There is an old and perhaps apocryphal story of a message that was passed from the front line in the trenches of the Somme back to HQ. It simply said: “Send reinforcements we are going to advance”, which, passed verbally and through a number of points, arrived at HQ as the puzzling “send three and four-pence, we are going to a dance”.
What, you may ask, has that got to do with insurance?
The answer very simply is millions of pounds lost to the public each year.
In the insurance world, there are many occasions when a document or communication from one party to another is passed via one or more agents.
The classic case is information from an underwriter to the insured, which may pass through as many as three or four agents. For some reason, perhaps the desire for greater name awareness, there is a dangerous tradition that, rather than passing on the original communication from the underwriter, the information is conveyed by way of translation into a form that gives the impression of emanating from the agent.
There is a multitude of ways in which, in law, information should be communicated in its original from the insurer to the insured (who are, after all, the contracting parties) but which ends up distorted (with good intentions or unintentionally) by agents and brokers along the way.
Problem areas include:
- Details of telephone calls
- Schedules of cover
- Renewal reports
- Results of risk surveys
The effect is often to put the insured into a position where the claim may be rejected, or a policy avoided at some time in the future.
One of the worst cases I have seen is the broker who extracts all the onerous conditions and obligations from a quotation and re-conveys them to the insured under the amorphous heading “Conditions, warranties, exclusions and excesses” in the belief that it is satisfying regulatory requirements, but with no attempt to identify which is which.
Whether information is going up or down the distribution chain, there are risks lying around every corner and ultimately it tends to be the public or the professional indemnity (PI) insurer who picks up the tab.
As an exercise, look at your own firm or department and consider each of the following examples and whether they could occur:
- An account executive takes a verbal instruction from a customer, which is written on a Post-It note or an existing piece of correspondence in a manner such that even he/she might not be able to understand it a few days later.
- As above, but the placing of the charge is delegated to someone who may misunderstand the instructions because they are unclear
- Putting insurance on risk on the basis of reference to warranties rather than conveying the exact wording
- Holding cover with insurers and not checking whether those instructions are received and understood if written confirmation is not forthcoming immediately or at worst within 24 hours
- Check your agency agreements. Irrespective of normal practice you may find a clause that states an insurer cannot be assumed to be on risk unless it had been confirmed in writing
- Résumés of cover presented to the insured without attaching the actual wording
- Verbally warning an insured at renewal about obligations, conditions etc., but not confirming in writing
- Agreeing verbal extensions of binders and using the authority without confirmation in writing
- Working through a distribution chain and rarely if ever seeing correspondence or documents produced by the insurer itself
- Placing with an agent with a binding authority without checking the authority exists or that the agent is binding within the authority. (Even if you and the insured are protected at law, a dispute between the agent and insurer can cause great inconvenience and delay in the settlement of claims.)
I am sure that this exercise will throw up many more examples.
One of the key learning points is that in order to complete a thorough procedures manual, you will need to analyse the risks that arise in the processes you adopt to transact business.
One of the key risks is the actual terms of a contract of insurance are not communicated from insurer to insured or that what is communicated is incorrect.
It may just be a case of ensuring communications are not misunderstood or mistranslated along the distribution route, but it may also be a case of adopting procedures that reasonably ensure that communications have been received.
For example, we know that some insurers may take a month to confirm cover; remember that 8% of all claims occur within a month of instructions being given, but only 0.3% occur within 24 hours.
It may be more attractive to ‘bundle’ information to the insured under your own house style, particularly with some of the less than user-friendly wordings issued by insurers, but do take care to ensure that you and your customers understand and know what the underwriter intended.
Finally, remember also that if you are the agent of the insured the law deems that the insured has received something when it is in their possession.
When you are undertaking this exercise, do make sure that you check how long it takes for that information to be re-conveyed to the insured. It really should not be very long at all and any regulator will expect you to have laid down standards in this area and confirmation that you have a system of checking that these standards are being met. Even slight errors of communication can prove very costly.
- 0.3% is a 1 in 365 risk of something happening and 8% is a 1 in 12 chance
- The chances of remembering the detail of a conversation are many times greater if recorded within 30 minutes
- The chances of someone conveying information accurately are many times better in 12pt Times New Roman than your handwriting
- It is a broker’s job to reasonably ensure that a client has sufficient information to make an informed decision about agreeing to enter into a contract of insurance or not
- The contract between an insurer and insured lies in what the parties said and agreed; not what you think was said and agreed.