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Where principles of equity and fairness hold sway over policy wordings

23 June 2020 Gareth Stokes

The principles of equity and fairness applied by the Ombudsman for Short-term Insurance (OSTI) when assessing complaints, introduce a degree of uncertainty insofar the performance of short-term insurance policy wordings. This newsletter will not delve into the ‘rule of law’ versus ‘equity and fairness’ debate; but rather focus on the short-term insurance broker’s responsibility to refer clients to the OSTI, especially when the reason given by the insurer for refusing to honour a claim seem unfair. We contend that any claim rejection based on a policy wording that, upon reading, leaves you with a sense of unease, is worth reviewing.

Keeping your insurer informed

The OSTI publishes countless case studies in its annual reports and quarterly Ombudsman Briefcase publications in an attempt to raise consumer awareness about common mistakes that contribute to claims rejections. Short-term insurance brokers must stay abreast of such developments to better advise clients upon entering and renewing policies, and when assisting with claims. The Ombudsman’s Briefcase, Issue 1 of 2020, places the spotlight on the duties and obligations of the insured insofar correct disclosures at policy inception. “It is important to understand that a contract of insurance creates duties and obligations for both the insurer and the insured,” they write. 

One of these duties is for the insured to inform the insurer, either directly in the case of a direct insured, or via an insurance broker, in the case of an intermediated insured, about any changes in his or her circumstance that deviate from those that existed when the policy was entered into. Consider the following example of a personal lines policyholder during the 2020 national lockdown period. The insured decided to move in with another family member for the duration of the lockdown. This decision meant that the insured’s house would be unoccupied for an extended period of time. It also resulted in one of the insured’s vehicles being garaged at a second risk address. The insured’s decision significantly changed his overarching risk profile, so, he telephoned his broker to inform them of the change. 

Many insureds fear telling their insurer of changes because they believe that the insurer might increase their premium; but in cases such as the one just shared, the net impact on the risk would be negligible. Sensible personal risk management indicates that you should inform the insurer of any changes, even if you believe them to be inconsequential. The ‘worst case’ of an insurer increasing your premium slightly or advising you that your decision negates your cover is actually a ‘best case’, because you avoid the risk of being without cover when disaster strikes. 

The regular driver syndrome

Failure to notify an insurer of changes in circumstance remains a major contributor to OSTI complaints. The case studies shared in the Q1 2020 Briefcase include one resulting from an insured’s failure to inform the insurer of a regular driver. We will not go into too much detail, except to say that the insured, who was the regular or named driver on the policy, had allowed his daughter to ferry her younger brother to school. His daughter was involved in an accident on one of these trips and the claim was subsequently denied. “The insurer rejected the claim on the grounds that the regular driver of the vehicle at the time of the accident was not the regular driver noted on the policy schedule,” explains the OSTI. 

What followed was the typical ‘we say / they say’ scenario that unfolds when policyholders test the limits of their policy wordings. For example, the daughter told the insurer that she was the regular driver, perhaps indicating that she had free and extensive use of the vehicle. The insured claimed that he had only asked his daughter to help out with the school run while he was attending a skills program that required him to leave home early in the morning. A claims assessor is going to ask questions in a case like this. It is, after all, common practice for parents to play fast and loose with their motor insurance in an attempt to shield themselves and their children from the high insurance premiums charged for new and young drivers. 

Resolved in favour of the insured, this time

The policy wordings went to lengths explaining the insured’s duty to keep the insurer informed of the regular driver. And this was the basis of their decision to reject the claim. They argued that “there was a duty on the insured to notify them of the change in the regular driver” and more importantly that “the regular driver was material to their assessment of the risk”. Finally, they argued, that since the insured was in breach of the policy terms and the insurer had been prejudiced, it was within the insurer’s remit to reject the claim. As is often the case the OSTI reached a different opinion. 

“There was nothing before this office to suggest that the insured intentionally misrepresented the regular driver,” they say. “And there was also no indication that the insurer would not have accepted the risk had it been advised of the change”. On this basis they instructed the insurer to calculate the premium prejudice it had suffered by not being informed of the change and adjust the settlement accordingly. 

Contract law versus treating customers fairly?

Today’s newsletter was a rather long winded way of imparting two important pieces of advice. First, policyholders should keep their insurers informed of changes to their circumstances, regardless of how insignificant they believe the change to be. By keeping your insurer fully informed you mitigate any risks associated with information asymmetry. And second, short-term insurance brokers should not be shy to steer clients towards the OSTI when the insurer appears to have an ‘open and shut’ case. The principles of equity and fairness might have a better chance of delivering on the industry’s TCF outcomes than contract law. 

Writer’s thoughts:
Short-term insurance brokers are frequently credited with ‘going to war’ for their clients at claims stage. The perception created in the market is that brokers will push back against the insurer’s strict application of the contract or policy wordings in an attempt to get an equitable and fair outcome. Is this still the case today, or do you find that insurers are pushing back too? Please comment below, interact with us on Twitter at @fanews_online or email me us your thoughts [email protected].


Added by Gareth, 23 Jun 2020
Thank you for the comment Terry. It would be interesting to see a breakdown of pay-outs made by insurers where the strict enforcement of one or other policy clause would have enabled the insurer to repudiate the claim outright. So many gray areas exist.
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Added by Terry Mc Donogh, 23 Jun 2020
In my experience Brokers do put a case to an insurer and Insurers are generally open to reason. Insurers like the full facts to co-incide with the Client's story. Untruthfulness is usually met with a definite no answer to the possible claim.
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