Master Policy – what will be different?
Changes are afoot in the insurance market. Lockton explains the implications for the Master Policy on matters that include solicitors’ duty of disclosure
The insurance market is seeing a number of changes – which will impact solicitors, and the Master Policy.
While the Master Policy renewal may seem some way off, it is only a month away, in May, that a “snapshot” of your firm’s claims experience is taken, which forms the basis for determining what claims loading or discount will apply to your 2017 Master Policy premium.
You will receive a letter notifying you of this “Five Years’ Claims Summary” in June. If you have any queries with the claims position noted in this 31 May summary, you should ensure that you raise these at the earliest opportunity.
Insurance Act 2015 impact
A number of firms may not be aware that the law applying to insurance policies changed in 2016. The new Insurance Act came into force on 12 August 2016, affecting all insurance policies governed by the laws of England & Wales, Scotland and Northern Ireland – including your Master Policy.
The Act deals with:
- the duty of fair presentation of risk, both before a contract incepts and when amended;
- warranties (including basis of contract clauses);
- terms not relevant to the actual loss;
- fraudulent claims by insureds;
- good faith.
Disclosure becomes “fair presentation”
The Act brings some clarity to the problematic area of disclosure, namely, what to tell your insurer before the start of an insurance contract. Previously known as the duty of disclosure, this is being replaced with the “duty of fair presentation of risk”.
In summary, the duty of fair presentation of risk is defined as: “disclosure of every material circumstance which the insured knows or ought to know, or failing that, disclosure which gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances”.
Your disclosure has to be clear, and relevant facts easily accessible.
What is the impact for you?
The Act has no impact on the extent of coverage that the insurers will be offering: the priorities of the Master Policy continue to be the protection of you as a solicitor, and protection of the public.
Because the Act puts more onus on insurers to ask the “right” questions, there has been a tendency for proposal forms to become longer and the questions more onerous. The Master Policy proposal form, you will be relieved to know, will not be changing. Indeed, our online form endeavours only to ask you questions relevant to your practice.
However, you will have to read and acknowledge your increased due-diligence obligations in order to produce a “fair presentation” of your risk to insurers. This is the single most obvious impact of the new Act on you.
Due diligence detail
The duty of fair presentation of risk requires you to act differently in respect of your disclosure investigations than you did under the duty of disclosure. We recommend that you start this process early and collate evidence of your investigations in case of any future disputes with insurers. You should present information clearly and flag material issues to insurers: hiding information within a “data dump” is prohibited.
You will need to be able to summarise and document:
- who has been consulted;
- what information was asked for;
- how the information has been collated and checked.
It is important to note that, under the Act, you will be deemed to know information if it is known to anyone within your business in a senior management or decision-making role, or anyone responsible for arranging the insurances.
Further increase in insurance premium tax
From 1 June, insurance premium tax (IPT) is increasing to 12%. Until recently the UK had one of the lowest rates of IPT in Europe. It sat at 6% for several years. In the last 18 months, however, it has been targeted by the Treasury, and has been increased three times.
This means that any business insurances that incept on or after 1 June (and that includes your Master Policy) will be subject to this new 12% tax rate – effectively a 2% increase on premiums from last renewal.
Other factors impacting on premiums
Your insurance premium is not just impacted by claims against your firm. For example, residential conveyancing claims, as a class, were largely responsible for the Master Policy being in loss – in other words, claims significantly exceeded premium – in six of the last 10 years (as at March 2017; it takes a number of years for the true cost of claims in any one year to be determined, and it remains possible that more of these years could yet produce a deficit). That has had a consequential impact on premiums.
Similarly, factors outside of the legal profession entirely can impact to some degree. Global losses that insurers face – whether through natural disasters, or major incidents such as terrorist attacks, or aircraft crashes – can impact certain insurers. In the UK, Brexit may also have an impact.
Insurers and brokers alike are engaging with Government to minimise any negative impact, and we do not anticipate any impact on Master Policy premiums in 2017 as a result, but there could be consequences for pricing in future if insurer “passporting” rights are not preserved following Brexit. Lockton continues to monitor developments in this regard.
Currently, firms can be reassured that market conditions are favourable, and the number of claims against the Master Policy has reduced from the recent peak in 2008-2012, which has allowed a reduction in premium since 2015. The priority for all firms must therefore be to continue to be mindful of relevant risk issues, to prevent future claims spikes arising.
You can receive periodic market updates, alongside all our other insurance and risk resources, on the Lockton website.
Mark Gray, claims director in Lockton's Master Policy team. e: firstname.lastname@example.org