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Insurance Act

On 12th August 2016 the Insurance Act came into force. The Act applies to commercial insurance only and incorporates some significant changes to the law in relation to policyholder disclosure and insurer remedies for non disclosure.

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How these changes affect you:

The Law Commission created the legislation with the intention of trying to reduce the risk of inaccurate disclosure leading to contested insurance claims and to create agreed remedies for insurers in the event of non disclosure. The Act also reduces the extent to which insurers can invoke policy “warranties” if the breach of warranty is not material to a claim.

We have created a guide for our clients, the guide includes the following details:

The act requires that insurers are presented with a “Fair presentation of risk”

  • What does a “Fair presentation of risk” look like?
  • What is a “Material circumstance”?
  • The fair presentation of risk has to represent the knowledge of your “senior management”, who are they likely to be?
  • What is a “reasonable search” for material information?
  • Information has to be “reasonably clear and accessible”, what does this mean?

Insurer remedies for failure to fairly present the risk vary depending upon the nature of the breach as follows:

  • Deliberate or reckless withholding of information.
  • Accidental non disclosure in circumstances where the insurer would otherwise have refused to quote.
  • Accidental non disclosure in circumstances where the insurer would otherwise have quoted different terms.

Breach of Warranty

  • Under the new Act the circumstances under which an insurer can refuse to pay a claim for breach of warranty are restricted.

Fraud

  • Under the new Act insurers can terminate a policy from the date of a fraudulent claim, but must cover claims arising from before the fraudulent act.

Opt Out

  • Insurers have an option to opt out of the Act on a case by case basis. We are expecting this to be an approach adopted by some of the Lloyds market. We have also had early indications from some composite insurers where they intend to adopt a partial opt out in order to provide greater benefit to policyholders.

Guide to the Insurance Act

As a result of a recent act of parliament, the Insurance Act 2015 (the “Act”), significant changes have been made to the law in relation to commercial insurance. The Act has a significant impact on the operation of your insurance policy, including your disclosure obligations towards insurers, warranties and fraud. The Act also impacts upon the remedies insurers may adopt in the event of your obligations not being complied with.
The purpose of this note is to highlight some of the key changes introduced by the Act and to explain the steps you need to take to comply with it.

The Act introduces some new obligations, which are coupled with strict remedies for insurers. We therefore recommend that you read this guide carefully. If you have any queries in relation to the content of this guide, please get in touch with your usual contact at Walmsleys who will be happy to explain your obligations.

What policies are caught by the Act and from when does it apply?

The Act applies to all non-consumer insurance policies commencing on or after 12 August 2016. The Act also applies to policies commencing before 12 August 2016 but whose terms are varied after that date. However, it is important to note that many insurers intend to adopt the new regime in advance of 12 August 2016. We will advise you where an insurer intends to do so.

Duty of Fair Presentation

The Act imposes an obligation on all policyholders to “make a fair presentation of the risk” prior to the policy commencing. A fair presentation is one that discloses, in a manner that is reasonably clear and accessible, every material circumstance which is known or ought to be known by the policyholder’s senior management, or those responsible for arranging insurance, following a reasonable search.

We explore below the meaning of the key components of this obligation:

“material circumstance” – this is anything which would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms. There is no specific limitation on what constitutes a material circumstance, but it would typically include any factors pertaining to the risk to be insured including prior claims, your financial history, convictions of key personnel and your business activities. You are not obliged to disclose something that reduces the risk to be insured.

“known or ought to be known” – you are obliged to disclose material circumstances that you actually know but also those that you ought to know. This means that if the information is readily available to you but you fail to disclose it owing to either a lack of enquiry or by “turning a blind eye”, you will have breached your duty to fairly present the risk. Equally, any relevant knowledge we have as your broker must also be presented to insurers. We must therefore make you aware that all information you provide to us must form part of the presentation of the risk, if relevant. This includes any information you provide to us in a social or informal setting.

“senior management” – your knowledge, for the purposes of the Act, includes (but is not limited to) that of all senior management. Senior management includes anyone who has a key role in making decisions on behalf of the business, even if they do not sit on the board or if they do not officially have a management role.

“reasonable search” – you are obliged to undertake a reasonable search. What is reasonable will depend upon the nature of your business and the policy you are purchasing. We will provide you with advice in each case as to what might be reasonable. When considering the extent of your search, you should take into account the nature of the insurance you wish to purchase and consider who within your organisation is best placed to provide relevant information.

“reasonably clear and accessible” – all information must be provided to insurers in a reasonably clear and accessible manner. This means that information must be provided in an unambiguous way. The new rules also prevent policyholders from concealing key facts amongst large volumes of less relevant or immaterial information.

What does this mean in practice?

The amount of information to be provided will depend upon the nature of the risk and the insurance you are purchasing. We will guide you through that process, although you should take the time to carefully identify who within your business is best placed to identify any information that may be relevant to insurers when considering the particular risk and type of policy.

What happens if you do not fairly present the risk?

If you fail to comply with your obligations, insurers have differing remedies depending upon the nature of the breach and what would have happened had you fairly presented the risk.

If you deliberately or recklessly fail to present the risk fairly (e.g. you deliberately withhold key information or fail to take any care when presenting the information), insurers are entitled to avoid the policy and retain all premiums. In other words, insurers can treat the policy as if it never existed, which would result in no claims being paid. You could also be required to repay any claims payments that have already been made.

If your failure to present the risk fairly was neither deliberate nor reckless (e.g. it was a simple oversight on your part), insurers may still avoid the policy if they can demonstrate that the policy would not have been provided if you had represented the risk fairly. In this scenario, insurers would be required to repay the policy premium to you, although they would be required to make no payment in respect of claims and you would be required to repay any claims payments already made.

If insurers are able to demonstrate that they would have provided the policy but on different terms, the policy would be treated as if those terms had applied from the beginning. Those additional terms could be, for example, increased excesses or additional exclusions. Those additional terms may result in no payment being made in respect of any particular claim (e.g. if insurers would have excluded that particular activity or imposed additional conditions which you did not comply with).

If insurers would have provided the policy but charged an increased premium, the amount insurers will pay will be reduced by proportion to the difference between the premium actually paid and the premium that would have been charged had the risk been fairly presented. By way of example, if a fair presentation would have resulted in the premium doubling, any claims payment under the policy will be halved. This is an extremely draconian policy remedy and therefore it is essential that you present the risk fairly. This remedy applies regardless of whether there is any connection between the shortcoming in the presentation of the risk and the subject matter of the claim.

Warranties

A warranty in an insurance contract is a promise by the policyholder to the insurer to do (or not do) something or a promise to maintain a certain state of affairs. Under the old regime, insurers can refuse to pay a claim if the policyholder breaches a warranty, even if the breach is unconnected with the loss or if the breach is remedied before the loss occurs. Insurers routinely use a ‘basis of contract’ clause to convert all presentations and information given by policyholders to insurers into warranties. This enables insurers to refuse to pay claims if any aspect of the presentation of a risk is inaccurate.

From August 2016, the position will be fairer for policyholders. Firstly, insurers will no longer be able to rely on basis of contract clauses to convert all representations into warranties. Furthermore, in the event of a breach of warranty, insurers will only be allowed to refuse to pay a claim where the loss arose during a period of non-compliance. In other words, if you breach a warranty (e.g. by failing to set a fire alarm), cover will be re-instated as soon as you re-establish compliance. Cover is simply suspended during periods of non-compliance. Finally, if the warranty is designed to reduce the risk of a certain type of loss or a loss at a certain place or time and the policyholder can demonstrate that the breach could not have increased the risk of that loss occurring, insurers must still pay the claim.

Fraud

Historically, in the event of a fraudulent claim being made against the policy, all cover under the policy ceased and insurers were entitled to retain the premium. The policyholder would also have to repay any claims payments already made. However, under the new regime, insurers will be entitled to terminate the policy from the date of a fraudulent claim or act, but must still cover claims arising from incidents occurring before the fraudulent act.

Important information about Fair Representation and your insurance

Fair Representation

It is your responsibility to provide complete and accurate information to insurers when you take out your insurance policy, throughout the life of your policy, and when you renew your insurance.

Duty of Fair Representation VIEW DETAILS >

You are reminded that it is an offence under the Road Traffic Act to make any false statements or withhold any relevant information to obtain a Certificate of Motor Insurance.

Please note that under the Rehabilitation of Offenders Act 1974 you are not required to disclose convictions regarded as “Spent”.

Examples of formation that should be included when providing a Fair Representation of your business:-

  • the fact that the structure of your Company has changed, or that you have established close links with another Company
  • the fact that you have entered into or are you likely to enter into any form of Creditor’s Agreement or IVA (Individual Voluntary Arrangement)
  • the fact that your firm has been prosecuted under the Health & Safety at Work Act or received a notice of intended prosecution, or an improvement or prohibition order has been served

Examples Continued…

  • the fact that any director or partner has ever;
    o been convicted of or a prosecution is pending for any offence involving arson, criminal deception, fraud, forgery, theft, robbery, handling stolen goods, any crime of violence or any other offence against property
    o been declared bankrupt or been a director of any company that went into administration or liquidation
    o had any County Court judgments or has arrangements with creditors outstanding
  • the fact that you work at hazardous locations or with hazardous materials
  • changes to processes, or use or practice in the storage of hazardous goods
  • the fact that goods may be fragile or of high value, or the fact that goods are second hand
  • information about geographical trading areas
  • information about storage premises and storage periods
  • the fact that another insurer has refused to renew a policy of the type being negotiated
  • your previous claims experience
  • the fact that you have experienced a number of incidents which were unclaimed for
  • changes to your business activities, acquisition of new premises or the alteration or disposal of existing ones
  • alterations to the values at risk, e.g. to buildings or contents
  • installation, alteration or disconnection of fire/security systems, sprinklers and water supply
  • any newly acquired dependency on customers or suppliers
  • amendments to the pattern of overseas trading, especially in North America
  • details of any contractual liabilities which you accept or hold harmless agreements into which you might consider entering
  • any driving offences incurred, particularly involving drink/driving, dangerous driving or any offence, which results or would result in endorsement of the driving licence