News and Views
Important changes are about to happen to the insurance industry
Important legislation changes that will affect insurance arrangements – Insurance Act 2015.
In February last year the Insurance Act 2015 received Royal Assent and will become effective from August 12, 2016. The Act will change the UK’s commercial insurance law. The current regime, underpinned by the Marine Insurance Act 1906, will continue to apply to policies incepted or renewed for a period of 18 months but thereafter the 2015 Act will apply, by default, to commercial (‘non-consumer’) insurance policies.
The simple guide below provides a concise update of what these changes will mean.
1. Duty of fair presentation
What is a ‘fair presentation’?
Disclosure made in a manner that would be reasonably clear and accessible to a prudent insurer. Representations of facts must be ‘substantially correct’ and representations of expectations or belief must be made in good faith. The requirement that disclosure be reasonably accessible to insurers is intended to prevent the practice of ‘data dumping’ i.e. swamping insurers with data without highlighting the key aspects.
2. Knowledge of Insured and Insurer
What disclosure needs to be made to insurers?
An insured will need to disclose either:
(a) every material circumstance the insured knows or ought to know; or
(b) sufficient information to put a prudent insurer on notice that the insurer needs to make further enquiries for the purpose of revealing those material circumstances.
What are ‘material circumstances’?
Any circumstances (including information held by or communications made to insureds) that would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms. These include special or unusual facts about the risk, any particular concerns which led the insured to seek cover and ‘… anything which those concerned with the class of insurance and field of activity in question would generally understand as being something that should be dealt with in a fair presentation of the risks of the type in question’. The Law Commission’s vision in drafting the Act was that insurers, brokers and policyholder bodies should ‘work together to develop guidance and protocols setting out what a standard presentation of the risk should include in particular circumstances’. This is a challenge for the risk community to address over the next 8 months.
If only material circumstances that are known or ought to be known by the insured have to be disclosed, whose knowledge at the insured is relevant?
To be disclosable, material circumstances either have to be known or ought to be known by:
a) the insured’s senior management, i.e. individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised; or
b) individuals who participate on behalf of the insured in the process of procuring the insurance (including brokers and other agents).
3. Remedies for breach of duty of fair presentation
Can clients/policyholders adopt a ‘don’t ask don’t tell’ approach to internal investigations of material circumstances ahead of placement?
No. Material circumstances which are ‘suspected’, or which would have been known if the relevant individual had not deliberately refrained from confirming them or enquiring about them, will have to be disclosed.
How extensive a search must insureds make for material circumstances?
Insureds have to make a ‘reasonable search’ of the information available to them, including information held by their agents or others who will be covered by the insurance. Any material circumstances that a ‘reasonable search’ would have revealed are disclosable.
What if the duty of fair presentation is breached?
a) If the breach was either deliberate or reckless, the insurer can avoid the contract (i.e. treat the contract as if it never existed), keep the premium and refuse to pay all claims.
b) If the breach was not deliberate or reckless, the remedy depends on what the underwriter would have done if a fair presentation had been made. If the insurer:
i. would not have entered the contract at all…
…it can return the premium, avoid the contract and refuse all claims.
ii. would have entered the contract on different terms…
…the contract is treated as if those different terms applied.
iii. would have charged higher premium…
… the insurer can proportionately reduce the amount it pays on a claim.
Will warranties still exist?
Yes, but it will be harder to create them, they will be more limited in scope and the effect of a breach of warranty will be softened.
Why will it be harder to create a warranty?
Clauses in proposal forms that turn an insured’s representations into warranties (so-called ‘basis of contract’ clauses) will no longer have any effect. Proposal forms and wordings will need to be revised to take this into account.
Why will they be more limited in scope?
Breaches of warranty that are irrelevant to the loss that occurs will no longer discharge insurers from liability – one of the key issues insureds have with the existing law. If the insured can show that failure to comply with any term in the contract (including warranties) could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred, insurers will no longer be able to rely on the breach to exclude, limit or discharge its liability.
What are the changes to the remedy for breach of warranty?
A breach of warranty will discharge the insurer from liability for losses occurring, or attributable to something happening, after the breach occurs. It will not discharge the insurer from liability for anything that happens before the breach – or after the breach has been remedied.
So an insured can now remedy a breach of warranty?
Yes. If the breach of warranty is remedied before the loss occurs, the insurer cannot rely on it.
What counts as ‘remedying’ the breach?
If the warranty requires something to be done by a certain time, or a condition to be fulfilled, or something to be the case (e.g. installing a certain sprinkler system in case of re) then a breach of that warranty is ‘remedied’ if the risk to which the warranty relates becomes essentially the same as the risk originally contemplated by the parties (e.g. installing a comparable sprinkler system). For other warranties, a breach is deemed to be remedied simply if the insured ceases to be in breach of the warranty.
5. Remedies for fraudulent claims
What will change?
Insurers will be entitled (on notice) to treat the contract as having been terminated from the date of the fraudulent act and need not return any premiums paid under the contract. Of course, insurers will still not be liable for any fraudulent claim and will be able to recover any payments made to the insured in respect of fraudulent claims.
What about valid claims made before the fraud?
These will be unaffected – which clarifies some potential confusion arising from the case law.
6. Contracting Out
For non-consumer insurance, the provisions of the Act are intended to provide default rules. However, parties are free to agree contract terms which are less favourable than those in the Act, provided that the insurer satisfies two transparency requirements. This ability to contract out is not true of consumer insurance contracts. An insurer will not be able to use a contractual term to put a consumer in a worse position that they would be in under the terms of the Act.
What are the transparency requirements for contracting out?
Where insurers do intend to opt out (and hence include a “disadvantages term” they must take sufficient steps:
To draw it to the insured’s attention before the contract is entered into, and
The disadvantages term must be “clear and unambiguous as to its effect”.
What is sufficient to meet the above two requirements will depend on the characteristics of the insured and the circumstances of the transaction (where and how is the contract made).
What cannot be contracted out?
The contracting-out provisions will not apply to settlement agreements or the prohibition in respect of basis of the contract clauses.
In many respects the new Act codifies existing case law rather than effecting wholesale revisions to the status quo, although some changes – such as the new law on warranties – will be significant. The Act will, however, take time to bed in and there are bound to be test cases in years to come about what some of the new provisions mean.