When an insurance buyer has to make a large claim on behalf of their company, the worst outcome is to have the claim rejected because of statements made, or errors discovered in prior proposals or application forms. Airmic’s CEO, John Hurrell, explains to Steve Dunkerley why the balance of power unfairly favours the insurer and the importance of efficacy during the procurement process.
The instant availability of information today means that large and small insurance buyers are increasingly aware of the potential for adverse major events. This, according to John Hurrell, CEO of Airmic, is driving demand for professional risk management and insurance services. In today's fast-moving global business world, where organisations are moving into new markets, going into new territories or developing new technologies, there are ever-increasing risk exposures that can give rise to a wide range of potential insurance claims. However, when losses arise, there can be unhappy policyholders who are not being paid the claim money they believe they are due.
"Some insurance buyers are feeling bruised right now, and their confidence in the way in which the insurance market operates can be fragile," says Hurrell. "Current UK insurance law makes it difficult for companies to be confident that large claims will be paid according to expectations."
The first gripe Hurrell has with the UK insurance system is around the disclosure of material facts by the buyer when seeking cover. A 'material' fact is one that would influence the decision for the insurance company to accept the risk, and determine the appropriate terms and conditions. If the buyer fails to disclose a material fact, however innocently, thereby inducing the insurer to accept the proposed risk, the only remedy the insurer has in law is to 'avoid' the policy.
This means the insurer can treat the policy as though it never existed. While integrity and honesty are essential in the insurance buying process, Hurrell explains how full disclosure can be a challenge for buyers, therefore making avoidance very unfair.
"Airmic members recognise the importance of full disclosure of underwriting information to insurance companies at the procurement stage in order to convey 'a fair presentation of the risk'," he says. "However, there can be considerable difficulties in collecting all necessary information across a diverse and sometimes complex organisation.
"There can also be confusion over what is deemed to be material information to the underwriter. There is a need for clarification of what is material and also greater clarity about who is deemed to hold information about the company."
Hurrell also points to increasingly complex or new insurance products causing added difficulty from a disclosure perspective. Global property, liability, employee benefits and directors and officers liability insurances are often purchased on a global basis, and the changing nature of cyberthreats (see the interview with Chris McGloin in 'One step ahead' on page 20) have the potential for items to be excluded, either by accident or design, leaving the insured uncertain as to the efficacy of the policy.
No basis for approval
In terms of a solution, Hurrell refers to a recent proposal made by the UK Law Commission that underwriters should employ proactive underwriting practices before granting cover. Hurrell is quick to point out that 'proactive' does not mean due diligence being carried out by an underwriter after a claim is made.
"If an underwriter is provided with information that is not sufficiently clear or detailed, the onus should be on the underwriter to ask further questions," he says.
"What is unacceptable is the situation where a claim arises and the insurer undertakes what amounts to retrospective 'claims underwriting'."
Regardless of how conscientiously the buyer tries to disclose all relevant information at the time of purchase, Hurrell also argues that there are many get-outs built into policies and the legal framework generally that mean insurers can often avoid paying.
One of these that Airmic is particularly focused on currently is the basis clause, which effectively binds proposals to insurance contracts, thereby turning proposal statements into warranties favouring the underwriter.
In a proposal, you can usually spot a basis clause above the signature box. The wording typically would be something like: "I agree that this proposal will form the basis of the contract between the Insured and the Insurer." Hurrell is concerned that, with basis clauses, the balance of power is clearly with the insurer.
"Reliance on basis clauses and/or breach of warranty can be a significant issue for Airmic members and can result in failure or reduction of claims," he says. "When the only remedy available to the insurer is avoidance of the policy, the insurer is in a strong position to negotiate a reduction in the quantum of the payment, on the basis that the insured may feel obliged to accept a reduced offer for fear of losing the claim completely if it goes to court."
While basis clauses have been common practice for more than a century, Hurrell is concerned that the insurance industry is increasingly relying on strict legal interpretation of policy coverage on major claims, irrespective of the high level of goodwill that still exists in the industry.
"One of Airmic's concerns is partly that insurance company lawyers are more involved in the process, which drives up costs and makes it harder from a governance perspective for the insurance company claims manager to justify making a payment when his legal adviser tells him he need not do so," he continues.
As a solution, Airmic has been working with law firm Herbert Smith Freehills to draw up clauses for insertion into insurance contracts to mitigate the impact of any 'innocent' non-disclosure or breach of warranties, basis clauses and other devices that can result in claims being refused for trivial reasons.
While changes in the law can be a slow process, Hurrell, for now, advises CFOs to focus on efficacy and to pay greater attention to insurance contracts.
"The most important role for the CFO in relation to efficacy of insurance is to ensure that appropriate attention is paid to the contract," he says.
"When reviewing budgets and budget projections, the CFO should view an insurance policy as having the value of the limit of indemnity that is purchased, perhaps £100 million, and not the value of the premium that is paid, perhaps £2 million.
"Undertaking appropriate due diligence of the insurance contract is part of achieving contract certainty, because it is more likely in most companies that a £100-million contract will receive legal review, rather than a £2-million contract," he concludes.