberate) any misrepresentation will result in the relevant course of action being taken by the insurer, as detailed in the above remedies section. If a misrepresentation is discovered which results in the avoidance or cancellation of a policy any premium refund due will be returned to you to be forwarded on to your customer.
How are customers impacted?
In the main, as long as a customer answers all the questions a broker asks accurately and confirms that any assumptions made fully apply to their circumstances then there will be no impact.
The provisions of the Act reflect what is already accepted to be industry good practice and the approach taken in recent years by the Financial Ombudsman Service. As LV= robustly follows FOS guidelines and conducts in depth root cause analysis on FOS decisions, the overall impact should not be significant.
Want to know more?
To gain a full understanding of the Consumer Insurance Act 2012 please visit legislation.gov.uk.