Fair Presentation: Insurance Act theory and practice

Inevitably it is far too soon for any cases considering the “Statute of the Year” but that does not mean that nothing has been happening in the real world. We are a mere four months post-commencement of the Insurance Act and not surprisingly, a good deal of negotiation has taken place around the terms of fair presentation and the extent of the search.

Until August, the discussion focused on theory more than practice but now that the Act is in force the hard bargaining begins – the “soft” market meets the legal niceties and the attached bulletin from the LMA outlines some of the conflicts.

At the end of the day, commercial reality will bite but a summary prepared by the Lloyd’s Market Association (available here) does make some good points – none of which I disagree with. Great care should be taken before some of those clauses in the Appendix are agreed and it is fair to pose the question of whether these clauses are ultimately in the policyholders’ best interests. If there is no realistic sanction for a breach of the duty of fair presentation then there is little incentive to get it right and pricing/coverage becomes more and more difficult for the underwriter to assess.

The objectives of the Act were to achieve a balance between interests of policyholder and insurer: to provide the right information to enable the insurer to provide the right coverage and the right price. An ineffective sanction for the first step could make it difficult to achieve the latter. As the LMA states: “It is good practice for underwriters to work with their brokers and insureds to scope out the disclosure process- for example, to discuss and understand the management structure of the insured and the nature and timing of the reasonable search.”

The Act was built on market consensus and good practice is in the interests of all parties. The implicit (and rhetorical question) posed is whether energies are being mis-placed? Is it not worth devoting that additional energy to getting the placement right rather than trying to pre-empt the situation that it might be wrong before you have even started?

Terry Renouf, partner, BLM Written by Terry Renouf, consultant

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