THE INSURANCE ACT – INFORMATION FOR REICH CLIENTSon
THE INSURANCE ACT 2015
EFFECTIVE FROM 12TH AUGUST 2016
This new legislation represents a sea change for the insurance industry and for commercial insurance policies.
Current legal position regarding commercial insurance contracts
- Based on principles developed in the 18th/19th centuries which were rather ‘insurer friendly’
- Places overly onerous obligations on the client at pre-contract stage i.e. to disclose all ‘material facts’ to insurers whether requested to or not
- Provides insurers with remedies which, in many cases, are disproportionate and draconian.
Overview of the new legislation
- Relates to commercial insurance contracts only
- Applies to new business cases, renewals and on an ongoing basis (endorsements/adjustments)
- Intended to update and modernise an antiquated area of law, out of line with modern business practices and the volume of information available online etc.
- Trying to ensure a neutral framework exists that is fair to both customer and insurer
- Encouraging dialogue and promote industry practices which support the understanding of risk.
Duty of ‘fair presentation’
- The client’s primary duty is to disclose everything material that they know or ought to know - all clients have a duty to volunteer information
- Failing that, the client must disclose enough information to put a prudent underwriter/insurer on notice that it needs to ask further questions to uncover material facts
- What must be actively disclosed:-
o Knowledge of senior management (i.e. anyone playing a significant role in the making of decisions about how the client’s business activities are to be managed or organised. The words ‘to be’ imply a higher level of management or oversight than those managing or organising the business on a day to day basis) – this may involve insurance managers, risk managers, company secretaries, finance directors, board members i.e. the ‘controlling mind’ (this list is by no means exclusive).
o Information which would be revealed by a reasonable search
- What is not required to be disclosed:-
o Information held by the insurer and accessible to the underwriter
o What an insurer writing this risk would reasonably be expected to know
o Common knowledge
- What counts as ‘reasonable’ is intended to be flexible and will be determined by the size and complexity of the client’s business risk?
- Clients/brokers must be able to present an audit trail of how information is put together i.e. who has been consulted, what information was asked for and how the information has been collated and checked
- However, there is no need to ‘reinvent the wheel’ in this respect – the best thing to do would be to look to draw upon and adapt existing sources of information i.e. board reporting, risk or contract registers etc.
- A ‘reasonable search’ may involve non-executive directors, ‘shadow’ directors, family members etc.
- It could also include enquiries via relevant third parties including accountants, solicitors, managing agents, consultants, I.T. providers, facilities management, contractors and anyone acting on behalf of the client under the terms of the policy
- For insurance involving subsidiaries the search should extend to them also (could involve foreign subsidiaries)
- Regarding professional indemnity insurance, this might extend to other 3rd parties i.e. lawyers and technical advisers
- Property Managing Agents will be construed as ‘agents’ regarding the ‘reasonable search’ and ‘fair presentation’ provisions in exactly the same way as brokers are.
- Any special or unusual facts relating to the risk must be disclosed and included in the client’s ‘fair presentation’
- This could include any particular concerns which led the client to seek insurance cover for the risk in question.
Remedies for breach of the insurance contract (following a claim)
- Insurers will not automatically have the option of cancelling the policy ‘ab initio’ (i.e. from the start) any more unless they can prove that a breach was ‘deliberate’ or ‘reckless’ on the part of the client
- Regarding non ‘deliberate’/’reckless’ breaches, there will now be 3 options available to the insurer – designed to put the insurer in the position it should have been in if a ‘fair presentation’ had been made at inception/renewal:-
- If the insurer would have refused to cover the risk had it known the new information, it can avoid the contract but has to repay the premium
- If the insurer would have charged a higher premium it can proportionately reduce any claims payments
- If the insurer would have included new terms or imposed different terms such as conditions/warranties, exclusions, sub-limits etc. the contract is to be treated as if it had been entered into on those terms.
Warranties and conditions
- ‘Basis of contract’ clauses will be abolished for commercial contracts – these turn information provided by clients on proposal forms (and similar) into warranties
- Breach of warranty will no longer automatically terminate the policy, instead it will lead to suspension of liability – if the breach is remedied then liability will resume
- If a loss is suffered once liability has been resumed (and the insurer can prove that something that occurred in the suspended period which contributed to the loss) the insurer does not have to pay the claim
- It is the client’s responsibility to show that a breach could not have increased the risk of a loss.
- If an insurer wishes to impose further remedies (i.e. charging an additional premium as well as proportionately reducing a claim) this would be classed as them ‘contracting out’ of the provisions of the Act
- To ‘contract out’ properly an insurer must bring the change to the attention of the client (or the broker) in a fully transparent manner
- The insurer can ‘contract out’ of the whole Act or do it on a clause-by clause basis
- The insurer must take steps to draw any disadvantageous terms to the client’s attention – this must be done before the contract is entered into or any variation to the contract is agreed.
- The law is being updated to make it simpler and easier for businesses to get claims paid by insurers and to assist insurers, brokers and customers to ensure that commercial insurance contracts are fit for purpose – customers get fairer outcomes in the event of a claim but only if they demonstrate an adequate approach to disclosing information about their risk to insurers before the insurance is agreed (i.e. the duty of ‘fair presentation’)
- Clients should leave more time for renewal (especially data gathering) in order to meet their obligations as the whole process may take longer than it did previously – as a result brokers will need to contact their clients earlier in order to start the renewal process
- It would probably be safest for a client to presume that insurers hold no prior knowledge of them at all, especially immediately after August 2016.
Andy Kay, Chief Risk Officer / Deputy Chief Operations Officer
Gail Howes, Head of Compliance & Internal Audit