The Insurance Act 2015 came into force on 12 August last year. Although the Act is directly applicable to insurers and insureds, and therefore does not require amendments to relevant regulatory rules, the Financial Conduct Authority (FCA) consulted in July last year on updating the insurance conduct rules in its Handbook in line with the Act to, amongst other things, "avoid inappropriate overlap between our rules and the new legislation, and reduce any potential for confusion."
Planned changes to the Insurance Conduct of Business Sourcebook (ICOBS), applicable to general and non-investment insurance business, and to the Conduct of Business Sourcebook (COBS), applicable to life and investment insurance businesses, have now been published and these will become effective in less than three months, on 1 August 2017. The changes fall primarily within the claims-handling provisions of the Sourcebooks and detail the regulator's revised approach to dealing with firms' rejection of policyholder claims given the more stringent requirements introduced by the Act.
For contracts entered into or variations made before the amended rules come into force – expected on 1 August 2017 - the FCA's current rules will apply. For contracts and variations after the proposed rules come into force, the amended rules will apply.
The planned changes include:
- Claims Handling rules in ICOBS and COBS will be supplemented with new guidance highlighting cases where rejection of claims by insurers that do fall within the Act will be unreasonable, for example, for certain breaches of warranty or for fraud;
- A new rule providing that rejections of claims by insurers that do not fall within the Act for breaches of conditions and warranties will be unreasonable unless those breaches are connected to the circumstances of the claim – ICOBS 8.1.2BR;
- New guidance that, to the extent that the Act applies, rejections of claims will be deemed unreasonable where the policy is operated or drafted in a way that does not allow the insurer to reject – ICOBS 8.1.2AG;
- Disapplication of part of a rule that contains an 'in connection with' test between the circumstances of the claim and the warranty/condition due to potential duplication with the similar test set out in section 11 of the Act. The FCA has said that it is no longer appropriate because the test is covered by the scope of section 11 and it could be "an inappropriate overlap with the intention of Parliament". – ICOBS 8.1.2R(3);
- A new rule and guidance, for consumer policies only, providing that insurance contracts should be drafted and operated with the effect that warranties and conditions contained within them are connected to the types of crystallised risks to which they relate. This is another form of the 'in connection with' test according to the FCA "but between different concepts and at a different time in the relationship with the consumer." The types of crystallised risk is intended "to capture the types of situation for which the policyholder has cover under the policy" – ICOBS 2.5.2AR;
- An exception has been introduced to the requirement that warranties in pure protection contracts are material to the risk and brought to the customer’s attention. The exception is in relation to a 'life of another' contract, where the warranty relates to a statement of fact concerning the life to be assured. The FCA says that it considers that this additional requirement is no longer necessary because section 7 of the Consumer Insurance (Disclosure and Representations) Act 2012 gives misrepresentations by a life assured the same status as those given by policyholders – ICOBS 2.5.2BR
In its Handbook Notice published this week notifying the changes to be brought in via Insurance Act 2015 (Consequential Amendments) Instrument 2017, the FCA states that its policy approach is to amend the rules to avoid undermining the scope of primary legislation, to focus on those instances where consequential changes are needed to preserve existing policy, and also to align the Handbook with the legislation. It had three responses to its consultation from trade bodies whose concerns mainly related to making sure the regulator made explicit where the application of certain rules applied to consumer policies only and/or to policies subject to the Act and not those that, for example, had properly contracted out of the Act. In its Handbook Notice, the FCA set out how it had taken this feedback into account in finalising the amended rules.