Mactavish CEO Bruce Hepburn shares his insights into the litigation surge and his hopes for the future.
After years of high pricing, the UK’s and global insurance markets have seen a dramatic decline in profitability over five years. This is due to increasingly negative market conditions. In this market, insurers face’seller’s guilt’ for both the risk they have written previously and the price or terms they have written them on.
We all know that insurance prices are on the rise. The UK market has seen four years of continuous price increases. Companies are now paying premiums that are more than twice what they were before the current hard market.
Although claims make up more than 70% of an insurer’s overall costs and will continue to be a key source of income for them, it has been difficult to track this shift in behavior from insurers.
Our latest research, the Mactavish Insurance Claim Litigation Index reveals that the UK’s insurance market has become more litigious since the advent of the hard market.
After years of high-quality pricing, the UK’s and the global insurance markets have seen drastic declines in profitability in the last five years.
Research has shown that companies are three times more likely to need to sue their insurance company to pursue a claim than they were five years ago. The index provides a remarkable insight into the culture of the UK insurance industry by combining the volume and diversity of disputes filed. This information can be used to help understand the arguments made by insurers when rejecting a claim. It also provides valuable insight for legal professionals and businesses about how to avoid these pitfalls.
The number of cases in England and Wales involving top 20 insurers has increased by more than tenfold over the past decade. If we focus on claims that involve insurers as defendants (i.e. These cases are primarily about the pursuit of policyholders for unpaid claims. Between 2012 and 2016, just under 20 such cases were filed against these companies each year. The figure for last year was 72 and that of the previous year was 69, which represents a 280% increase in legal action against the top insurers.
This is only the tip of the dispute iceberg. The vast majority of disputes are settled privately, in mediation, arbitration or through private settlement. Only a small fraction of cases go to court. Policyholders rely on cash flow to get through any major loss event. This gives insurers leverage over reducing settlements.
To understand the reasons behind the rapid rise in disputes, it is necessary to look deeper at the wider trends in the industry. In the UK, it has been a long time since there was a tool that could track insurance claims and litigation performance.
Common Insurer Defences for Rejecting Claims
Mactavish reviewed 50 recent legal claims to find out the legal pleadings and why insurers were declining to pay claims. We find that almost all cases involving insurers are about the pursuit of unpaid commercial insurance claims. Two of the most common defenses against refusing to pay a claim are that the policyholder did not have coverage for the loss and/or non-compliance with the policy terms.
These defenses are often relied on because of a common issue in many insurance policies. We see too often that policy wordings are not issued until months after placing the order and are then accepted by businesses. This ambiguity in the market creates a greater risk of non-compliance and lack of coverage.
A lot of policies are written in such a way that it is difficult for an experienced lawyer or insurance professional to understand. When it comes to notifying an insurance company of a possible claim, the common time-proximity requirement of “as soon as practicable”, “immediate” or “forthwith”, or the requirement to provide ‘full details of circumstances can mean very different things for business owners and managers. These vague clauses are only understandable by those who have years of market experience.
We see too often policy language that is not available until months after it has been placed.
Some insurance claims are in a gray area, where quantum or liability is not immediately apparent. These cases will require judicial insight. However, disputes can arise for many other reasons. For businesses that are trying to navigate this market, it is important to have well-written insurance policies. This will ensure that there is no room for error and protect your coverage.
The Legal Sector’s Impact
The index’s results are a clear indication of great opportunities for the legal industry, with barristers and insurance solicitors in greater demand than ever before. Employers and clients will be putting greater pressure on those who create insurance contracts as they are subject to more scrutiny by the courts.
The legal sector could soon be caught in a litigious minefield. Some cases have already been centered on defective policy drafting. This has led to the possibility that law firms may be held liable for unpaid claims in the course of litigation.
The opportunities to profit are obvious from legal claims disputes increasing in number, but the legal sector must be careful not to get caught in the middle of this conflict between policyholders and insurers.
The reputation of the insurance industry and economic growth in balance
The consequences of increasing numbers of claims disputes ending in court for policyholders, insurers, and the economy are more severe. Insurers refusing to pay claims puts many SMEs in a difficult position. Many of those in this position may be already in financial distress due to the loss that led to the insurance claim. They are therefore unlikely to be able to start a slow and costly legal action.
Businesses that lack confidence in the market for insurance can have a significant impact on their economy. Companies are less likely to take risks to grow, such as expanding into new markets and launching new products. It is concerning that the insurance industry is causing damage to its customers and decreasing the value of its products at the most crucial times.
Uncertain Future
The perfect storm of Brexit, war in Ukraine, global inflation, financial markets instability, sanctions, and new classes and types of risks are all continuing to prolong the market’s lifecycle, driving up premium rates and reducing claims payouts. It is probable that policyholders will continue to pursue high-volume legal actions.
The insurance industry must accept its responsibility for meeting the needs of its customers. The industry must support UK businesses in times of economic turmoil by offering clear-drafted products and adapting them to meet expectations. This will help improve their survival chances and not further threaten their chances.
Bruce Hepburn CEO
22a St. James’s Square London SW1Y 4JH UK
Tel: +44 02070 467955
Bruce Hepburn, the founder and CEO at Mactavish is a UK-based independent outsourced insurer and claims resolution specialist. The company publishes well-respected research on the corporate and commercial insurance sectors, and works with policyholders in order to provide better insurance solutions. Bruce has been Mactavish’s leader for more than 20 years and is familiar with every aspect of the business.