The Insurance Act 2015, which is the result of a joint review by the Law Commission and Scottish Law Commission into insurance law, comes into force this month. Together with the 2013 consumer insurance reforms, the new Act represents the greatest change to insurance contract law in this country in over 100 years. It will amend certain key sections of The Marine Insurance Act 1906, although it is worth noting that this Act has not been repealed.
Although the changes introduced into the new Act will apply to business (i.e. non consumer) insurance, it is a timely reminder of some of the implications of The Consumer Insurance Act 2012 which came into force on 6 April 2013 and which deals with insurance for home, car, pet, travel, life, critical illness and income protection insurance, health insurance and pension annuities. As with the 2015 Act, good faith and accuracy of material information also play an important role.
The Consumer Insurance Act 2012
The 2012 Act gave customers more clarity on what information they need to disclose to their insurer when taking out insurance. It created an obligation on the part of the insurer to ask specific questions to obtain relevant information about the circumstances relating to the purchase of insurance. The Act gives legal protection if the purchaser unknowingly gave incorrect or incomplete information to the insurer. The insurer would not be able to decline a claim on the grounds of non-disclosure unless the purchaser carelessly or deliberately lied or misrepresented his circumstances.
The Act generally expects the purchaser to take reasonable care to avoid misrepresenting his circumstances when answering questions posed by the insurer. This means ensuring that information given to the insurer is not knowingly untrue or misleading. The Act also applies to insurance renewals made after 6 April 2013.
The purchaser has a duty to check the renewal notice and notify the insurer if the information held about his circumstances has changed or is incorrect. Some renewal notices, of course, often specifically ask customers to check that specific important information is correct.
We set out below the results of a recent examination into levels of underinsurance which suggest some serious implications as to how the purchasers of contents insurance interpret their duty to keep the broker or insurer informed of important information relating to value. These results do not, of course, reveal the extent to which underinsurance is result of a deliberate decision by the policy holder (for example to avoid increased premiums) and which may then fall into the “knowingly untrue or misleading” category, but it is not unreasonable to assume that at least some of it is decision based.
Meeting the requirements of the 2015 Act
There is also an implied challenge to the broker or insurer when insuring their own businesses under the 2015 Act in terms of the new ‘Reasonable Search’. This obliges the insurer or broker to make adequate enquiries within their business to identify and verify information relevant to the risks concerned. If their business tolerates inadequate information about the value of items they insure, it is hard to see how they can meet this requirement. (It is not uncommon to find valuations for current policies that are ten years older or more.)
Awareness of underinsurance by clients must also surely count as a “known area of concern” where there is now a requirement under the 2015 Act for this to be highlighted. Where circumstances merit, insisting on annual valuations where there are known market fluctuations (for example, jewellery or Asian works of art) or, at the very least, tri-annual may be a way forward.
The problem of underestimation
The problem of policy holders underestimating the value of their contents has increasingly been viewed as a matter of growing concern. The disparity between the insured value and the real value can often be very high particularly with regard to jewellery where prices have been rising in recent years. According to the Association of British Insurers, research showed that one in five households could be underinsured because they did not know how much their home contents were worth. In 2011, Direct Line was estimating that some 6.8 million British households were then underinsured, with £200bn of home contents at risk in total. (Telegraph, 16 Jan 2011).
A recent analysis of a sample of valuations, revealed high levels of underinsurance, particularly in the categories of fine art and jewellery (valuables) and would appear to support the above findings.
No less than 30% of clients who had instructed a Walk Through Validation (WTV) were found to require a full valuation if they were to provide the required accurate basis for their insurance cover. (The WTV is provided to the Mid Net Worth client and consists of a room by room contents appraisal by category, providing global figures and comments). In the majority of these instances, amounting to as much as 82%, the problem was found to lie with failures to keep up with rising jewellery values. Of the other 70% of WTVs 67% were found to be underinsured to some extent or another.
Rising jewellery values
The 2015 October issue of the Financial Ombudsman Service’s News reported an instance where the insurer voided the policy for underinsurance. The customer was only insured for up to £25,000. Following a break-in when all her jewellery was taken, the loss adjuster found that replacing all the lost items would cost over a £120,000. The same issue reported another case which involved the changing value of gold jewellery where £8,500 was claimed for a lost gold bracelet appearing on the current insurance schedule still at its original valuation some years earlier at £4,500. The insurer declined to pay the full £8,500 on the grounds that they had made clear to the customer that it was his responsibility for keeping the valuation of the bracelet up to date and that there might be consequences to under-insuring his possessions. At the higher end of the market, certain categories of jewellery, such as coloured stones, have seen huge increases in price in recent years. Last year, according to the new Fancy Colour Diamonds Index, coloured stones have risen in value by 165% since January 2005.
But it is not just rising values, but also the growing demand for jewellery that may be affecting insurance valuations. Hammerson’s Retail Tracker has shown a 3.5% rise in jewellery sales for the first half of this year (with a 2.4% rise in June alone) continuing a reported surge last year for expensive handbags and jewellery which quoted retailers including Boodles, Harrods and Bentley & Skinner as reporting an increased demand from women buying jewellery in the £1,500 to £2,000 bracket.
Underinsurance at the higher levels
Looking at all valuations, both full and WTV, the highest level of underinsurance, by both client numbers and values, was at the £400k band, although at that level the actual average percentage of underinsurance represented 23% of insured value. By contrast, at £250k, the percentage of value underinsured rose to as much as 39.92%. A substantially significant number of clients in the sample were required to revalue within the bands up to the £200k level, accounting in the sample for a difference of some £2.6m between the current and recommended valuations.
In some cases, it was found necessary to recommend significant increases in valuation, as in the following examples:
We appreciate that the average premium is below £300 for the 20.4m UK homes with contents insurance (ABI UK Insurance Key Facts 2015). However, it is, of course, at these levels that a huge amount of insurance cover is being provided. We are aware too that there is often a focus on value discrepancies at the higher end of the market rather than at the lower, but there is always the possibility that this may lead to an incomplete assessment of overall risk.
If translated into the context of the industry as a whole, the above findings may raise some serious issues around the accuracy of information being used to achieve a “fair presentation of risk” by brokers and insurers as required by the 2015 Act. Underinsurance on an industrial scale should, perhaps, also be prompting the insurer too look again at how he meets his obligation under the 2012 Act when asking specific questions to obtain relevant information from the purchaser of insurance.
While many insurance companies have been continuously improving their proposal forms to make it easier and clearer for their non-business customers, unlike the 2015 Act, the obligation remains with the customer to supply correct and up-to-date information. Brokers and insurers may have to do much more through customer education to ensure that they are operating with up-to-date information to identify more accurately the risks to businesses under the ‘Reasonable Search’ to achieve the ‘fair presentation of risk’ required by the 2015 Act.