global insurance management

Consumer Insurance Act

Feb 04 2013

Consumer Insurance Act

Relevance:                   All firms.

Action required:           Amend TOBA, and other client papers, prior to 06.04.13 to accommodate legal changes to Consumer insurance disclosures.

In April last year we advised firms of a new piece of legislation that would come into effect this year and amongst other items, would change the duty of disclosure for Consumer customers.

The change applies to Consumer insurances and not those for Commercial customers.

(Note: The Act only covers consumer insurance, which it defines as insurance bought by individuals "wholly or mainly for purposes unrelated to their trade, business or profession". This wording is intended to be broad enough to include "mixed-use" contracts, which cover both private and business use, as long as the main purpose of the contract is for private use.  This differs from the FSA's approach, which treats a customer acting in the capacity of both a consumer and a commercial customer as a commercial customer.)

The Consumer Insurance (Disclosure and Representation) Act 2012 takes effect from 06 April 2013 and removes the requirement for the consumer to declare all ‘material facts’ when applying for insurance cover.  Instead, it puts the onus on insurers to ask the right questions to obtain the information to underwrite the risk.

So “material facts” and “utmost good faith” are no longer phrases that insurers can fall back on when considering whether to pay a Consumer’s claim or not, or even continue with the particular policy.

The new word is “misrepresentation”, which could be found to be either deliberate (or reckless) or careless and the consequences of each vary accordingly.

ACTION REQUIRED: As a result, your Terms of Business document will need to be amended (see also later comments regarding the FSA-FCA changeover). We have drafted a paragraph for firms to use in their client TOBA replacing the current paragraph “Your duty of disclosure”

This is as follows:

Providing information to your insurers

Your insurance is based upon the information provided to the insurance company.

For Consumers (individuals buying insurance wholly or mainly for purposes unrelated to their trade, business or profession) this means that you must take reasonable care to answer all questions fully and accurately. Once cover has been arranged, you must immediately notify us of any changes to the information that has been provided to your insurers. Failure to provide accurate and up to date information may invalidate your insurance cover and mean that a claim may not be paid.

All other customers must disclose all ‘Material Facts’ (any information that may influence the insurer’s decision over cover or terms) prior to inception and throughout the period of insurance. Failure to disclose material information may invalidate your insurance cover and could mean that a claim may not be paid.

ACTION REQUIRED: Consumers will have to complete a proposal or receive a statement of Fact when arranging cover with new insurers. When offering renewal with the existing insurer, on or after the implementation date of the changes, we recommend that you send the last Proposal form or Statement of Fact that you have on file and ask the client to check that nothing has changed.

ACTION REQUIRED: At the same time, firms should review their stock of standard letters and documents such as Demands and Needs, MTA confirmations and Renewal invites to modify any reference to “material facts” for Consumers and incorporate suitable “reasonable care” wording, such as that recommended for your Terms of Business.

This area is one of the main legal changes made but another one concerns the position of “Agent”, where the Act sets out a code for determining whether an insurance broker or intermediary (referred to throughout as an "agent") acts for the Insurer or the Consumer for the purposes of passing on pre-contract information and entering into the contract.

The code referred to is based largely on existing law, supplemented by FOS practice and industry understanding, but the rules would not apply to other areas of agency, such as collecting premium, or to business insurance.

Three circumstances have been identified where an intermediary will be taken to be acting for the insurer:

  • when the “agent” is the insurer's Appointed Representative (or Introducer Appointed Representative);
  • when the “agent” has been given express authority by the insurer to collect pre-contract information from the consumer; and
  • where the “agent” has express authority to enter into the contract on the insurer's behalf.

In all other cases, it will be presumed that the agent acts for the consumer unless, in light of all the relevant circumstances, it appears the “agent” is acting for the insurer.

Other provisions in the Act are as follows:

  • Insurers will be prohibited from contracting out of the effect of the Act.
  • The Act abolishes basis of contract clauses. Therefore statements made by the consumer will not automatically be transformed into warranties.
  • For group schemes, if a group member makes a misrepresentation, this will only have consequences for the particular individual concerned.
  • If a consumer takes out life insurance on the life of another and the insured makes a careless or deliberate misrepresentation, the insurer will have the normal remedies.

As indicated, these changes happen from 06 April 2013 and firms will need to amend their Terms of Business document to cover those policies being incepted, amended or renewed from that date.

However, there is something else happening before then that we need to bring to your attention.

The FSA is closing down on 31 March 2013 and the FCA takes over regulation effective from 01 April 2013.

From April, any reference to FSA will have to be replaced with FCA and this will affect all regulatory-related documents.  At this point, we have not been given the exact details for disclosure wordings etc and we can only make certain assumptions as to what the revisions may be.  We understand that final confirmation will be issued toward the end of March but giving firms a 6-month transition period.

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