Insurance Helpline | Consumers should perform due diligence before buying insurance
QUESTION: I bought motor insurance on a Nissan Caravan through a broker. All of the documents that were required to obtain coverage, including the driver's licence, were given to the company. After filing a claim, I was very surprised to learn that no indemnity was being offered. There is a difference between the vehicle's laden weight and the laden weight on the driver's licence. The broker as my agent did not do a proper due diligence. The same also applies to the insurers. Do you agree? N. B. W., Kingston 8.
Insurance companies, agents, and brokers are required by the regulator - the Financial Services Commission - to undertake "due diligence" investigations. These apply to customers and prospective insurance buyers.
The aim is to find out if these subjects are involved in money-laundering.
Buyers should, for their own protection, similarly investigate the risk-transfer entities, brokers, agents, and insurers with whom they plan to enter into business deals.
Due diligence, according to the Merriam-Webster Dictionary, developed a legal meaning since it was first used in the mid-15th century. It means "the care that a reasonable person takes to avoid harm to other persons or their property; in this sense, it is synonymous with another legal term, ordinary care. More recently, due diligence has extended its reach into business ... signifying the research a company performs before engaging in a financial transaction. This meaning may also apply to individuals: people are often advised to perform their due diligence before buying a house, signing a loan, or making any important purchase (or entering into any written agreement)".
It plays an important part in managing risks.
I use the term 'doing homework' as an alternative for due diligence. Buyers should do their homework or conduct due diligence investigations before entering into insurance contracts. This is one way to avoid unpleasant surprises.
I agree with you, N.B.W. The broker did a very poor job. It did not play the role as your claim advocate. Its actions were similar to those of a post box. It simply stored and delivered the insurer's message to you.
You must also accept some of the blame. Had you read the cover note or certificate of insurance, you would have known that coverage was granted on the basis that the person driving the vehicle, you or another driver, was permitted to drive "in accordance with the licensing or other laws or regulations".
Also, if you had read your policy, you would have known before the accident occurred that your insurer was "not liable in respect of any accident, loss, or damage, or liability caused or sustained whilst the vehicle is being driven by a driver who does not possess the requisite driver's licence".
Due diligence is essential even when insurance is being bought through a broker.
INSURANCE BUYERS' DUTIES
The buyer's duties in relation to insurance transactions, according to the UK-based Association of Insurance and Risk and Insurance Managers in Industry & Commerce (AIRMIC), include:
1. Accurately completing proposal (application) forms and disclosing material facts.
2. Reviewing policy wordings to ensure that they meet requirements.
3. Paying the premiums when they become due.
4. Complying with the policy requirements - seeking clarification where necessary.
5. Notifying insurers about changes in material facts and when there are changes in your circumstances.
Most consumers -businesses and individuals - view the relationship with their insurers as static. This is wrong. Contracts of insurance envisage that the insured-insurer association is dynamic.
The policyholder's attention is usually focused on only two of the five items, namely 1 and 2. Because of this, buyers are often caught by surprise when claims are reported one duty that was left off AIRMIC's list.
INSURANCE BROKERS' DUTIES
AIRMIC identifies five duties that brokers should perform. These are:
1. Discuss and advise on the type and level of coverage required.
2. Disclose all sources of income on the account and manage conflicts of interest.
3. Supply details of insurers approached and quotes received to insured.
4. Ensure that all documents are sent to insurers in good time.
5. Monitor claims activities and pursue and/or advise on recoveries.
There are five other items that can be added to the AIRMIC's list: a) paying the premiums to insurers when due; b) delivering policy and other documents to customers on a timely basis; c) bringing to the customers' attention insurance provisions that may be harmful; d) reporting claims promptly to insurers; and e) placing contracts with insurers when so directed and otherwise complying with buyers' instructions.
The due diligence exercise that your insurer conducted was not done to ensure that you were protected. It was carried out exclusively to protect the interests of the insurers. It was your responsibility and that of the broker to take steps to ensure that your vehicle was properly covered by insurance.
Given the facts now in your possession, it will be your job to decide who was responsible for your insurance not performing as was expected.
- Cedric E. Stephens provides independent information and advice about the management of risks and insurance. For free information or counsel, write to: email@example.com