The Insurance Act 2015 to come into force August 2016
The Insurance Act 2015, enacted by Parliament on 12 February 2015, is due to come into force on 12 August 2016. It represents the most significant reform of UK insurance contract law for over 100 years, since the Marine Insurance Act 1906.
All contracts of insurance and reinsurance, including variations to existing contracts made after 12 August 2016, will be governed by the Act.
The aim of the Act is to bring about a balance to insurance law, which has historically favoured insurers, and to enhance customers’ rights and the remedies available to them when things go wrong.
What are the key changes implemented by the Act?
- The pre-contract duty of disclosure has been replaced by a new duty of fair presentation.
- There is no longer only one remedy (of avoidance) for non-disclosure/misrepresentation.
- The law on breach of warranty has materially changed.
- It will be possible for insurers to contract out of the Act and introduce tougher terms if they choose.
Duty of Disclosure replaced by the Duty of Fair Presentation
Under the current regime, an insured must disclose ‘every material circumstance’ known, or which ought to be known, ‘in the ordinary course of the business’.
If the insured breaches that obligation, the insurer is entitled to avoid the policy and refuse all claims under it.
While the duty on a business insured to disclose facts it knows, or ought to know, are material to the risk being underwritten by the insurer (so the insurer can be confident about the level of risk it’s underwriting) remains central to the new regime under the Act, the extent of the insured’s duty has been modified. The insured will be required to make a ‘fair presentation of the risk’ to the insurer.
To make a ‘fair presentation of the risk’, the insured must make sure it carries out a ‘reasonable search’ for information that is available to it, and that is material to the risk being underwritten under the policy.
What amounts to a ‘reasonable search’ will vary depending on the size, nature and complexity of the insured’s business.
However, as a minimum requirement, the insured must disclose anything that is:
- Within the knowledge of the insured’s senior management. This includes not only the board of directors but also those who play significant roles in making decisions about the operation and management of the insured’s business.
- Within the knowledge of those employees and members of the insurance team, including any insurance broker, that are responsible for arranging the insurance if a reasonable search should have revealed that information.
- May be revealed by a reasonable search.
The insured must provide sufficient information to put a prudent insurer ‘on notice’ that it needs to make further enquiries.
The information must also be organised and provided to the insurer in a way so that gives a clear indication of the risk and circumstances.
This requirement is designed to avoid the insured submitting information that it too brief or ‘dumping’ un-signposted information on the insured.
The Act places a positive duty on the insurer to make inquiries too.
An insurer ‘ought reasonably to know’ information if it’s known to an employee/agent who ought to reasonably have passed it on to the underwriter.
An insurer is also presumed to know things which are common knowledge, or which an insurer offering insurance of the type in question to businesses in the area in question would be expected to know in the ordinary course of business.
What happens if the duty to make a fair presentation is breached?
Currently, an insurer only has one, severe, remedy: to avoid the policy and walk away from all claims.
This is the case even where the insured’s non-disclosure was inadvertent and the insurer would have agreed to the contract, perhaps on revised terms.
Deliberate or reckless breach
If an insured deliberately or recklessly fails to make a fair representation to the insurer by withholding information or failing to take sufficient care when providing the information, the insurer is entitled to void the policy, to treat the policy as if it never existed and walk away.
The insured may then have to repay any payments for claims made under the policy and the insurer be entitled to keep the insurance premiums paid from inception of the policy.
However, the burden is on the insurer to prove that the presentation was deliberate or reckless.
Non-deliberate or non-reckless breach
In all cases other than for a deliberate or reckless breach, there are a range potential remedies which may be applied under the Act including:
- Where the insurer would have declined the risk altogether, the policy can be avoided, with a return of premium to the insured.
- Where the insurer would have accepted the risk but would have included new or different terms, for example conditions and exclusions, the policy should be treated as if it included that term regardless of whether the insured would have accepted that term.
- Where the insurer would have charged a higher premium, the settlement of the claim under the policy can be reduced proportionately. For example, if the insurer would have charged double the premium, it need only pay half the claim.
However, the test of what the insurer would have done had it known the true facts is a subjective one.
In practice, it may be hard for the insured to disprove that an insurer would have responded in a particular way had a fair representation been made.
Currently, basis of contract clauses are regularly included in either the insurance policy itself, the proposal forms, or both. These clauses essentially convert all statements made by the insured to the insurers into warranties.
So, if the information given by the insured proves inaccurate or incomplete, the insured may not only face an allegation of material non-disclosure or misrepresentation, but also an allegation of breach of warranty.
A breach of warranty discharges the insurer from its obligations under the policy from the date of the breach, irrespective of whether the insurer has suffered any loss or damage as a consequence.
The Act outlaws basis of the contract clauses and it will not be possible for business insurers to contract out of this particular change.
This means, any provision in a proposal form which purports to convert answers in the proposal into a warranty (i.e. a condition imposed by the insurer) can no longer be used.
Also warranties will only now apply in the specific circumstances of the loss. So, where a claim is made under a policy for damage caused by flooding, the fact that the insured warranted, but in fact did not have, a working fire alarm will not be a bar to that specific claim under the policy.
The Act also changes how a breach of a warranty will be dealt with.
All warranties will become ‘suspensive’ conditions. This means that, while the insured is in breach of a specific warranty (i.e. to have a working fire alarm), there will be no cover for losses that result from that particular breach.
However, once the breach is remedied and the alarm fixed cover is reinstated. This contrasts with the current position where a warranty cannot be remedied.
Insurers will be able to contract out of the Act, with the exception of basis of contract clauses.
If an insurer wishes to contract out of the Act and to include different, more onerous terms, these must be made clear and unambiguous and clearly brought to the attention of the insured.
The insured should then consider how the proposed terms are likely to affect its business and any claim it may need to make under the policy and seek legal advice before accepting the offer.
What steps should an insured take?
The changes introduced by the Act will be welcomed by insureds as redressing the imbalance under the current law.
But there will be some uncertainty until the courts and the new regime under the Act particularly in relation to fair presentation, has been tested and interpreted by the courts.
In the meantime insureds should:
- Plan carefully before submitting a proposal for insurance or reinsurance so it can carry out a reasonable search for information that is material to risk to be underwritten.
- Consider what information will be material to the risk (for example is there anything unusual about the business compared to similar business in the industry or market) and who might hold that information.
- Speak with senior management and those who play significant roles decision-making about the operation and management of the business and placement of insurance including any brokers about what information they have.
- Carefully gather and organise the information and ensure that it is provided to the insurer in a clear and structured way.
- Keep an audit trail / records of the process the business has followed in relation to the placing, renewal and / or amendment of its insurance policies.
- Carefully consider any offers of insurance or reinsurance to see whether the insurer has sought to contract out of the default regime under the Act. If so, seek legal advice as to how that may affect the business in the event of a claim under the policy before accepting the offer of cover.
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