Poorly designed underwriting platforms can lose a court case

Poorly-designed-insurance-underwriting-platforms-can-lose-a court-case

The way in which online underwriting platforms are designed and operated can have a major impact on an insurer’s ability to defend itself in court, global law firm Clyde & Co said last week.

In particular, the firm singled out the arrival of the Insurance Act on the statue books as a reason to review underwriting platforms with particular focus on the manner in which documentation is issued and information on a risk is collected.

Speaking at a seminar in London last week, Clyde & Co Senior Associate Dominic How outlined a series of factors that have a powerful influence on an insurer’s ability to rely on its underwriting platform in a legal action.

His comments came after Clyde & Co’s involvement in a long-running legal dispute in which the behaviour of an underwriting platform and the information it requested from the insured became a major feature in successfully declining a £2m property claim.

According to How, the manner in which a platform gathers information and then responds to it can become a matter of intense scrutiny in a dispute. Because of this, underwriters should review the way platforms operate, focusing on:

  • wording of questions in the proposal and statement of facts
  • declarations reminding the insured of their duty to give a fair presentation of information about the risk
  • where drop-down menus offering a choice of predefined options are used (for example when describing the insured's trade) it is important that there is also a free text box which can be used by a proposer in the event that the predefined options do not accurately describe the insured's business
  • endorsements or bolt-on clauses that are not inconsistent with other aspects of the policy wording
  • the way in which warranties link to certain sections of the policy
  • triggers that refer the risk to a human underwriter for review if certain responses are provided

Dominic How said: “As more and more underwriting is conducted via online platforms, the way in which these systems behave will increasingly come under the Courts’ scrutiny. Because of this, it’s vital that the processes and language of these systems are both understandable to a judge and are robust enough to hold up under legal examination.

“The risk is that platforms that are too linear and too rigid in their processing can weaken the underwriter’s case in the event that a policy is avoided. The Insurance Act’s insistence on proportionate remedies in the event of misrepresentation makes the need for clear evidence of the underwriting process more important when the insurer seeks to validate their proposed remedy.”

Dominic How’s insights come following his work on a case in which an underwriter sought to decline a £2m property claim for fire damage in 2012 on the grounds of misrepresentation of the risk. The insured, Dalecroft Properties, had insured a large commercial property in Margate with an MGA using an online underwriting platform. Upon investigation, it was discovered that many of the representations made by the insured around state of repair, type of roof and the absence of any vandalism were false. It also emerged that the insured failed to declare that the local authority had placed an Emergency Prohibition Order on the property because of safety fears arising from its poor condition. The manner in which these declarations were made on the underwriting platform was a focus for the judge.

The insured also argued that a ‘cancel and replace’ notice issued by the underwriting platform a couple of months after policy renewal in 2008 amounted to ‘a new policy’. However, the underwriter argued it was actually a policy endorsement, but the workings of the underwriting platform meant it had to be issued as a cancel and replace notice. The judge ultimately accepted the underwriter’s argument.

Dominic How said: “When designing these platforms, insurers need to think carefully about how they might be interpreted in legal actions. How and when will human intervention be triggered? If none of its pre-defined options are accurate, does the insured have the ability to declare this and provide additional information? Does the system make clear the insured’s responsibilities and the need to declare anything they think may be material and how this information will filter through to the actual underwriter in the event that a referral is generated? These will all be important in a legal dispute.”