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Jamaica News - Real Estate - Services (June 9, 2004)
Insurers worry over FSC's delay in explaining average clause
Jamaica's general insurance companies fear that they could be exposed to massive claims, without the requisite financial cover, by people who under-insure, because of the snail's pace of the Financial Services Commission (FSC) in defining for consumers the average clause concept in their policies.

Insurers could face bankruptcy in such circumstances, firms say.

The FSC, however, believes that such fears are unfounded, saying that companies are protected until the definition is in place.

The average clause was introduced by insurers after Hurricane Gilbert in 1988 when companies paid out over US$700 million to property owners. Only a small portion of that was covered by Jamaican firms, with the bulk of the payments being met by foreign reinsurers.

But consumers are believed to have cashed in on windfalls from the hurricane, with the catastrophe that not only drove up premiums but sent insurers scurrying for a mechanism that would limit claims only to the proportion of the value to which a property was insured.

"In simple layman's terms, the average clause says: 'if you are fully insured, then we will pay the full amount of your claim, but if you are only half insured, we will settle half of your claim'," explains Andrew Levy, the president of the Jamaica Association of General Insurance Companies (JAGIC).

"It's the only fair way to do business," he says.

The average clause has been the subject of disquiet among consumers since it was introduced, but the concept was, at least broadly, embraced in the upgraded Insurance Act, that was approved by Parliament in 2001.

However, the law requires that FSC, the regulator for insurance firms and other non-banking financial companies, draft an explanation of the average clause for consumers. This would become the standard for the industry.

The FSC has not yet produced a final draft.

"In the meantime, all of us are working with explanations which have been drafted by each firm," says Peter John Thwaites, managing director of West Indies Alliance insurance company.

Insurance companies are concerned that in the absence of FSC definition, insurance companies could be open to legal challenges of the average clause, which, if successful, could be debilitating for the industry.

"Someone is going to take us to court and test it," says Levy. "A judgement in favour of such a claimant could technically leave us all bankrupt."

But Brian Wynter, the head of the FSC, believes that such concerns are exaggerated.

"From the FSC's point of view, there is no cause for concern as the provision will be effective when the notice is prescribed," Wynter says. "We have gotten a legal opinion on this."

But the industry officials complain that they have been back and forth with the FSC on the definition for more than a year without agreement and say that even if they are provided with protection from the requirement of section 120 of the Insurance Act, consumers could find themselves in peril.

"Until the legal position is clarified, we will not be able to settle claims, so section 120 actually makes the customer's position worse as the lack of clarity may cause delays in customers getting their payments," according to Levy.

Wynter, however, declined to hazard a guess on the implementation date for the definition, saying that this would take place "as soon as we are able to agree on all the relevant details".

"It's a complex legal issue," he says.


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