Here we go again, another dramatic transformation to insurance, but who remembers the last one?
It was only back in 2013 that personal insurance was to be revolutionised and the Consumer Insurance (Disclosure and Representations) Act would turn the tables in the favour of consumers rather than insurers.
Behind the scenes there was a fundamental shift of power away from insurers, but unless you have had a ‘problem’ claim, you would be none the wiser. The position can probably be summed up by the Insurance Ombudsman since saying that the act just brought the law into line with the way they already operated, although a more cautionary note maybe why many customers still have to go to the Ombudsman to achieve a fair claim settlement?
With personal insurances, the new law put the onus on the insurer to ask the right questions of the policyholder, rather than being able to turn down a claim if the policyholder did not provide the full information.
However, commercial insurance will be different and when the Insurance Act 2015 comes into force on 12th August 2016 it will redefine the business insurance buyer’s duty of disclosure to insurers and require a ‘fair presentation of risk’.
There will be two elements to the fair presentation of risk, along with the existing obligations of good faith and ensuring the accuracy of information. Firstly, there must be a reasonable search, with adequate enquiries within a business to include relevant knowledge of senior management, as well as third party consultants. Secondly, the information must be clear and accessible and highlight unusual activities or those known areas of concern that affect the risk.
‘Information’ is what the business knows or reasonably ought to know or that would have been reasonably revealed from a reasonable search. If you are still with me, you will be pleased to note that it does not include information that an insurer knows or should reasonably know, i.e common knowledge about a trade or profession.
The challenge for some businesses will be the need to cascade the search for information through their company and ensure that it is passed to the person responsible for arranging insurance. Insurers, particular those with ‘simplified’ online solutions will also need to review how they request underwriting information.
Where there is non-disclosure of information, insurers will have remedies depending on the severity. These range from avoiding the policy and keeping the premium for deliberate and reckless cases to reducing a claim on a pro-rata basis for cases where the insurer would have accepted the risk, but charged a higher premium. There will no longer be any ‘innocent’ non-disclosure.
The new act will also do away with the legal right for insurers to completely avoid a policy for a breach of warranty (such as you must set the burglar alarm). Insurers will be able to suspend cover where there is breach of a policy warranty or condition, but must restore cover when the breach is remedied and policyholders will now also have the defence that non-compliance with a warranty was irrelevant to the loss and didn’t increase the risk. Another part of the act clarifies that insurers can avoid a fraudulent claim entirely, even if part of it was honest and keep the premium.
The final provision of the act to mention is that insurers can contract out of parts of the act, so long as anything disadvantageous to a client is made ‘clear and unambiguous’.
The act has enjoyed widespread support and has been passed using the Law Commissions procedure for uncontroversial bills, but interestingly that doesn’t include a policyholder’s right to damages for late or non-payment of claims. That was too controversial, although this will apparently be dealt with by the forthcoming Enterprise Act during 2017.
At face value 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, particularly with the insurer’s right to contract out.