Applying the finishing touches

As surely the whole insurance industry is aware, 14 January 2005 sees the Financial Services Authority extending its statutory powers to the regulation of general insurance sales and administration. In exercising its powers, the FSA must act in a manner consistent with its specified statutory objectives of maintaining market confidence, increasing public awareness of the financial system, securing protection for consumers, and reducing financial crime.

The FSA has set out its approach to claims handling in two consultation papers - CP 160 and CP 187 - and in Policy Statement 04/01, which provides feedback on CP 187. Detailed rules and guidance have now been finalised and are set out in ICOB 7, part of the Insurance Conduct of Business Sourcebook, and are included in appendix 1 to the Policy Statement.

ICOB 7 seeks to ensure claims are handled fairly and processed and settled promptly; customers are provided with information on the claims handling process, with an explanation of why a claim is rejected or not settled in full; and insurance intermediaries disclose and manage any conflicts of interest that may exist.

The FSA has adopted a stricter approach to claims handling for retail customers than for commercial customers. Insurers must respond promptly to customers' claims notifications - generally within five business days of a claim being made. Insurers must also inform retail customers if their claim is clearly not covered by the policy, the action that will be taken by the insurer, when that action will be taken, and whether the insurer will appoint other parties on its behalf. Insurers must provide customers with reasonable guidance to help them make claims under their policies.

Insurers must not unreasonably reject a claim made by a customer. They must also give careful consideration to the circumstances before refusing to meet a claim made by a retail customer on the grounds of non-disclosure of a fact, misrepresentation of a fact, or breach of warranty or condition.

Insurers must keep retail customers reasonably informed about the progress of their claims and must notify them as soon as practicable whether or not the claim will be rejected, in part or in full. Unless insurers accept a claim in full, they must explain why they reject the claim, specifying any relevant term of the policy.

Insurers must also inform customers whether the claim will be settled by payment or by providing goods and services. Insurers must settle claims promptly, keeping records of each claim for a minimum of three years after settlement.

FSA standards

In addition, there are specific rules for motor liability insurers. There are no detailed rules in respect of claims made by third party claimants but insurers must observe the FSA's standards.

If investigations are likely to be protracted due to fraud indicators, insurers would be expected to advise customers of the reasons and provide regular progress reports. Where there is evidence of fraud, claims could be rejected on the basis of misrepresentation of facts material to the risk, non-disclosure of facts material to the risk, or breach of warranty or condition. However, if settlement is ultimately agreed, it would need to be dealt with promptly.

Insurers are not responsible for the administration and performance activities that insurance intermediaries carry out on behalf of customers in connection with claims. In these cases, intermediaries should refer to ICOB 7.4. This states: when acting for customers in relation to claims, intermediaries must act with due care and skill; and they must not put themselves in a position where their own interest or duties to others conflict with their duty to customers.

An intermediary that arranges a policy and acts for the insurer in relation to the claim must tell the customer at the point of claim that this is the case. An intermediary that does not deal with claims must either pass on to the insurer any notification of the claim or inform the customer it cannot do so.

If customers complain about the way a claim has been handled, intermediaries must take note of specific rules and guidelines in the dispute resolution section of the FSA Handbook. If an amicable resolution is not reached, the Financial Ombudsman Service will get involved. Its decision is binding on the insurer or intermediary, though customers have the option of pursuing the matter in court.