The hardening market and emerging issues with online insurance transacting

Insurers have continued to improve their online product offerings across “retail” and “wholesale” insurance products that are distributed either directly to “consumers” or via “intermediaries”. Online systems reduce insurers’ cost base, as well as assist with compliance, governance, reporting and claims. They can also remove the risk of “human error” during quoting, binding and issuing of policies.

In the current market, online systems are becoming more frequently utilised where:
  1. the cost of insurance is increasing

  2. the availability of cover is limited

  3. underwriting resources are more depleted: turnaround times are increasing.

In recent times, however, we have reviewed numerous online quotations and indeed policies that are not reflective of the risk sought to be insured. Our fear is that systems are being manipulated to make a risk fit the system, as distinct from the system properly underwriting a risk. Notwithstanding the exposure presented to an insured who may think they have adequate and appropriate insurance only to be denied cover in the event of non-disclosure, an equal warning should be heeded by intermediaries and insurers relying on the systems.

Duty of disclosure

Insurers rely on the answers to questions asked in online application whilst in the process of quoting in order to price a risk and set the scope of cover. As per our article (here), the “duty of disclosure” is paramount in insurance contracting. The insurer will, in the event of a claim, review the disclosures made when determining the availability of cover.  The insured must disclose every matter it knows, or it could reasonably be expected to know, that is relevant to the Insurer’s decision to accept the risk. This disclosure obligation extends new, renewal, extensions, variances or reinstatements of the policy.

It can be difficult for an Insured (who may have no specific insurance expertise) to understand what is relevant to an insurer’s decision to accept or decline to provide a quotation. If you fail to comply, an insurer can decline indemnity under the policy or cancel the policy. There are numerous examples of insurance disputes arising from duty of disclosure obligations – and once your claim is declined, the onus (and expense) is on you to prove the policy responds.

Many online systems may not have a functionality to disclose precise or any additional information. Many systems will have set responses (drop down answers) to questions which may not accurately encompass the disclosure the proposer seeks to make. Failure to make thorough and precise responses to questions asked in proposal forms will enliven insurer’s rights to deny or reduce their liability for a claim. Also, see our article Current trends in claims management reflecting poorly on industry: strategic denials.

Is the cover appropriate?

Where an insured contracts directly with an insurer, or with an intermediary under a general advice warning, the insured is obligated to understand its own policy terms, conditions, restrictions and exclusions (usually referred to as a product disclosure statement or PDS).  The cover provided by insurers can vary dramatically. Cover and premium can also be driven by the appetite of the insurer for the particular item or business being insured. Where an insured is not represented by a broker, the insured selects the cover it has and makes a decision on whether the cover is appropriate for its risk and the business it operates. In the event a claim is not met due to the coverage not being appropriate or adequate, this risk is assumed by the Insured.

Brokers using online systems

As stated, brokers too are now more frequently transacting via online systems. Often this will be presented to brokers as a way to improve efficiency of the transaction, particularly for Small/ Medium Enterprise (SME) style business, or otherwise scheme arrangements for various industries or professions..

The key difference here is that brokers retain the obligations to place adequate and appropriate cover for their client. The onus in respect of duty of disclosure obligations remains the same, but there is an added layer of protection for the Insured, as the broker is required to gain an understanding of the coverage required, what disclosures should be made to an Insurer and bring anything of relevance to the Insurer’s attention even if it may not appear in a standard online portal questionnaire.

An example of broker’s duties and online transacting was set out in the case of in Kotku Bread Pty Ltd v Vero Insurance Ltd & Anor [2012] QSC 109. That case involved the existence of expanded polystyrene (EPS) in an insured property. Cover for that property was procured by the broker using an online system. The insured property was destroyed by fire; the loss was $2.7M.

The online proposal form asked what percentage of EPS that the insured property comprised. The Broker was given options of 0%, 1-33% or over 33%. The broker disclosed 0% on the basis that was the information “known to her” when placing the policy.  At trial, evidence was produced suggesting that figure was closer to 70%. It was held then that the insurer had no liability to indemnify the insured for the loss. Otherwise, it was held that:

  1. the Broker had a duty to inquire about the internal construction of the bakery and, if necessary, to inspect the premises in the exercise of reasonable care and skill (at para 215, 216)

  2. inquiries should have been made as to the existence and extent of EPS in the building so it could respond to the insurer’s question and/or if it could not inspect the premises it should have at least obtained information (such as drawings/plans/surveys) about the construction of the building

  3. EPS is known in insurance as being high hazard and on that basis the broker should have educated the insured about the impact of that material on insurance premiums and the underwriter’s appetite

  4. by reason of the Broker failing to adequately disclose and place the risk, its client (the insured) did not receive the benefit of cover. Evidence was established that had the existence of EPS been disclosed, then the insured would have been able to access cover with another insurer (save for a higher premium, which was established to be an additional $10,000).
Key messages
  1. For insureds who transact their insurance online:

    • You must comply with the duty of disclosure. If you are unsure whether your responses do comply, you should confirm the disclosures with the issuer in writing.

    • Take time to consider and compare the quotations received prior to entering into a contract of insurance.

  2. For insureds—why they should engage brokers:

    • Brokers must provide their clients with advice on the appropriateness of the cover they recommend. This includes risks of a business, availability of cover, cost of cover, relevant exclusions and claims advocacy.

    • If a dispute on coverage arises following a claim, you have both an advocate to assist with resolving the matter or an additional avenue to pursue recovery of your loss if you believe your advisor has made an error – a clear advantage of transferring the risk for insurance to a broker.

    • As an insured’s risk exposure becomes more complex, the appropriateness of online transacting wanes.

      Remember, online systems are designed to standardise insurance transactions into a “one size fits all” solution. This is precisely why these systems may become disadvantageous – they remove the ability to “differentiate” risk.

      Clients we deal with seldom consider that their business risk is below par – online portals do not provide an opportunity for an insured to demonstrate this to an insurer. Your risk will be underwritten as any other in your industry with the simple distinction as to its size and claims history. Sustainable, adequate and appropriate insurance is achieved by brokers working with motivated insurers who will properly review and appropriately cover and price risk accordingly.

      Bellrock represents its clients in this way in the market and is transparent with our clients relating to the discussions which have taken place. We place great emphasis on our relationships with trading partners and believe that clients and insurers should have dialogue when appropriate. We believe this results in better renewal outcomes and greatly improves claims outcomes when the unexpected occurs.

  3. For the insurance industry:

    There is no doubt that online quoting and technology have benefits for transacting “affinity” business. However, those systems must be confined to doing just that. Underwriters must scrutinise these systems. In particular, there should be a methodology to ensure that the systems are not being manipulated for the objective of obtaining cheap, but “illusory” insurance. The integrity of intermediaries is extremely vital to this process.