Posted in News on 31 Oct 2016
The Insurance Act 2015 is a move to modernise how insurers approach insurance policies. Coming into force on 12 August 2016, the new Act will seek to re-balance customers’ rights – and the remedies available when things go wrong.
The Act applies to commercial insurance policies, including contracts of reinsurance and retrocession, governed by the laws of England, Wales, Scotland and Northern Ireland entered into from 12th August onwards, but the duty of fair presentation under the Act also applies to any MTA (mid-term adjustment) after that date.
While full disclosure by clients as the insured party remains central to the new regime, it also compels insurers to be proactive about making distinctions between material and trivial facts. Importantly, what that does is give the insured more protection against claims that have been rejected by insurers on a technicality that isn’t relevant to the claim.
Alesco believes it will make for healthier, more intelligent insured/insurer relationships and will give the insured a stronger say at the moment of truth.
What are the facts?
Duty of Fair Presentation replaces the current Duty of Disclosure
Disclosure of circumstance and risk factors remain at the core of the new Act – of course insurers must still be confident about the level of risk they take on in any given commercial situation. However, there is a subtle but important shift of emphasis in the new legislation:
- The primary duty as an insured still includes disclosing material facts they know or ought to know.
- In the absence of full disclosure, clients need to disclose sufficient information that alerts – and under the legislation, compels – a sensible insurer to dig deeper. This places the onus on the insurer to be more proactive and not simply base policy terms on assumptions and a one-way flow of information.
- Effectively the Act says it’s unreasonable for an insurer to assume that a single policy purchaser in a client’s business has every single material fact to hand – possibly from a multitude of sources. Therefore the Act defines ‘ought to know’ as including senior management knowledge, the insurance buyer’s knowledge and other information held elsewhere in your organisation that could be established by a reasonable search. The definition of a reasonable search is as wide as needs to be to engage and consult with all people who have influence over the information that would need to be provided to any prudent insurer.
- Then there’s the presentation of the facts themselves: the information a client has to disclose must be done so in a way that gives a clear indication of risk and circumstance to a prudent insurer. This prevents disclosure submissions that are too brief – and submissions that are a blizzard of un-signposted data.
- The Act recognises that an insured need not disclose information known, or deemed to be known, by an insurer. So where you have had a relationship with an insurer for a while and it already holds information which relates to a client’s insurance cover, the Act recognises that the insurer will be taken to already know that information, where the information is readily available to the insurer.
In other words, it’s all about a balance of information that delivers a more rounded, realistic and relevant picture of risk. The insurers will have to take on partial responsibility for validation and assessment of the risks to be insured, which is good news for the insured.
The new insurer remedies for breach of disclosure
The remedies for breach of the duty of fair presentation will be more sensitive to the complexities that are faced running a business in the 21st century. After all, the original Marine Insurance Act dates back to 1906 and so much has changed in the way commerce operates. The remedies to the insurer will vary depending on the nature of the breach by the insured as outlined below:
- Deliberate or reckless breach: The insurer can walk away from the policy and keep premiums from the policy inception – but ONLY if it can prove a deliberate or reckless breach of fair presentation. The onus lies with the insurer to prove this, not the insured.
- Non-deliberate or non-reckless breach: There will be multiple remedies available to an insurer but the responsibility lies with the insurer to show what it would have done if it had known all of the material information:
- Insurer would not have written the risk on any terms: the insurer can void the policy but MUST refund all premiums from inception.
- Higher premium originally chargeable based on the breach data: if the insurer would have charged a higher premium, the insurer can then reduce any claim settlement accordingly.
- Application of new or different terms (e.g. conditions and exclusions, not premiums): the policy will be treated as having been entered into on those terms and claims will be settled on those terms.
We think these are really positive steps: it means extra, more proportionate remedies if a client finds itself in a breach situation.
Areas to watch out for: contracting out new terms
- Under the new legislation, insurers can actually contract out of most of the Act and introduce disadvantageous terms if they choose.
- While this may sound self-defeating from a client’s point of view as the insured, if the insurer chooses to do this, it must notify us as the broker – or the insured directly if dealing direct with the insurer.
- Any disadvantageous term applied has to be absolutely clear in its intent and effect - and both its application and explanation must be made plain before you take out the policy.
- Clients still have the opportunity to shop around before committing to the policy. So, we recommend that they factor in a little extra preparation time just in case there is a need to go back to square one.
How will this affect Warranties on policies?
Basis of Contract Clauses will be outlawed by the Act - so words along the lines of ‘this proposal forms the basis of and is incorporated into the contract’ can no longer be used by insurers.
- Warranties will only apply to the specific circumstances of the loss; so the fact that an intruder alarm is inoperative when a policy has an alarm warranty will no longer be a bar to making a flood claim for example.
- However a warranty will also be able to operate in a perhaps unexpectedly lateral way. What happens if a policy has an alarm warranty and the alarm is inoperative, an intruder gets in but sets the place on fire? The insurer could still argue that the breach of the warranty has contributed to the loss.
Warranties will become ‘suspensive’ conditions under the new Act…
- This means that while an insured is in breach then there is no cover for losses resulting from that particular breach.
- But once it is remedied then cover is reinstated from the date the breach is addressed - unlike under the Marine Insurance Act 1906 where a warranty cannot be remedied.
What can customers do now to align their business insurance needs to the new Act?
Allow plenty of time
- Don’t leave renewal duties to the last minute. We recommend that clients make sure there is plenty of time to discuss things in-house. Talk or raise issues with your insurance broker in good time so that you can ensure your duty of fair presentation is settled in a way that maximises the new protections embedded in the Act.
Extra latitude also demands extra precision
- The new legislation is deemed fair and that will likely mean it will be more rigidly interpreted. The insured need to make sure that they, with support from their insurance broker, prepare the required duty of fair presentation in as precise – and relevant - detail as possible.
Clients should take a step back and review their own business risk and ask:
- Are they providing enough detail? Are they providing the right detail? Do they need more input from senior management or other relevant parties?
- Are they consulting all and appropriate parts of the business where there’s risk – from staple exposures like public and employers’ liability and professional indemnity to more specialist areas like cyber risk, business interruption and beyond?
- How best do they collate and then present the information for an optimised fair presentation at renewal time or when there is a mid-term alteration?
- How do they demonstrate that they have run reasonable searches – and that those searches are authorised at the appropriate level within the business?
- How do they best check that they are making a fair presentation when it comes to specialist policies that protect individuals – such as directors’ and officers’ liability (D&O) policies or those covering negligence or malpractice?
What will Alesco be doing to assist our clients?
- Provide guidance on the Act itself, and the new duties it requires
- Review our clients’ current policies and the impact of the Act
- Review any renewal terms and the changes Insurers are making to their policy wordings to comply with the Act
- Draw to our clients’ attention any new terms and conditions from insurers, and identify where insurers are contracting out of the Act and what that will mean to our clients and theirs.
Would you like to talk to us about this more?
Call us or email us on:
T: 020 7204 8999
Alternatively, please contact your usual office or Account Executive.