Eighteen months since the Insurance Act 2015 came into force the FCA is presently considering whether (and how) more SMEs should fall within the jurisdiction of the Financial Ombudsman Service. At present only smaller SMEs (“micro- businesses”) with €2m turnover and fewer than 10 staff can seek a FOS adjudication on disputed insurance issues. The FCA Consultation, concluding on 22 April, is seeking views on whether eligibility should be extended to small businesses with annual turnover of less than £6.5m and fewer than 50 employees. It is estimated that such an extension would provide an additional 160,000 businesses with access to the Ombudsman. In assessing how to respond to this consultation it is useful to consider the impact of the Insurance Act since the commencement on 12 August 2016.
Whilst it is the case that there have been two 1/1 renewal cycles it is still too early for any disputes to have been brought before the Courts. At least a couple of cases (the “Star and Garter” being the most recent) have considered coverage issues since the introduction of the Act but they were determined on the basis of the old law. Our own intelligence gathering suggests there are not a host of disputes that are heading to the Courts. This reflects well on the considered and painstaking work of the Law Commission in achieving the broad consensus that enabled it to change the law using its special Parliamentary procedures. Additionally there is a reputational reluctance amongst many insurers to be the first to take a coverage case to a judgment which will inevitably be widely discussed and (over) analysed. We perhaps have a “J-curve” where the numbers of cases has in fact dipped for the reasons discussed.
Nevertheless the Act did introduce a number of changes. The law on disclosure changed placing a greater risk on a client’s professional advisers to advise and so it was not surprising that brokers were very active in trying to mitigate the risks of non-disclosure for their clients. A number of clauses circulated which would have obliged insurers to accept the presentation as Insurance Act compliant. The approach was strongly resisted by carriers but it did nevertheless focus minds on the duties and responsibilities of the parties which further prompted all parties involved to consider their respective processes. Thus the new law did ensure that “fair presentation” escalated within customer organisations, beyond the management levels that would normally have dealt with renewals. We are aware that as a consequence, presentations were more thorough and accurate: responding to the underlying professionalism agenda of the Law Commission. Better presentations lead to better coverage and more accurate pricing – to the benefit of all stakeholders.
Proportionate remedies was “new law”: avoidance, under the Marine Insurance Act was a harsh remedy for a breach that was neither deliberate or reckless and the law now allows an adjustment to the claim in those circumstances. There has been an interesting market response which was to accept additional premium for the non-deliberate / non-reckless breach. This does give rise to an interesting issue of “moral hazard”: what is the incentive to provide an accurate presentation if, on encountering a non-disclosure issue, the customer merely has to pay what it ought to have done and gets the claim paid as well? The outcome is that the insurer bears the risk and provides certainty for and a better product to the customer (whilst preserving the remedy of avoidance if we are looking at the more extreme examples of non-disclosure that fall beyond inadvertence). The balance of risk has again moved in the direction of the commercial policyholder and towards a position that reflects the response of the Ombudsman.
It remains far too early to be making any assessment of the efficacy of the Insurance Act but if we were asked if we saw any looming problems the answer would have to be: “Not yet”. If we had to anticipate where the courts might be troubled and have to return to interpretation on more than one occasion, this would be around the issue of “irrelevant terms” where the law is new and the Act has a challenging wording. The circumstances where “the non-compliance with the term could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred” is pretty hard to understand and will no doubt be harder to apply in the situations which give rise to a coverage dispute.
If the assessment is that it is too early to reach any conclusions about the Insurance Act the same might be said about extending the Ombudsman’s jurisdiction to an additional 160,000 policy holders. It is accepted the distinction between a personal lines policyholder and a micro-business can be vanishingly small but the insurance needs of a £6.5m business will be more complex and sophisticated. We have advanced the argument that better coverage has been provided to the consumer as a consequence of the Insurance Act and that coverage disputes that might indicate broader issues are rare. We suggest that extending FOS jurisdiction at this point may be premature where better cover is available and coverage issues have declined. It may also be appropriate, on policy grounds, to allow the jurisprudence of the Courts to develop and offer the certainty of case law for this young legislation. Could the FCA be solving a problem that does not yet exist whilst creating a jurisprudential vacuum for the future?