Firstly, three top tips:
- Do not assume “nothing has changed” about insurance. The Act requires new standards of disclosure of material information and the insurers have been stripped of some of the historical and powerful remedies of voidance. This will force insurers to find new ways of “balancing their books” in the way that they interpret the “proportionate remedies” available to them in paying claims. Otherwise prices would have to increase.
- It is tempting to believe that the obligation to make “a fair presentation of the risk” is no different from the former obligation to disclose all material facts. It is substantially different because the obligation reaches further into the Insured’s knowledge of its business and affairs. There is a requirement for far greater specific detail, clarity and accessibility of the information presented to an insurer.
- Know, for sure, if you are making an “advised sale” or a non-advised sale to your customer or client. This is a particularly important now because the Act envisages the broker, as the agent of the Insured as being a party that knows or ought to know what should reasonably have been revealed by a reasonable search of information available to the Insured. 
The Act envisages the broker’s role as being one of a professional adviser. This must be distinguished from the alternative role as a seller of a commodity without responsibility for the suitability of the insurance for the Insured.
If, as a broker, there is no intention of being responsible for the buyer’s choice or selection of the insurance being sold it is important to make that clear to the buyer from the very outset of inviting them to transact. That has commercial implications, of course, and they must be carefully thought through by senior management.
Process – the enemy of foresight and forethought.
The automated and algorithmic processes adopted by the industry as whole are what actually govern the manner in which most (by volume) commodity insurance is now sold and therein lies the root of the principal risk to brokers, from the new Act.
Processes are designed to make things easier, faster and less expensive to deliver. They also give a comfort blanket to the broker’s (and insurers’) sales and administrative personnel because the assumption they will make is that “someone” has “made the process fail safe”- i.e. the computer is always right. Well, that might not be so.
Claims experience is showing that there is an increasing tendency for there to be critical data errors in the chain of, very often, several intermediaries between the insurer at risk and the Insured. These include the underwriting agents, brokers and sub-brokers that now form the bedrock of the insurance industry.
The technical and data collation interface of the processes used by the several intermediaries are vulnerable to errors in consistency and transparency that can lead to misinformation and disinformation being supplied to the insurer and the insured (it goes both ways) and this leads inexorably to a dispute as to coverage. A broker in the chain is exposed to criticism by the Insured when a claim is disputed.
Foresight and forethought in practice
Q. What is required of a broker now that is different from before the Act?
A. An appreciation of how the Act implies an intention to make the role of the broker intermediary more accountable as a professional advisor.
This is a thorny subject because the question it invites is “what is a professional advisor that is different from an insurance intermediary/broker”?
That is the question that typically forms the basis of determination of a broker’s obligations and duties of care when before a court of law.
The essence of a broker’s duties and obligations to its client is based upon the principle of carrying out a suitable demands and needs assessment before selling the customer/client the policies that, by implication, will meet those demands and needs and upon which the Insured will rely.
By bringing a clear and deliberate obligation upon the Insured and its advisers to make “a fair representation of the risk” in the manner in which the Act makes that obligation, there is a consequential need for the broker (as agent of the Insured) to ensure that it has foreseen the demands and needs of the insured as far as reasonably possible and given forethought as to how they may be met or otherwise dealt with.
This undoubtedly can put a greater burden of responsibility upon the future modern broker simply because the Act is more specific in what are the obligations of the insured; and therefore of its agent.
The “Insured’s knowledge” includes:
- Knowledge of Senior management
- Knowledge of the Insured’s people dealing with insurance; including the broker.
- Information which would be revealed by a reasonable search.
Get out of jail card?
The fair presentation of the risk requires:
Clear and accessible disclosure, without material misrepresentation, of:
- Every material circumstance which the insured knows or ought to know;
Or, failing that,
- Sufficient information to put a prudent insurer on notice that it needs to make further enquiries to reveal those material circumstances.
Q. Is it therefore sufficient for a broker to rely upon 2. above to avoid the necessity to make a full disclosure or reasonable search for material information?
Why? Because in the event that the matter results in a claim against the broker for failing in its duties and obligations to its client the body of opinion in the broking community will be likely to show that a competent broker would not have relied upon that provision of the Act to avoid its responsibility to its client.
In the next issue the question of interpreting the Act in the event of a disputed claim will be discussed. How to recognise the signs of an impending dispute over coverage or quantum and what to do about it.