The Insurance Act 2015 comes into force on 12 August 2016. Although this may seem a long way off, it fundamentally changes the way business insurance will be underwritten, so if you take out any sort of insurance cover for your business it is worth being aware sooner rather than later.
Insurance law has been governed by legislation from 1906 which was weighted heavily in favour of the insurer. The Insurance Act 2015 changes the law for businesses, in the same way that the Consumer Insurance (Disclosure and Representations) Act 2012 changed the law for consumers.
Key areas that will be changed by the Act are:
- Fraudulent claims
This article addresses the first three. It does not deal with fraudulent claims, as the law in this area is not altered significantly by the Act.
1. 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 insured as they are expected to assess whether something would affect the terms on which insurance was written.
Under the Act, there is a new duty of “fair presentation”. A policyholder is required to disclose every material circumstance which it knows or ought to know (which is similar to the current law). However, the duty is also met if a policyholder provides sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances. This shifts the obligation towards insurers and recognises that provision of insurance is rarely a simple affair, with questions often being required to draw out all relevant information.
Importantly, the Act also requires the policyholder to disclose information in a reasonably clear and accessible manner. Simply providing your insurers with vast amounts of data, which contains the relevant information along with an array of irrelevant information, will not discharge your duty.
Knowledge of the policyholder
What a policyholder knows or ought to know is defined by the Act, and it differs according to whether the policyholder is an individual or not. A corporate policyholder is deemed to know what is known to the senior management or any persons responsible for the insurance, such as a risk manager. “Senior management” is defined as individuals who play significant roles in the making of decisions about how the policyholder’s activities are to be managed and organised, and therefore this is likely to go beyond the Board of Directors.
A policyholder “ought to know” what should reasonably have been revealed by a reasonable search, so you cannot just turn a blind eye to information which you suspect is present. This relates to information held within the policyholder’s business, and also information held by the policyholder’s agent (e.g. insurance broker).
Knowledge of the insurer
The duty of fair presentation does not require a policyholder to disclose information which the insurer knows or ought to know. This includes the knowledge of those who participate in the decision to take on the risk and what terms (i.e. underwriters), and also information which ought to have been passed on by the claims team. Insurers are required to make internal enquiries as to what is known within its business, as well as enquiries with the policyholder when information is provided which should put them on enquiry.
When does the duty of fair presentation apply?
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, the duty arises again.
Under current law, if a policyholder fails to make disclosure of a material fact, the insurer is entitled to avoid the policy from inception, as if the policy never existed. This is a draconian remedy with serious implications for insureds: they find themselves suddenly uninsured at the very time they need the insurance cover they thought they had paid for. In contrast, the Act sets out an array of remedies which are aimed to be more proportionate to any breach of the duty to make a fair presentation.
Can insurers still avoid the policy from inception?
Yes, if the policyholder has deliberately or recklessly breached the duty of fair presentation, the insurer may still avoid the policy. 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 whether 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.
Whilst these new remedies are more favourable to policyholders, the practical difference that they will have remains to be seen. It may be that insurers simply say that they were never have entered into the contract, in which case the policyholder will still be left without cover in a similar way to they are now, but the courts will need to test any such assertion very closely.
Under current law “basis clauses”, which elevate every pre-contractual representation to the status of a warranty, are permitted in non-consumer contracts. 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 occurring. 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, the two facts are not linked. However, under current law, insurers would be entitled to avoid all liability from the moment the alarm was not set.
Under the Act, this will not be the case:
- Basis clauses will be abolished. This does not prevent insurers and a policyholder agreeing that certain representations will constitute warranties, but it does prevent that being the default position, which is so potentially damaging to insureds. If a statement in a proposal is deemed to be a warranty then policyholders will be entitled to rely on their brokers to explain the effects of a warranty to them.
- 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. To counter this shift in favour of the policyholder, the Act provides that the burden in showing that the loss and the breach are not linked, is on the policyholder.
When does this apply?
The new law on warranties and terms not relevant to the actual loss only applies to business insurance contract 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, but varied afterwards.
Can I contract out of the Act?
With the exception of the abolishment of basis clauses, businesses can contract out of the Act. However, if they do so, insurers are required to take sufficient steps to bring such “contracting out clauses” to the policyholder’s attention, and the clauses must be written in clear terms. This does not detract from a broker’s obligation to explain these onerous terms to their policyholder clients.
The Act shifts burdens which were previously on the policyholder towards insurers and the imbalance between the parties is on its way to being addressed. Although the disclosure duties on policyholders are lessened, and the remedies for breach are now proportionate, policyholders should still do their best to avoid breaching their new duties. Practical ways to do this would be to:
- Start the risk assessment for new insurance (or a variation of existing insurance) in good time. Internal enquiries are likely to be needed and reasonable searches carried out. For large corporate policyholders, this could include much broader enquiries with a number of individuals in various locations.
- Collate information ready for disclosure in a manner that is reasonably clear and accessible. If you “data-dump” to insurers, this will not discharge your duty. Similarly, if you “data-dump” on your insurance broker, they are likely to push things back to you to be presented in a more accessible manner.
- Look out for any clauses which are expressly stated to be warranties in your insurance policy. Although basis clauses are being abolished, insurers can still make certain terms and representations warranties.