LONDON (Reuters) - Insurers could face higher claims under a proposed legal reform aimed at making it harder for the industry to avoid paying out to its business customers.
A 1906 law under which companies' insurance is invalid unless they volunteer all relevant information when taking out the policy gives insurers too much scope to turn down claims, the Law Commission said on Tuesday.
Instead, companies should provide a fair description of the risk they want to be covered against, and insurers should be responsible for finding out any additional information they need by asking questions.
"The law in this area ... has fallen out of date," said Scottish Law Commissioner Hector McQueen.
"Large, complex international corporations struggle to cope with its requirements as much as their smaller counterparts because the present rules are weighted against them all."
The proposed shake-up comes amid signs that insurers, grappling with weak prices, are increasingly disputing claims in an effort to protect their profits.
Over 11 percent of British corporate insurance buyers have had a claim challenged on non-disclosure grounds in the last two years, according to a report published Tuesday by insurance consultancy MacTavish.
"There is evidence of claims being questioned for reasons that seasoned market participants find surprising," MacTavish said in the report.
The Association of British Insurers said the planned reform could have unforeseen consequences for the commercial insurance market.
"Potential legislative reform of business insurance requires careful consideration as it may have significant ramifications for the way that insurers conduct their business," said Maggie Craig, the ABI's director of financial conduct regulation.
The Law Commission is a panel of judges and senior lawyers tasked with updating and simplifying British legislation whose recommendations require parliamentary backing.
More than two thirds of its reform recommendations have been implemented.
(Reporting by Myles Neligan; Editing by Elaine Hardcastle)