The Law Commission is planning to review insurance contract law concerning non-disclosure to improve protection for consumers.
Under current legal rules, insurance companies are technically within their rights to refuse to either pay a claim or return the premiums paid if the client fails to disclose “all material facts” at the outset of applying for almost any type of insurance policy and are later found to have not disclosed that information, even if the insurer has not asked relevant questions.
The legal onus under legislation set down in 1957 is therefore very much on consumers to ensure they have disclosed all relevant information which might affect the status of their policy.
But, over time, insurance companies have implemented codes of practice and industry standards to help insurers assess the situations where insurance claims ought to paid and premiums at least repaid.
The Association of British Insurers developed the Statement of Long Term Insurance Practice (SOLTIP) and the Statement of General Insurance Practice (SOGIP) in 1983 to set down industry rules as firms felt the legal definition was harsh and contrasted their preferred correspondence with consumers.
Since then, more codes and standards on the treatment of client claims have emerged and many of the original SOLTIP and SOGIP principles are now enshrined in Fiancial Services Authority (FSA) rules, as well as within the Financial Ombudsmand Service's (FOS) principles on non-disclosure.
But there are still some groups of customers whose products are not regulated, such as travel insurance distributed through travel agents, so the codes of practice and Ombudsman rules don’t apply.
Similarly, any adviser who deals only with corporate clients who have a turnover of £1m or more is advising on products such as key worker insurance products which are still unregulated, so in both situations there is no recourse to complain to the Financial Ombudsman Services.
As a result, the Law Commission – an independent body charged by the government with review and reform of existing legislation where necessary – is conducting a joint consultation with the Scottish Law Commission from January 2006 to tackle a legal framework which is considered “outdated and unduly harsh to policyholders”.
Details of the “initial scoping study” will only be revealed next year, however, the Law Commission says it is also seeking feedback from the industry as to whether, for example, other areas of insurance contract law such as “insurable interest” should be redefined.
Nick Kirwan, protection marketing director at Scottish Widows, says while this is a positive step towards protecting consumers, there is some concern as to how far reform of all non-disclosure legislation might alter in order to protect those consumers who fall into these financial services loopholes.
“It is great news as we don’t want people falling into regulatory ‘black holes’. The question is whether it will actually go further then just closing the gap. But it may also help to clarify the differences between rules of the Financial Ombudsman Service and Financial Services Authority,” says Kirwan.
There is still some discrepancy across the industry as to the official standards set on non-disclosure as the FOS and FSA currently have different rules as to what constitutes non-disclosure.
Under FSA rules, there are three levels of non-dislosure: innocent, negligent and fraudulent.Under FOS rules, there are four levels of non-disclosure under which it assesses whether the insurer should pay a claim: innocent, inadvertently, clearly reckless and fraudulent.
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Matthew West on 020 7484 9893 or email [email protected].IFAonline
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