1902 and all that to Mactavish, published in Post magazine March 2011

Post response: 1906 and all that to Mactavish 2011

John Hurrell, Chief Executive of AIRMIC says "for well over a year Airmic has been warning of trouble brewing in the commercial insurance market. Mactavish has come out and said it: "Commercial insurance is not fit for purpose".

However, despite the unwelcome message to our industry, Mactavish's conclusions could be turned to advantage by pioneering young insurers and brokers whose interest in their future demands a unique selling point. To achieve that requires a closer look at the irreconcilable clash between the principal behind the Marine Insurance Act 1906 (of utmost good faith and the duty of disclosure) and the insurers' much-claimed defense for refusing claims; their fiduciary relationship to shareholders.

"Only the goodwill and common sense of most insurers makes the system workable," says John Hurrell, "but that is not something on which buyers should have to depend."  In other words, the duty of disclosure as described in the Act  is too broad to be understood by insureds. But what is the real alternative? Surely the insured party to a contract founded upon utmost good faith ought to be able to rely upon utmost good faith being exercised at all times to bring reason and proportionality to the interpretation of what otherwise is a sound principle , utmost good faith, underlying the contract.

Remove that principle and the contract reverts to being an ordinary contract and it is not commercially feasible to make a contract of insurance with a party who does not have to tell the insurer about the nature of the risk. Ergo, utmost good faith is an essential prerequisite of a contract of insurance. (That is not my original thought!)  But that principle has been lost sight of by some insurers in the day to day conduct of insurance and that is the root cause of the findings that enable Mactavish to declare the industry not fit for purpose.

This was not so in December 1906 when the Marine Insurance Act (1906) was introduced, some 8 months after the San Francisco Earthquake which brought fame to Cuthbert Heath and Lloyd's of London for an act of overt good faith in instructing his representatives in America to "pay all claims irrespective of the terms of the policies".

It seems that the Marine Insurance Act got it right and modern practice has got it wrong.

 

Fiduciary duty and the clash with utmost good faith

The fiduciary duty of insurers to their shareholders is often cited as a reason for insurers not paying claims when their lawyer has highlighted a technical reason by which the insurer can deny the claim but which reason does not go to the intention of the policy or is otherwise contrary to  utmost good faith.  In other words, where an insurer can reasonably pay a claim in accordance with utmost good faith but elects not to, citing fiduciary duty to shareholders as the reason.

Should it be a defense? If so it runs fundamentally counter to the  principle of utmost good faith. There is the clash.

Is it an act of bad faith to do so? If so should utmost good faith be deemed to over-ride the fiduciary duty to shareholders?  Who is the industry serving first? Is insurance an economic necessity to be entered into in good faith or a game to be played by unequal parties?

This is where the industry needs direction from itself as a matter of ethics and professionalism and from the courts as a matter of good law. Many of the senior decision makers in the industry are qualified ACII or FCII and some have other relevant qualifications, in addition. It is disingenuous to suggest that these qualified, experienced people  habitually need a lawyer to tell them when to pay a claim, or not.

If the industry took more responsibility for itself  and justified its actions to shareholders by reference to good faith it is unlikely there would be a kick back from shareholder investors who knew what was good for them.

Getting it together

Insurers cannot, as recommended by Mactavish, expect higher levels of prudence, and understanding from insureds with whom they do not effectively engage. In my experience of over 40 years the industry, the last 9 years involved in claims dispute resolution, I find most insureds are honest and cooperative with insurers but, as Mactavish has found, there is massive ignorance by insureds of what really matters to insurers in the context of material information and disclosure. Why is that surprising to insurers? It happens  because  some insurers simply do not make it clear. They could and should but it makes you wonder why they don't.

Materiality is a complex subject, even to the experts in the industry. It is as mysterious to insureds as "hyperbolic discounting" probably is to most of us. The only effective way to get an insured to understand the vast array of things that constitute what is meant in any given case by material disclosure (the Marine Insurance Act's "Every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk.")  is to engage with them in a non-hostile way and demonstrate levels of reasonableness, proportionality and good faith that promotes a mutual trust between insured and insurers.

Mactavish's  eight proposed protocols for refining risk placement , including one of a two stage tender process , are well intentioned but even so they leave the entire infrastructure of insurance trading at risk if the underlying duty of utmost good faith is undermined.

Roger Flaxman
Email: pa@flaxmanpartners.co.uk

This document is intended for general guidance. It is not intended to apply to any particular case and does not constitute either legal or insurance advice.