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Insurance News

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The 2015 Insurance Act

Published: 12/10/2016

The 2015 Insurance Act came into force 12 August 2016 and applies to all contracts of insurance and variations to existing contracts of insurance made from that date.

The Act is the result of a joint review by the Law Commission and Scottish Law Commission into insurance law. It has brought about important changes to the laws concerning disclosure in non-consumer (e.g. commercial) insurance contracts; warranties and other contractual terms. A key aim of the Act is to ensure better exchange of information between insurers, brokers and customers to reduce the number of disputes and avoid disruption for all parties. It also sets out insurers' remedies for fraudulent claims.

At a glance the Act deals with:

  • Duty of disclosure, both before a contract incepts and when amended
  • Warranties (including basis of contract clauses)
  • Terms not relevant to the actual loss
  • Fraudulent claims by insureds
  • Good faith
  • Amendments to the Third Parties (Rights Against Insurers) Act 2010

It is worth noting that many insurers have already incorporated its changes into their practice and policies prior to this date. And as your insurance broker, Flint will provide detailed advice as necessary; we too have examined our working practice in accordance with these amends. However, it includes specific responsibilities for policy holders, including company executives of which you need to be aware

Duty of Fair Presentation

Insureds were always required to disclose every circumstance that they knew or ought to know about a particular risk in order for the insurer to assess and underwrite. This required at least some degree of prediction by the client and broker as to what a prudent insurer would be influenced by.

The Act brings much needed clarity around what information the purchaser of insurance must provide for the insurer, which of their staff is responsible for doing so and to whom they have to provide it.

This is called a 'duty of fair presentation' and needs to include:

  • Every matter which they know, or ought to know, that would influence the judgement of an insurer in deciding whether to insure the risk and on what terms (very similar to the current position); or
  • Sufficient information to put an insurer on notice that it needs to make further enquiries about potentially material circumstances.

Disclosure needs to reasonably clear and accessible to a prudent insurer.

No 'data dumping'

Important information cannot be hidden within a mass of other material

A 'fair presentation' does not have to be made in a single document or oral presentation. The underwriter may need to ask questions to draw out additional information via a series of exchanges. All information that has been provided to the insurer by the time the contract is entered into will therefore form part of the presentation.

Who's knowledge?

For large corporate firms, when deciding what the insured knows the Act takes this as knowledge of the senior management (board of directors, but also those who play a significant role in decision making with regard to the company's activities) and those responsible for arranging the insurance cover.

What knowledge?

An insured must carry out a reasonable search for information, in line with the size, nature and complexity of the business.

The insured will be deemed to know what 'should reasonably have been revealed by a reasonable search' (section 4(6) of the Act. This might include information held by non-senior management (who perhaps perform a managerial role), where it would have been reasonable for the insured to seek out this information. Relevant information held by any other person (even outside of the company, such as an agent or beneficiaries of cover) should be given to the insured via a reasonable search.

As under the previous law, knowledge acquired by the broker in the course of acting for your company will be deemed to be your knowledge and will be disclosable.

Where the duty to make a fair presentation has been breached – the Act introduces an entirely new system of proportionate remedies.

Remedies for Material Non-Disclosure or Misrepresentation

Previously, an insurer was able to refuse all claims under an insurance contract if the pre-contractual disclosure duty was breached, even if the breach was committed by the broker. The 2015 Act has now introduced a range of proportionate remedies, applicable depending on the scale of the breach and the state of mind of the insurer.

  • Deliberate or reckless breach: the insurer will be able to avoid the contract and keep any premiums;
  • Breach is neither deliberate nor reckless and the insurer would not have entered into the contract: the insurer will be able to avoid the contract but must return any premiums;
  • Breach is neither deliberate nor reckless and the insurer would have entered into the contract on different terms, other than terms relating to premium: the insurer will be able to treat the contract as if those different terms apply – for example, any additional exclusions that would have been imposed;
  • Breach is neither deliberate nor reckless and the insurer would have entered into the contract for a higher premium: the insurer will be able to reduce the cover to which the insured is entitled on a proportionate basis.

To bring an action for relief for non-disclosure, insurers will need to be able to prove how they would have acted differently if the breach had not occurred.

Warranties

Previously, breach of a warranty in an insurance contract automatically discharged the insurer of liability from all risks covered by the policy from that point onwards, even if the breach was remedied.

The Act has now banned 'basis of the contract' clauses from commercial* insurance contracts. Breaches of warranty can now be cured; all warranties will become ‘suspensive conditions’. This means that cover is suspended for the period during which the warranty is not complied with. Furthermore, this means that an insurer will be liable for losses that take place after a breach of warranty has been remedied, assuming that a remedy is possible.

e.g. if an insured breaches a warranty that roof structures will be inspected every six months, that breach will be ‘remedied’ if the roof is inspected after seven months, and so coverage will be suspended for only one month in such circumstances. A loss resulting from a cause that would have been prevented if an inspection had taken place will not be covered if it occurred in that one month.

Remedies for fraudulent claims by policyholders: consumer and non-consumer contracts

Previously, in the event of fraud, an insured party would forfeit the whole claim and insurers could also avoid the whole contract. Part 4 of the 2015 Act now sets out a clear statement of insurers’ remedies in the event of fraudulent claims brought by policyholders. Insurers:

  • Will not be liable to pay the fraudulent claim;
  • May recover any sums paid to the insured in respect of the fraudulent claim; and
  • May, by notice, treat the policy as terminated with effect from the fraudulent act and retain all premiums paid. Previous valid claims are unaffected.

Duty of utmost good faith: consumer and non-consumer contracts

Previously, either party could avoid the insurance contract if the other failed to act in accordance with ‘utmost good faith’. The 2015 Act has now removed avoidance of contract as a remedy for breach of this duty, and abolished any parts of legislation prescribing this as a remedy.

Conclusion

These changes are designed to remove outdated legislation and bring rules for insurance in line with common law and should therefore be good for insurance.

It reinforces the premise that a policy is a legal contract and therefore not to be taken lightly. It also highlights that as a customer you are paying for the specific terms of that contract and should not be seeking cover at simply the cheapest premium.

At Flint this does not reflect a huge change in our practice; we have always put time and energy into collecting full information to be presented to insurers. We continue to be here for advice and work together with our clients to ensure good practice at all times.

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