Jeff, the word ‘faith’ is probably not something most businesses would want to use in a contract, yet it’s a crucial principle of insurance.
True. In fact, a normal contract is the reverse, which is ‘caveat emptor’ or ‘let the buyer beware’. Say I’m selling a car and you’re interested in buying it. You take it for a test drive, we negotiate a price and shake hands on it. The next day, the thing breaks down. It’s a lemon. But you’ve tested it, I gave you the service history, you agreed on a price, so there’s no comeback. Most commercial contracts are like that.
But in insurance, we use the principle of Utmost Good Faith, which is a legal term often presented in Latin as ‘uberrima fides’ or ‘uberrimae fidei’. The insurer promises to tell the client all about the policy, and the client promises to tell us all the relevant information we need to assess the risk. You may say you’ve never put in a claim, you’re a healthy individual with two arms, two legs and good eyesight. We say that’s fair and give you a 50% no-claim discount.
But how do you know all those things are true?
We don’t know it’s true, but when we’ve asked for details while creating your car insurance policy, you’ve said it’s true. When you finally make a claim, we find out you’ve got one arm missing, you’re blind in one eye and you’re the world’s worst driver. So we have a right then to A/ completely reject the policy; and B/ not pay the claim. It’s the client’s responsibility to provide us with the material facts. A material fact is something that would affect the risk.
But it’s a two-way street.
Right. Our duty is to tell the client, as clearly as possible, what is covered, and more importantly, what is not covered. If the client isn’t sure, we need to explain it. A lot of policies now include definitions – it’s like a glossary in a policy. I believe this is very important. Why? Because I feel it’s fulfilling the Utmost Good Faith on our part.
What happens if there’s a breach on both sides?
A good example was the Twin Towers after 9/11. There was an ‘event deductible’ as part of the policy. So, was the attack on the two towers part of one event or two (one attack per tower)? According to the insurer it was two, so two deductibles applied. Was that explained to the client? Obviously not because they took it to court, and quite rightly the judge found that it was one event. In that case, the client was not advised correctly.
I’ve always thought of insurance as being quite simple – there’s one agreed amount paid if a certain event happens.
But then there’s the fine print. There’s the exclusion list, the conditions and the warranties. Do we explain the difference between a condition and a warranty? We must. I don’t want to see fine print anymore. I want to see those details printed in bright red. We used to have that information written in old style English. Not anymore. The client must be able to clearly understand it.
But as you’ve mentioned, it’s far more likely for the client to break this rule of Utmost Good Faith.
According to Swiss Re, 30% of all claims worldwide are fraudulent in some way. But it’s not just the clients we have to deal with. People & Partners clients who have medical cover get a card which ensures they’re covered in the case of an emergency. But what if the hospital or clinic overcharges or over-treats the client? It’s the clinic or hospital we then have an issue with. We have a doctor who looks at all our medical claims. We’re always looking for fraudulent claims.
But there are going to be honest mistakes. There will be varying levels of criminality.
Of course. That’s why we reserve to right to either reject the claim, warn the client, or cancel the policy. There are a whole range of circumstances.
There’s a big difference between someone lying about the age of their TV and, let’s say, arson.
I’m glad you mentioned arson. There was a time when local cinemas were the cultural centre of most towns in the UK. There were hundreds of cinemas in larger towns but suddenly, due to things like colour televisions, the numbers dipped. Suddenly there was a spate of fires in cinemas. Some claimed it was a lit cigarette in a dustbin or they’d left the projector on by accident. For a couple of years, we had to employ a forensic expert from the fire brigade to investigate fire insurance claims.
And at the other end of the scale, nobody’s ever come around to my place to check if I really do have a brand-new television.
We couldn’t afford it. That’s why those policies are based on faith. But for larger policies, we inspect some properties and go through the process of a proposal form.
In general, do you weigh up each case on an individual basis?
There are many types of misrepresentation. There’s fraudulent – you do it deliberately. There’s innocent – you don’t think it’s a material fact. And then there’s negligent – you can’t be bothered to tell us. Then we must decide what to do after a client has lied. We have the right to avoid the claim and avoid the policy. If it’s fraudulent, we may even have the right to claim damages.
I imagine it’s often an honest mistake.
Most times, unless it’s serious, I’ll ignore the breach. You can mess around with this principle for commercial reasons. We don’t like fraud but sometimes it’s hard to prove, and if you have a great client it’s better to just say, okay I’ll forgive you.
And has this principle been a part of the industry for a long time?
Basically, since the beginning. It might be put in the policy or not, but at the bottom of the contract where you sign, it will say that you declare all the information is correct to the best of your knowledge. It’s an interesting principle because it causes court cases on both sides, but I think it’s a principle that shows good spirit – we trust you and you trust us. We have a legally binding contract with certain expectations, and you can’t always put it all into writing, so that’s why I love this principle.
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Jeffrey James Whittaker is a veteran of the insurance industry who has worked with large clients on high value, high profile ‘Mega Projects’ such as sky trains, subway systems, hydro-electric dams and various oil/gas projects, both on-shore and off-shore.