UK insurance law reform: the market response

Author: | Published: 26 Jun 2012
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Insurance companies in the UK are expected to lobby against the UK Law Commission’s proposed reform of national insurance rules. But lawyers and insurance underwriters in the country remain unfazed by the move.

The Law Commission today launched a market consultation into its proposed update of national insurance laws for the first time since 1906.

The new regulations would make it more difficult for insurers to turn down claims by arguing claimants had failed to disclose information that underwriters might consider relevant.

The shake-up comes as corporate insurance buyers warn that insurers are refusing to pay a greater proportion of claims.

At present the law, which is based on the Marine Insurance Act of 1906, requires companies to disclose any information that underwriters might consider relevant, even if insurers do not request it.

Insurers can repudiate entire claims by arguing clients have not adequately disclosed information or have breached other conditions. And in recent years insurers have become more aggressive in enforcing their legal rights.

In a statement released today, the Law Commission branded the current legal regime as unclear and harsh. "If a business breaches the duty of disclosure, an insurer can avoid the contract," it read. "That means it can act as if the contract does not exist and refuse to pay any claims. The consequences for the business and its employees may be catastrophic."

Market participants expect insurance companies will lobby against any attempt to change the status quo, however.

One insurance and reinsurance partner based in the city said the legal regime had always been weighted in favour of insurance companies, to the detriment of the market. "Change will not be good for the insurers," he said. "They will likely try to fight this."

Scottish Law Commissioner, Professor Hector MacQueen, agreed the present rules and remedies were weighted against large, complex, international corporations as much as their smaller counterparts

"We are offering the industry and its business policyholders an opportunity to come together to develop definitions, principles and protocols that make for clearer, fairer law," he said. 

Herbert Smith's Alexander Oddy said the Law Commission's move to seek further public consultation on the changes was unusual. "It is important that policyholders as well as insurers and insurance brokers take the opportunity to shape a process which Law Commissioner David Hertzell this morning described as shaped as much by policy as the law," he said.

"The Law Commissions' proposals in relation to the duty of disclosure and warranties in insurance contracts will, if carried through to legislation, redress substantially in favour of policyholders a number of the features of insurance law which are widely regarded as unduly harsh and favourable to insurers," he said. 

Nonetheless, other market participants did not expect to be much affected by any of the mooted reforms.

One London-based insurance underwriter said the changes were primarily aimed at small to medium companies without the know-how or access to legal advise that the country’s larger financial institutions had.

"The law change will definitely benefit corporate clients as it will give greater clarity, but I would argue that sophisticated buyers would be aware of the limitations of their insurance policy already," he said.

"For the larger financial institutions any discrepancies will always go to arbitration so the process therefore becomes much more transparent," he said.

Hertzell, the Law Commissioner leading on the project for England and Wales, said many of the definitions and principles the Commission were proposing were already found in the current case law. But he said embedding them in the statute would make the law clearer and fairer for insurers and their clients.

The Association of British Insurers’ Financial Conduct Regulation director, Maggie Craig, said potential legislative reform of business insurance required careful consideration. "It may have significant ramifications for the way that insurers conduct their business," she said. "We will consider these proposals carefully."

The consultation period on the changes proposed will end September 26 2012.