FM Global operations claims manager sifts through incoming law

Ben mc kenna2

In today’s world, losses are becoming larger, more complex, and can often have serious strategic implication, writes FM Global London Operations operations claims manager, operations vice-president Benedict McKenna.

In our field of industrial and commercial property insurance, businesses need to know their insurer is going to pay when they need them most. 

At FM Global, we strongly believe in long term relationships with clients that are built upon trust and integrity. We welcome any legislation (such as the Insurance Act 2015) that promotes contract certainty, and helps clients get fair treatment from their carrier following a loss.   

Below are four key changes that the Insurance Act will bring into force in August 2016, as well as why we think they are good for the industry as a whole:

1. Duty of disclosure: The ‘duty of fair presentation’ replaces the ‘duty of disclosure’. Clients must conduct a reasonable search and disclose material information if they are aware that it would affect the risk. Equally, the insurer is required to assess the information and make further enquiries as needed. The insurer is also expected to be competent in its class of business. Passive underwriting (or underwriting at the claims stage) is no longer allowed. If the insurer fails to assess the information provided and make further enquiries at the time of entering the policy, it cannot then deny a claim after a loss has occurred because the insured failed to disclose some piece of information. 

Is it a good move for the industry? 

Shifting some of the responsibility of disclosure from the insured is an excellent move and can only help strengthen the relationship by encouraging more open collaboration between both parties . The remedy of the insurer must be proportionate to the breach. Insurers will find it more difficult to avoid a claim for non-disclosure. However, the Act does still allow them to work out what they would have done (e.g. increased premium / changed terms) had the insured disclosed the relevant information at the time of entering the policy, and then change the loss settlement accordingly.  

 The change in legislation will have less of an impact on FM Global, as our field force of more than 2,000 loss prevention engineers inspect client locations and share their findings with the client and the underwriter. We rely more on our engineering and underwriting rather than focusing exclusively on remedies for breach of duty of disclosure or fair presentation. 

2. Basis of contract clause: From August 2016, insurers can no longer automatically treat statements made by the client, submissions or proposal forms as warranties.  

Is it a good move for the industry? 

If the policy contained a basis of contract clause, a false representation of any type could allow underwriters to decline indemnity for breach of warranty, even if it was not material to the loss. We think that moving away from basis clauses is a good move towards improving contract certainty, and avoiding clients from encountering unexpected repudiations. At FM Global, we do not use basis of contract clauses in our policies.  

3. Warranties: Previously, warranties made by the policy holders that were breached in any way could discharge the insurer of all responsibility, even if the breach was not material to the loss and even if it was remedied. Now, insurers will find it more difficult to deny a claim for breach of a warranty that was not material to the loss.  There is an exception to this if the warranty was fundamental to / went to the core of the policy itself – e.g. driver’s age in a car insurance policy. 

Is it a good move for the industry?  

We think it is a good thing for policyholders that the law is moving away from a situation where a warranty “must be exactly complied with, whether material to the risk or not” (s.33(3) Marine Insurance Act 1906). This is because it is unfair for an insurer to be discharged from liability from the date of the breach of an immaterial warranty even if it is remedied prior to the loss. 

 At FM Global, we have never used warranties in our policies which is reassuring for our clients. 

4. Fraud: Before the new legislation was introduced, it was unclear whether an insurer could refuse to pay genuine claims for losses suffered before a fraudulent act was discovered. The Act has clarified this, and the insurer will still be liable for losses before the fraudulent act took place.  

Is it a good move for the industry?  

The act codifies common law principles. In the event of fraud, the insurer can deny the claim and/or terminate the contract from the date of the fraudulent act (not the discovery of it), while retaining the premium paid. The insurer is still liable for losses before the fraudulent act took place. 

 We welcome this change in the law and additionally, in FM Global’s policy, fraud has to be both wilful and material in order for us to deny a claim. This is even better for our clients.