Implications of the Insurance Act 2015
Insurance law has been governed by legislation since 1906 which was weighted heavily in favour of the insurer. The Insurance Act 2015, which comes into force on 12th August 2016, modernises the law for businesses and aims to make recovery from insurers simpler and fairer in the event of a claim.
Key areas that will be changed by the Act are:
- Duty of Disclosure
- Contracting Out
1. Duty of Disclosure – fair presentation of the risk
Under current law, a policyholder is required to disclose all material circumstances that are known or ought to be known by them. A material circumstance is anything that might influence the judgment of a prudent insurer in deciding whether to accept a risk and, if so, on what terms. This places a high duty on the policyholder as they are expected to assess whether something would affect the terms on which insurance was written. Under the new Act, there is a duty of ‘fair presentation’.
As well as the existing obligations of good faith and ensuring the accuracy of material information, there are two elements to the fair presentation of risk.
- There must be a reasonable search, with adequate enquiries made within a business to identify and verify information. This should include the relevant knowledge of senior management and also external consultants who may be involved in the buying of the insurance (the insurance broker), other business activities or insured by the policy. The latter could include contractors, customers or suppliers.
- The information must be clear and accessible and highlight unusual activities or those known areas of concern that affect the risk. ‘Data dumping’ of large amounts of information without signposting is unacceptable.
‘Information’ is what the business knows or reasonably ought to know or that would have been reasonably revealed from a reasonable search, but does not include information that an insurer knows or should reasonably know, i.e common knowledge about a trade or profession.
Businesses should now set up systems to compile, check and record information, establish responsibilities and set sign-off requirements where appropriate.
The new duty of fair presentation applies to contracts of insurance that are placed on or after 12 August 2016. However, it also applies to variations on existing contracts that are agreed on or after 12 August 2016. Each time that a contract of insurance is varied (a mid-term adjustment) this duty arises again.
Under current law, if a policyholder fails to make a disclosure of a material fact, the insurer is entitled to avoid the policy from inception, as if the policy never existed, so the business could find itself suddenly uninsured. In contrast, the new Act sets out remedies which are aimed to be more proportionate to any breach of the duty to make a fair presentation.
An insurer can still avoid the policy from inception if the policyholder has deliberately or recklessly breached the duty of fair presentation. In this situation, the insurer is not obliged to return any of the premium. A breach is defined as deliberate or reckless if the policyholder knew that it was in breach, or did not care that it was.
For breaches that are not deliberate or reckless, the remedies available to insurers have been widened. The result of this is that proportionate remedies are now available, based on what the insurer would have done had it known the true facts:
- If the insurer would not have entered into the contract on any terms, the insurer may avoid the contract, but they must return the premium;
- If the insurer would have entered the contract but on different terms, those different terms will be deemed to apply;
- If the insurer would have entered the contract but on a higher premium, the amount paid for the claim may be reduced proportionately. By way of example, if the premium would have doubled had the duty of fair presentation been properly discharged, the insurer is entitled to only pay 50% of the claim. Some insurers have already stated that in such cases they will expect the payment of any additional premium to be made before they settle a claim.
A breach of warranty in insurance contracts automatically discharges the insurers from liability under the insurance contract from the date of the breach onwards. At present, this is the case even if the breach is wholly unrelated to the loss itself. A typical example of this would be failure to set an intruder alarm, followed by a fire destroying premises. Assuming the fire was not the result of arson by an intruder, under current law, insurers would be entitled to avoid all liability from the moment the alarm was not set.
Under the new Act, this will not be the case:
- Warranties in their current form will be abolished. This does not prevent insurers and a policyholder agreeing that certain conditions may still apply, but it does prevent that being the default position as above. As your broker we will continue to explain any warranties or policy conditions that apply to all issued policies and any duties that must be complied with, and it is often the case that we can negotiate with your insurers where a particular warranty or condition is not workable and can adapt it to best suit the needs of the business.
- Breaches of warranty can be remedied. Cover will be suspended until the breach of warranty is fixed, but once that remedy has taken place, cover will be re-instated.
- Insurers may not rely on breach of a term to avoid or limit their liability unless the breach was linked to the loss caused. This widens the circumstances when a non-compliant policyholder may be able to successfully claim on their insurance, although the Act provides that the burden of proof in showing that the loss and the breach are not linked is on the policyholder.
The new law on warranties and terms not relevant to the actual loss only applies to commercial insurance contracts entered into on or after 12 August 2016. Unlike the duty of fair presentation, it does not apply to contracts entered into before that date.
4. Contracting Out
Insurers have the right to contract out of the new Act’s requirements so long as anything disadvantageous to a policyholder is made ‘clear and unambiguous’.
However, what normally is advantageous to a policyholder may not be in all circumstances. For example, in the event of non-disclosure or misrepresentation where information comes to light which would have increased the premium, some insurers are offering to contract out of the Act’s proportionate claim reduction and replace it with a premium adjustment. This would normally be better for a policyholder, as a claim would be paid in full, however, a policyholder could be worse off in the event of a small claim.
In view of the above, insurers are likely to notify any term that departs from the Act.
The Insurance Act should bring about noticeable changes to the way that commercial insurance is transacted and greater fairness to claims, although it will take a while for any unintended consequences to emerge and no doubt some legal challenges will be needed to bring clarity to some aspects.
Insurance claims will also be affected by the Enterprise Act 2016, which is due to come into force during 2017 and will allow a policyholder to seek damages from an insurer for late payment of claims. Further details will be published in due course.
for more information please contact your usual Nsure representative, email firstname.lastname@example.org or call the office on 01903 520200