In February 2015, Royal Assent was given to the Insurance Act 2015 – the most significant statutory change to UK commercial insurance law in over 100 years. The following bullet point guide, created by NDML, pin points the key details that you need to know:
- What is the timeframe?
The Act comes into effect in August 2016. Given the lead time for the placement process – many months on larger accounts – both insurers and insureds will need to prepare for the changes in good time before then.
- What contracts will be affected?
Once the Act takes effect it will apply to all commercial insurance and reinsurance placements, renewals and endorsements. Certain provisions also have (limited) application to consumer contracts. Some in the insurance market may, in addition, want to ‘contract in’ to the Act before it comes in to effect. This ought to be done with care and with appropriate legal advice, to minimise the risk of contractual uncertainty.
- Can parties agree not to apply the new law?
Yes, for non-consumer contracts regarding the key provisions of the Act – but only if any terms less favourable to the insured than the terms of the Act are sufficiently drawn to the insured’s attention and are clear and unambiguous in effect.
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.
- 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 18 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).
- Can risk managers 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 fire) 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.
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.
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.