Is the Insurance Act 2015 giving insurers a get-out clause for claims?

The Insurance Act is ostensibly designed to protect insurance customers, making insurance clearer and fairer. However, there have been some recent cases where policyholders have had a claim refused as the insurer felt the insured values were wrong.

You may think you have answered everything correctly, but this may not be the case in the eyes of the insurer.

Let me give an example, there’s a news story at the moment about a family in Devon that had a disastrous house fire. The house was gutted.

Pen Underwriting , a division of leading broker Arthur J. Gallagher & Co refused to pay the claim because they cited the information given was fundamentally incorrect.

Here is how something that looks trivial becomes material:-

  • The family obtained a quote on a five bedrooms house online.
  • They disclosed five bedrooms, because the two rooms in the converted attic were not being used as bedrooms by them.
  • The house had been recently been marketed as seven bedrooms
  • Insurers investigated and they reasoned it had seven bedrooms

Why the significance?

The insurers Pen Underwriting used, Ageas, would not offer cover on a seven-bedroom house.

When it came to paying the claim The Insurers response was

“Because of this misrepresentation we are complying with the Insurance Act 2015 and cancelling the policy rather than paying a proportion of the claim.”

This was referred to the Ombudsman, however even though they agreed that the family did not deliberately misinform the insurers, technically, Ageas have every right to reject the claim.

My concern is that Ageas’ response citing compliance with the Insurance Act, begs the question, is this going to be a great opportunity to turn down claims?

What’s the impact for commercial insurance?

This example is of home insurance bought online, without using a broker or with direct interaction with the insurer. As we all know, this is how most personal lines policies are bought. But, what does it mean for business insurance? There is something called the Application of Average. If a person is underinsured, or they have undervalued the value of the items insured, the application of average is a means of reducing policy claims proportionately to reflect the amount of underinsurance.

What does Application of Average have to do with the Insurance Act?

A key element of the Insurance Act is the ‘fair presentation of risk’.  This means providing truthful and accurate information about the risk before purchasing insurance. Once insurance is in place, a policyholder must tell their insurer about any ‘material circumstances’ that could impact their policy.

The act requires insurers to take proportionate action if there hasn’t been a ‘fair presentation of risk’. This includes:

  • Voiding the policy (if the insurer feels there is deliberate or reckless misrepresentation of risk)
  • If it wasn’t deliberate, but the information that wasn’t supplied means that the insurer would not have taken the policy (as in the Ageas case), the insurer can void the policy but reimburse the policy holder their premium
  • If it wasn’t deliberate, and the insurer would have insured you, but would have applied different conditions or terms, then the insurer has the right to reduce the claim accordingly.

Alarmingly, myself and my team at Castlemead, have noticed that many small business policies from mainstream insurers such as Allianz are now non-average. This means that it is clear that in the event of significant under insurance they will absolutely have the option to void the cover.

In summary to avoid being impacted by Average and inadvertently falling foul of the insurance act, it is important that, as always, you disclose anything that may be material to your insurer and be accurate around sums insured and security.

When it comes to commercial insurance, the best way to do this is to work with a broker you know and trust to help you answer the questions.

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