Have you ever had a claim rejected by an insurance company because you failed to disclose an element of risk before signing the contract? This is a fairly common occurrence that has been the cause of many disputes which have been resolved in and out of court. It can have a devastating effect on organisations of any size, but small businesses are naturally less able to cope with the losses.
It has happened so often that the English and Scottish Law Commissions have been jointly reviewing insurance contract law. They recently issued their third consultation document focusing on this aspect, which they say will be the last one before they pass proposals to Parliament.
The Law as it Stands
Insurance law is governed by the Marine Insurance Act of 1906. Originally designed to insure ships and their cargoes, in the absence of a more general law, the Act has been applied by the courts to all forms of insurance.
It places a duty on the business to disclose all possible risks to the insurer before the premiums are decided and a contract raised. Business policy holders rarely understand the importance of this disclosure, but insurers are not required to intervene even though they are much better placed to know what questions should be asked and answered. Even some insurance brokers have little understanding of what is needed for a good presentation of risk.
An Unfair Balance
It means that the letter of the law supports insurance companies to collect premiums and then refuse to pay out following a claim on the grounds that they were not made aware of a particular risk. Policy holders may believe they have disclosed everything relevant when they have actually missed something that would have made a difference to the premiums charged. In these circumstances, even if the non-disclosure is not relevant to the specifics of the claim, they will not be entitled to benefit from the policy.
Small businesses may actually have a slight advantage here, because insurers are often more wary of doing business with them than they are of the business giants or even medium sized organisations. They may therefore ask questions and be more probing than the law currently requires them to be before setting premiums and issuing policies. If a claim is disputed, though, they are likely to be less able to pursue it and reach a favourable solution.
Redressing the Balance
So an implied suggestion in the consultation is to place a duty on insurers to follow up disclosure with their own investigations where they are not completely comfortable with a risk area. Another is that the remedy should no longer be an automatic withholding of claim payments. All the circumstances should be considered so that some benefit can be received by a business that has acted in good faith.
If you would like to take part in the consultation, you can find it at http://lawcommission.justice.gov.uk/consultations/business_disclosure.htm.
