Insurance Update

The importance of Underwriting Guidelines

Introduction

Underwriting Guidelines may be defined as the set of requirements an Insurer’s underwriting staff, or authorised agents, use as guidelines to make decisions regarding the acceptance, modification or rejection of a customer’s insurable risk.

In theory, the definition sounds quite simple. In practice, however, Underwriting Guidelines prove to be a very useful tool when it comes to protecting the Insurer’s interests – both before a risk is purchased or if a policy coverage dispute arises with an Insured.

A recent AFCA Determination has again highlighted the importance of Underwriting Guidelines, especially in the unfortunate event of a dispute between an Insurer and its customer.

This article makes reference to the recent AFCA Determination, along with some Court Authorities, which considered the Insurer’s Underwriting Guidelines for various reasons. These decisions collectively provide a neat summary of how and when Underwriting Guidelines may protect the Insurer’s interests.

Recent AFCA determination

Facts

A homeowner lodged a claim on his home and contents policy after a blaze damaged his investment property.

The Insurer declined the claim because the homeowner failed to inform the Insurer of previous claims which the homeowner had made before taking out the insurance policy.

The homeowner admitted he had submitted prior claims, but the homeowner said he was unaware he was supposed to disclose theses prior claims because they related to his home and a different investment property (i.e. not the investment property damaged by the recent blaze).

Relevant evidence

When the homeowner purchased the policy from the Insurer, he answered “no” to the following question from the Insurer – “Have you had any thefts, burglaries or made any insurance claims for home and/or contents in the last five years?”

The Insurer gave evidence that the homeowner would have been considered an “unacceptable risk” if the prior claims were referred to the Insurer’s underwriting department. The Insurer also stated it would have immediately cancelled the policy.

The Insurer referred to its Underwriting Guidelines which defined an “unacceptable risk” as a prospective customer who had more than three claims lodged in the past five years. However, the Insurer said its Underwriting Guidelines were applicable “the majority of the time,” but that “exceptions to the rule” did exist, but maintained that there was “no room for discretion in this instance”.

AFCA’s determination

AFCA determined that the homeowner breached his duty of disclosure by not telling the Insurer of the prior claims. AFCA felt that the homeowner knew (or a reasonable person would have known) that the prior claims were relevant to the Insurer’s decision to accept the risk.

However, AFCA observed the Insurer did not follow its Underwriting Guidelines because the Insurer “ignored” a prior claim submitted by the homeowner (i.e. the Insurer admittedly did not pay that claim, but the Insurer did not cancel the homeowner’s policy).

AFCA determined that the Insurer’s decision was not consistent with the Insurer’s Underwriting Guidelines because there was no outlined distinction between paid and unpaid claims in the Guidelines. As a result, the Insurer could not maintain it would not have offered cover to the homeowner.

Therefore, AFCA rejected the Insurer’s argument, and determined the Insurer could not decline the claim based on non-disclosure.

Other decisions

In the New South Wales Court of Appeal decision of Stealth Enterprises Pty Ltd t/as The Gentlemen’s Club v Calliden Insurance Limited, the Court was required to consider a factual situation where the Insured’s brothel was damaged by fire, but the Insurer denied the claim because the Insured failed to disclose its director and manager were members of the Comancheros and the brothel’s registration had lapsed.

The Court of Appeal found that evidence from an underwriter that a risk is unacceptable was not enough on its own. However, if the underwriter’s opinion is supported by the Insurer’s Underwriting Guidelines, or evidence is obtained from several underwriters / senior underwriters, the Court would almost certainly be satisfied as to how the Insurer would have responded to the risk.

An almost identical scenario was considered by the New South Wales District Court in The Owners – Strata Plan No 55682 v W. R. Berkley Insurance (Europe) & Ors. The Court heard evidence about the Insurer’s Underwriting Guidelines in that a ‘bike club’ came within the category of a risk that would be declined by the Insurer or perhaps referred to senior underwriting staff. In this decision, the bike club was an alleged outlaw motorcycle gang.

A similar issue arose in the New South Wales Supreme Court decision of Legge v Universal Hospitality Group where the Court was faced with determining policy coverage after the Insurer declined coverage to the Insured (a hotel). The principal claim stemmed from a hotel patron who suffered severe spinal injuries when he fell down stairs at the hotel.

The Insurer denied indemnity due to the Insured’s alleged non-disclosure. More particularly, during the renewal process, the Insurer argued at hearing that the Insured failed to disclose it was operating a “nightclub” at the hotel. Whilst considering the various policy coverage issues in dispute, the Court held that Underwriting Guidelines and evidence of declinatures in similar circumstances (with confidential information redacted) should likely be put into evidence by the Insurer.

The issue was also considered in in the New South Wales Court of Appeal decision of Prepaid Service Pty Ltd v Credit Insurance NV. The Court determined that the Insurer has the onus of satisfying a court that the Insurer would not have issued the policy if the Insured’s relevant misrepresentation/non-disclosure had not occurred. The decision highlights the importance of relying upon clear Underwriting Guidelines as part of satisfying that onus.

Considerations

At Page Seager Lawyers, we are called upon to assist Insurers with policy coverage disputes and we are required to consider the effect, if any, of our clients’ Underwriting Guidelines. The abovementioned decisions, and many others like them, provide a very good guide as to the fundamental importance of Underwriting Guidelines.

Insofar as protecting our clients’ interests are concerned should a policy coverage dispute arise, the authorities provide the following insight, in that Underwriting Guidelines should be:

• Clearly written and unequivocal in nature.
• Reviewed and updated as legal precedents and the insurance market change and develop.
• Well known to all underwriters – both employed staff and authorised agents.
• Consistently and diligently applied by underwriters.
• Strategically used as key evidence for a court hearing or AFCA complaint.