Proposed laws could stop insurers turning down genuine claims when customers make honest mistakes on their applications.
Insurers will no longer be able to wriggle out of paying genuine claims after the government announced plans to stop firms penalising customers who make honest mistakes when applying for cover.
The proposals mean that the system of applying for policies will change, with the onus no longer on applicants to ensure they disclose “all material facts” when buying policies.
Instead, it will be up to insurers to ask relevant questions during the application process to ensure that they have all the information they need from clients.
The change is part of the Consumer Insurance (Disclosure and Representations) Bill, which is in part designed to bring the customer-insurer relationship into the 21st century.
The existing laws covering this area of commerce date back to 1906, according to a Treasury spokesman.
What is the problem at the moment?
Under current legislation, insurers are entitled to turn down claims if they subsequently find that the customer did not disclose all potentially relevant facts when they bought the cover.
This can apply even if the “hidden” information has no real bearing on the claim in question.
For example, if someone makes a claim for a payout on a health insurance policy after being diagnosed with cancer, an insurer could legitimately refuse to make a payout if it discovers that the customer failed to reveal a family history of heart trouble when they took out their policy.
To be fair to insurers, the industry has itself already taken steps to try and ensure that genuine claims are settled in cases such as this.
Nick Starling at the Association of British Insurers said: “The insurance industry is committed to ensuring that customers understand their rights and obligations, and have their genuine claims paid quickly.”
But new legislation will ensure that consumers do not have to rely on their insurers “doing the right thing” on a voluntary basis.
What will change?
The new Bill makes it clear that it will be up to insurers to ask the right questions on application forms rather than relying on customers to offer all the relevant information.
This way, firms will only be able to turn down claims if a customer has made a false declaration on their application.
Announcing the Bill, Treasury minister Mark Hoban said: “The Government is committed to strengthening consumer protection in financial services and these reforms will help meet this commitment. They will provide a better deal for the consumer, while saving money for the industry and giving people the certainty they need when taking out insurance.”
Hoban added that the measures had received support not just from consumer groups, but from insurers and brokers as well.
Victory for Trading Standards
The Trading Standards Institute (TSI) claimed the Bill represented a huge victory for its campaign to make the law fairer.
Peter Tyldesley, a lecturer in insurance law at Manchester University who has been instrumental in the TSI’s efforts, said: “The law was not developed with consumers in mind: it sets unreasonable standards for them to meet and punishes them disproportionately when they fail.
“Insurance law reform will bring benefits for all – a guaranteed fairer deal for consumers and renewed confidence in the insurance industry.”
TSI spokesman David Sanders added: “We have campaigned long and hard for consumer laws that are appropriate to the modern age and fair to consumers and traders alike.
“Like other ancient laws devised solely for business, such as the Sale of Goods law and Bills of Sale, consumer insurance law is totally inappropriate for consumers in the modern age and often leads to great hardship for consumers – sometimes when there is already the stress of serious illness.”
