Rob Smart, Chief Technical Officer at Mactavish, takes a look at the pitfalls of policy wording.
The hard market, now in its fifth year, has done far more than drive up premiums. It has also had a profound effect on how insurers are dealing with claims. As the Mactavish Claims Litigation Index has demonstrated, more and more insurance clients are having to resort to litigation to get their claims paid.
Whether it is Covid Business Interruption, Russian War claims or just the day-to-day business of the commercial insurance market, D&O, property and professional negligence, the number of insurance claims being challenged, rejected or chipped has, arguably, never been higher.
One of the reasons for the flexibility in claims departments, which allows them to be more generous in a soft market and take a wholly different approach when the market is hard, is the ongoing problem of poorly worded policy documents. All too often policies are built like Frankenstein’s monster; bolted together from different bits of existing documents, they may look like the real thing but when push comes to shove, they can behave unexpectedly.
Of course, this problem can cut both ways. Faced with billions of pounds worth of business interruption claims stemming from the pandemic, insurers argued that their policies were never meant to capture societal risks on the scale as those presented by the pandemic. Unfortunately, that wasn’t what their policies set out, nor was it how the courts interpreted at least some of them.
These kinds of problems are rife across the industry, involved in practically every disputed claim. At Mactavish, we have come across insurance policies sold to companies involved in steeplejack services that prohibited them from working at heights, or IT support businesses precluded from working in office premises other than their own. Many problems are more subtle but no less damaging to cover. Too often insurance contracts are produced in a kind of ‘one-size-fits-all’ manner which, while cost effective at the underwriting stage, can lead to enormous problems when those contracts are asked to perform in a claim.
Getting the right advice when taking out insurance is key. The legal and technical jargon used in contracts can be hard enough for experienced insurance practitioners to understand. For people whose day job is far removed from insurance or law, or those who don’t have English as a first language, insurance contracts are utterly impenetrable. For years, all parties in the industry, insurers, brokers, lawyers and the regulators have talked about introducing standards for the use of ‘plain language’.
In 2021 the FCA was explicit in setting out how insurance product information: “…shall be drafted in plain language, facilitating the customer’s understanding of the content of that document, and shall focus on key information which the customer needs to make an informed decision. Jargon shall be avoided.”
It is abundantly clear that this standard has yet to be achieved. But in any case, this is not always enough. Insurance contracts need to be precise, accurate and tailored to individual customer needs. Unfortunately, incentives in the insurance industry can encourage quantity of premium over quality of cover drafting, leading to poor outcomes when insurance contracts are asked to perform under the stresses and strains of a claim. Insurers pay for volume, ramping up the bonuses they pay to brokers if they can produce more business that fits a general, rather than specific, model.
And the problem is twofold. As insurance is becoming more standardised, business is moving the other way. Companies and the risks they face are becoming more complicated, not less. Products, services, working practices, even employees, are more diverse, specialised and individual than ever before, with the pace of operational change pushed ever harder by recent crises. All this needs to be reflected in insurance contracts. An employers’ liability policy for a company whose workforce is entirely office-based should be very different from one where the office is virtual, and everyone works from home. A business interruption policy for a company which outsources production must be different from one which produces in-house. The same principle applies to cyber insurance and professional indemnity and almost every commercial insurance line on the market.
The long-term effects of this breakdown between what customers need, and what they are getting offered by the industry, can only lead to one outcome: a slow erosion in the take-up of insurance and a shrinking market as trust in the product is broken down.
To reverse this trend will need concerted action from all parties in the industry: insurers, brokers, regulators and trade bodies. A market which has only recently become fully d1igitised also needs to be thinking proactively and creatively
about the potential for Artificial Intelligence to be used at the point of sale to determine risks, coverage levels and appropriate exclusions, improving policy quality. As an industry we are lucky in that it would seem we are living through a period where the problems are significant, but the solutions are all around us. We just need to grasp them.