The after effects of CIDAR
Property Insurance Aware 1
The Consumer Insurance (Disclosure and Representations) Act 2012 (“the Act”) has now been in force for a little over six months and truth be told neither we, nor seemingly the Financial Ombudsman Service (FOS) have yet seen a significant volume of claims coming through the door which are governed by the Act. This is not entirely surprising given that the Act is not retrospective.
A lot has been written about the effect of the Act and the tests it introduces – we ourselves wrote two articles on the issue last year. We do not therefore intend to repeat the effects of the Act here. Instead, what we have found of particular interest has been the reaction and concerns expressed to us by some of the UK’s leading Insurers to the Act and its effects. Our view, which we expressed in an earlier article, is that the Act does not go so far as to bring the position under consumer insurance law into line with the FOS approach.
The wording of the Act is not, for instance, reflective of the approach taken by the FOS where brokers are involved on behalf of consumers, or even where small businesses are concerned. Insurers that we have spoken to up and down the country have been almost uniform in the issues they have raised with regard the differing approaches of the Act and the FOS and whether fundamentally the Act will have any real impact.
There appear to be two main areas of concern:
- What is a ‘consumer insurance contract’ and ‘who is a consumer’?
- Brokers and intermediaries
Who is a ‘consumer’?
Under the Act a ‘consumer insurance contract’ is defined as a contract of insurance between, “an individual who enters into the contract wholly or mainly for purposes unrelated to the individual’s trade, business or profession” and an insurer. ‘Consumer’ is defined as the individual who enters into a consumer insurance contract, or proposes to do so.
On the face of things, it seems fairly obvious as to whether an individual is a consumer or not. However, in practice we envisage significant difficulties with the definition of ‘consumer’ and ‘consumer insurance contract’, particularly when dealing with small businesses. Many individuals have more than one trade, business or profession, something which the Act does not seemingly cater for. An architect may have a small portfolio of tenanted properties, a plumber may have a holiday home that is used privately for one month of the year, but rented out for the remainder. Even if it is accepted that an individual can have more than one trade, how many properties does the architect need to own and rent out to be considered a business insured rather than a consumer? How long a period can the plumber rent out the holiday home for before it is considered to be a business? The Act does not provide any guidance, but we expect there to be a sliding scale and tipping point in these types of cases which is yet to be determined and may well become the subject of litigation, should a dispute fall outside the ambit of the FOS scheme.
It is also yet to be determined what approach the Act will take to the definition of ‘consumer’.
By definition, the position ought to be that anyone taking out insurance for the purposes of their trade or business, no matter how experienced that person is in that trade, should fall outside the scope of the Act. However, there remains the possibility that the court will not adopt that approach, but will favour the FOS’s view that a small business, considered to be financially unsophisticated, should be treated as a consumer?
Brokers and intermediaries
The Act contains some helpful guidance on whether, for the purposes of the Act, a broker or intermediary is considered to be the agent of the insured or the insurer. The Act also states in section 3(2)(e) that one of things that will be taken into account when assessing whether an insured has taken reasonable care in answering the insurer’s questions at inception is, “whether or not an agent was acting for the consumer.”
What it does not say is what the effect of the presence of that agent will be. Must the insured meet a higher or lower level of care in such circumstances? Logic dictates that the threshold should be higher as the insured has appointed a specialist who knows the market and is well aware of the information required by insurers from an insured at inception.
Under the common law, a person is responsible for the acts of his agent so that a careless or reckless misrepresentation made by an agent is treated as if it has been made by the principal. An insurer would therefore, as a matter of insurance law, be entitled to avoid a policy of insurance if the test under the Act could be satisfied, irrespective of whether the non-disclosure or misrepresentation was made by the insured or the insured’s agent. The problem facing insurers is that this is not the approach currently adopted by the FOS. The FOS will ask insurers to deal with the claim proportionately where the broker has acted negligently (i.e. as if the consumer had not taken reasonable care - more on which below), leaving the insured to go against the intermediary for the balance with the insurer having to meet part of the claim with little or no chance of redress against the broker.
The introduction of the Act does bring insurance law more into line with the approach of the FOS, but we share insurers’ concerns that because one does not mirror the other, the reality is likely to be that the Act will have little effect on the two issues identified above; consumers and small businesses will inevitably continue to refer complaints to the FOS where decisions are made on the basis of what is considered by the Ombudsman to be fair and reasonable, without due consideration of the governing laws, including the Act.
On a positive note
However, it is not all doom and gloom. There is one aspect of the Act to which insurers’ response has been overwhelmingly positive and which does serve to introduce an approach already adopted by the FOS, namely that of ‘proportionate responses’. Most insurers we have spoken with are intrigued by the practical application of Schedule 2 of the Act – Insurers’ Remedies for Qualifying (Misrepresentations) – where there has been a careless misrepresentation by, or on behalf of, an insured and insurers would have written the policy but with an increased premium. In those circumstances, the insurer is entitled to take a proportionate response and reduce proportionately the amount paid on the claim e.g. if the insured only paid half of the higher premium that would have been charged, the insurer need only paid half the claim.
Insurers envisage something of a battle with their insureds in this area and we envisage that this may well be the basis for the majority of disputes between insurers and their insureds. Insurers have the backing of the FOS, at least in principle, to apply proportionate remedies in the right circumstances, but an insured is unlikely to accept a significant deduction to a claim without a fight.
Six months on from the introduction of the Act we have learnt very little about its application in practice, but share insurers’ concerns. The reality is that the vast majority of disputes between insurers and consumers will still go through the FOS scheme and the Act will have little impact on the approach and decisions of the FOS.