Claims Practice M85 Flashcards

UNIT OVERVIEW AND ASSESSMENT STRUCTURE

• Purpose of Unit M85: Candidates must demonstrate an understanding of how insurance claims are handled throughout their lifecycle.
• Assumed Knowledge: Proficiency in fundamental principles of insurance as covered in IF1 (Insurance, Legal and Regulatory).
• Assessment Components:
  • Coursework Assignment: Submitted via RevisionMate, consisting of 10 questions following learning outcomes. Must be completed within 6 months of purchase.
  • Multiple-Choice Examination (MCQ): Online exam consisting of 50 questions with a 1-hour time limit. Must be passed within 18 months of purchase.
• Syllabus Weighting:
  • Key aspects of claims handling (Outcome 1): 25 questions.
  • Personal lines claims (Outcome 2): 7 questions.
  • Property and business interruption claims (Outcome 3): 7 questions.
  • Third-party liability claims (Outcome 4): 11 questions.
• Reference Standards: Candidates are examined on English law and practice unless otherwise stated.

UK REGULATORY ENVIRONMENT

• The Regulatory Framework: Formed on 1 April 2013 following the Financial Services Act 2012.
• Regulators:
  • Financial Policy Committee (FPC): Located within the Bank of England; responsible for macro-prudential supervision and identifying systemic risks to the UK financial system.
  • Prudential Regulation Authority (PRA): Part of the Bank of England. Responsible for prudential supervision of banks, insurers, and major investment firms. Primary objective: promote the safety and soundness of firms. Insurance objective: secure an appropriate degree of protection for policyholders.
  • Financial Conduct Authority (FCA): Independent regulator with a strategic objective to ensure relevant markets function well. Operational objectives: Consumer protection, market integrity, and effective competition. Responsible for the Financial Ombudsman Service (FOS) and Financial Services Compensation Scheme (FSCS).

THE FCA HANDBOOK AND PRINCIPLES

• Principles for Businesses (PRIN): Eleven principles all regulated firms must meet. Core principles for claims include:
  • Principle 1: Integrity.
  • Principle 2: Skill, care, and diligence.
  • Principle 6: Customers’ interests (treating them fairly).
  • Principle 7: Communications with clients (clear, fair, not misleading).
  • Principle 8: Conflicts of interest management.
  • Principle 9: Relationships of trust.
• Training and Competence (TC): Firms must ensure employees are competent, remain competent, and are appropriately supervised. The Insurance Distribution Directive (IDD) requires 15 hours of continuing professional development (CPD) per year for relevant staff.
• FCA Thematic Reviews: Tools used to assess specific risks across the market. Examples include TR15/6 (SME claims handling) and TR14/8 (Household and retail travel claims).
• Vulnerable Customers (FG21/1): A vulnerable customer is especially susceptible to harm due to personal circumstances. Key themes: Recognizing vulnerability, the value of sympathy, importance of empowered staff, and meeting communication needs.
• The Consumer Duty: Finalized July 2022 for implementation in July 2023. Sets a higher standard for customer protection than Principle 6, focusing on delivering good outcomes and providing fair value.

INSURANCE: CONDUCT OF BUSINESS SOURCEBOOK (ICOBS) 8

• ICOBS 8.1.1 (General Requirements): An insurer must handle claims promptly and fairly; provide reasonable guidance; not unreasonably reject claims; and settle promptly once terms are agreed.
• Unreasonable Rejection (8.1.2): For consumer policies, rejection is unreasonable (except for fraud) if it concerns:
  • Non-disclosure of material facts the policyholder could not reasonably be expected to disclose.
  • Non-negligent misrepresentation.
  • Breach of warranty or condition where the circumstances of the claim are unconnected to the breach.
• Qualifying Misrepresentation (8.1.3): A misrepresentation made in breach of the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA) where the insurer would not have entered the contract or would have offered different terms had they known the facts.
• Motor Claims (8.2): Third-party motor claims must be settled within three months if liability is admitted and damages quantified.

CONFLICTS OF INTEREST AND OUTSOURCING

• Conflict Scenarios:
  • An insurer insuring both parties in a dispute.
  • A corporate policyholder with a high excess disagreeing with the insurer on liability or settlement value.
  • Brokers acting as agents for both the insurer and the customer in claims handling.
• Outsourcing (ICOBS 2.5.3): Insurers may use Third Party Administrators (TPAs) or Managing General Agents (MGAs) but retain full regulatory responsibility for meeting ICOBS standards. Insurers must perform regular audits and define agreed service standards.

COMPLAINTS PROCEDURES AND THE FOS

• Definition of a Complaint: Any expression of dissatisfaction alleging financial loss, material distress, or material inconvenience.
• Timelines:
  • Complaints resolved by the close of business on the third day require a summary resolution communication.
  • Complex complaints must receive a 'final response' within 8 weeks.
• Financial Ombudsman Service (FOS):
  • Compulsory for all authorized firms; deals with unresolved disputes from 'eligible complainants' (consumers, micro-enterprises, small charities).
  • Complainants must refer cases within 6 months of the final response; 6 years after the event; or 3 years after they knew they had cause for complaint.
  • Maximum Monetary Awards (Standard since 1 April 2022):
    • $£375,000$ for acts/omissions on or after 1 April 2019.
    • $£170,000$ for acts/omissions before 1 April 2019.

ELEMENTS OF THE INSURANCE POLICY

• Contract Certainty: The agreement of all terms before or by the time a contract is entered into.
• Policy Structure:
  • Schedule: Personalizes the cover (Policy number, insured entity, period of insurance, sum insured, premium).
  • Insuring Clause: Expresses the promise to pay and describes the liabilities insured against.
  • Definitions: Defines key terms. Defined words are often highlighted in bold/italics.
  • Limits of Indemnity: May be 'any one loss', 'each and every claim', or 'in the aggregate'.
  • Exclusions: Narrow the cover (e.g., wear and tear, deliberate acts, radioactive contamination, terrorism).
  • Conditions: Obligations of the policyholder (e.g., prompt notification, taking reasonable care).
  • Governing Law: Usually English law/jurisdiction; may include arbitration clauses.
• Market Reform Contract (MRC): In the London Market, the underwriter initials ('scratches') the MRC/slip to conclude the contract.

POLICY TRIGGERS: CLAIMS MADE VS. LOSSES OCCURRING

• Losses Occurring (Occurrence Basis): The policy responds to physical damage or bodily injury occurring during the policy period, regardless of when the claim is reported. Used for property, motor, and public/employers' liability.
• Claims Made Basis: The policy responds if the claim is first made against the insured during the policy period. Common for Professional Indemnity (PI) and Directors' & Officers' (D&O). Requires 'run-off' cover after retirement.
• Notification of Circumstances: Under claims made policies, if an insured notifies an insurer of an event likely to lead to a claim, the future claim is 'deemed' to have been made during the original policy period.

LEGAL PRINCIPLES AND CONTRACT LAW

• Insurable Interest: Required by the Marine Insurance Act 1906 and Life Assurance Act 1774. The policyholder must benefit from safety or be prejudiced by loss.
• Contract Formation: Requires Offer, Acceptance, and Consideration (Premium payment or promise to pay).
• Duty of Utmost Good Faith (Uberrimae Fidei): Requires honesty. Abolished by the Insurance Act 2015 as a means to terminate policies; replaced by specific remedies for breach.
• Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA): Duty to take reasonable care not to make a misrepresentation.
  • Careless misrepresentation: Proportionate remedy.
  • Deliberate/Reckless misrepresentation: Insurer can avoid the contract.
• Insurance Act 2015 (Commercial): Duty of Fair Presentation. Remedies for breach depend on whether breach was deliberate/reckless. If the insurer would have charged more premium, the claim payment is reduced proportionately.
• Enterprise Act 2016: Implied term that insurers must pay valid claims within a reasonable time. Policyholders can claim damages for losses caused by unreasonable delay.
• Proximate Cause: The direct/dominant cause of the loss. Leyland Shipping v. Norwich Union (1918) established the torpedo as the proximate cause over the subsequent storm.
• Breach of Warranty: Under the 2015 Act, liability is merely suspended during the breach and resumed once remedied.
• Waiver and Estoppel: Kosmar Villa Holidays v. Trustees of Syndicate 1243 (2008). An insurer does not waive its rights merely by commencing a reasonable investigation.

CLAIMS INFORMATION AND RESERVING

• Reserving Philosophy: Every insurer has a corporate approach (conservative vs. optimistic).
• Uses of Reserves:
  • Estimating future cash flow for Finance Departments.
  • Calculating technical reserves for company balance sheets.
  • Providing loss experience data for Underwriters.
  • IBNR (Incurred But Not Reported): Actuarial estimates for unreported claims.
• Step-laddering: Bad practice where reserves are increased incrementally. Reserves should be a realistic estimate from the outset.
• Reserving for Liability: Companies may reserve for the full exposure or use 'reserving to exposure' based on probability of success (e.g., $40\% \times \text{quantum}$).
• Impact of Agency: Information given to a broker (agent of insured) is not deemed given to the insurer unless the broker has delegated authority.

FRAUDULENT CLAIMS

• Types of Fraud:
  • Underwriting fraud: Fronting or misrepresentation at inception.
  • Claims fraud: Fictional losses.
  • Staged incidents: Deliberate damage (e.g., 'crash for cash').
  • Misrepresentation/Exaggeration: Genuine loss with inflated value.
• Indicators: Unoccupied buildings (arson), fires between 2 AM and 5 AM, lack of MOT/logbooks (motor), inconsistencies in descriptions.
• Legal Consequences:
  • Britton v. Royal (1866): Claims are void where there is no loss.
  • Insurance Act 2015 s.12: Insurer is not liable for a fraudulent claim; can recover sums already paid; and can terminate the contract from the time of the fraudulent act.
  • Criminal Justice and Courts Act 2015 s.57: For third-party PI claims, if the claimant is 'fundamentally dishonest', the court must dismiss the entire claim even if a portion is genuine.

SUBROGATION AND CONTRIBUTION

• Subrogation: Right of the insurer to take over the insured's rights against a negligent third party to recover costs.
  • Castellain v. Preston (1883): Prevent profit from loss.
  • Action must be in the name of the insured (Exception: Riot Compensation Act 2016).
• Sharing Recovery: If recovery is less than the loss due to an excess, the insurer satisfies its own loss first unless the shortfall involves items not covered by the policy.
• Contribution: Sharing losses between insurers when double insurance exists.
  • Maximum Liability Method: $\text{Proportion} = \frac{\text{Sum Insured under Policy A}}{\text{Total Sums Insured}}$
  • Independent Liability Method: Used for liability and most property claims. $\text{Proportion} = \frac{\text{Indep. Liability A}}{\text{Total of Indep. Liabilities}} \times \text{Loss}$
• Salvage and Abandonment: Salvage is the insurer's right to take over subject matter. Abandonment is the giving up of the subject matter to the insurer (Marine constructive total loss requires a notice of abandonment).

REINSURANCE CLAIMS

• Types: Proportional (Quota share, Surplus) and Non-proportional (Excess of Loss).
• Legal Position:
  • Insurance Co of Africa v. Scor (1985): 'Follow the settlements' requires the claim to be within the contract terms, adjusted professionally, and no fraud.
  • Hill v. Mercantile & General Re (1995): Reinsurer can dispute claims if they fall outside the specific terms of the reinsurance contract.

VALUING THIRD-PARTY PERSONAL INJURY CLAIMS

• General Damages: Non-pecuniary (pain, suffering, loss of amenity). Values guided by Judicial College (Guidelines for the Assessment of General Damages).
• Special Damages: Pecuniary/financial losses (loss of earnings, care costs, prescriptions).
• Multiplicand and Multiplier: Used for future losses.
  • Multiplicand: Net annual loss.
  • Multiplier: Years from trial to retirement (adjusted via Ogden Tables).
• Discount Rate: Reflects return on investment of a lump sum. Changed to $-0.75\%$ in 2017, then revised to $-0.25\%$ in 2019 under the Civil Liability Act 2018.
• Compensation Recovery Unit (CRU): Insurers must repay social security benefits and NHS treatment charges to the DWP before paying the claimant.
• Periodic Payment Orders (PPOs): Courts can mandate annual payments for care instead of lump sums for catastrophic injuries.

CIVIL PROCEDURE RULES (CPR)

• Overriding Objective: Enabling courts to deal with cases justly and at proportionate cost.
• The Three Tracks:
  • Small Claims Track: Value up to $£10,000$ (usually PI claims where the injury element is $< £1,000$).
  • Fast Track: Value $£10,000$ to $£25,000$; trials limited to one day.
  • Multi-track: Complex or high-value claims ($> £25,000$).
• Pre-Action Protocols: Steps to follow before litigation.
  • PI Protocol: Defendant has 21 days to acknowledge and 3 months to investigate.
  • Low Value Portal (MOJ Portal): Online process for claims $< £25,000$ with fixed costs.
• Negotiation Tools:
  • Part 36 Offers: Offer to settle with specific cost consequences if the other party fails to beat the offer at trial.
  • Privilege: Documents (like legal advice) are protected from disclosure unless waived.
• ADR (Alternative Dispute Resolution):
  • Mediation: Non-binding facilitated negotiation.
  • Arbitration: Private, binding process under the Arbitration Act 1996.
  • Early Neutral Evaluation: Neutral third party predicts the court outcome.