By: Gibbs Laidler
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The Insurance Act 2015
The Insurance Act 2015 modernises the transaction of insurance by replacing key parts of the Marine Insurance Act 1906. The overall intention is to improve the balance of interests between you and insurers. It includes new provisions relating to disclosure, warranties and other contractual terms and clarification of insurers’ remedies for breaches by you of their requirements.
The Act comes into force from 12th August 2016.
The duty of fair representation
The Act provides a clearer legal framework in relation to non-consumer insurance contracts by replacing the duty of disclosure under the Marine Insurance Act 1906 with a new duty to make a fair presentation of the risk.
Before entering into a contract of insurance, you must still disclose every material circumstance which you know or ought to know. Failing that, you need to disclose sufficient information that alerts – and under the legislation compels – a sensible insurer to dig deeper. This places the onus on your insurer to be more proactive to make further enquiries for the purpose of revealing those material circumstances, and not simply base your policy terms on assumptions and a one-way flow of information.
This helps to address concerns that insurers tend to underwrite once a claim has occurred; but it is not intended to give rise to a two-step process where you can give a brief description of the risk and then the insurer has to ask relevant questions. Any material circumstances that a ‘reasonable search’ would have revealed must be disclosed. Every representation as to a matter of fact must be substantially correct and every material representation as to a matter of expectation or belief must be made in good faith.
You will be deemed to have the knowledge of anyone who is a part of your organisation’s senior management or who is responsible for your insurance.
Senior management means anyone playing a significant role in the making of decisions about how your business activities are managed or organised.
Someone is responsible for the insured’s insurance if they participate in the process of procuring your insurance, whether the individual does so your employee or agent, as an employee of your agent, or in any other capacity.
The information must be presented in a way which would be reasonably clear and accessible to a prudent insurer. This requirement may help to deter submissions that are either too brief, or a blizzard of un-signposted data. Representations need not be contained in only one document or presentation and may be withdrawn or corrected before the contract of insurance is entered into.
Insurers are presumed to know things which are common knowledge, and things which an insurer offering insurance of the class in question or in the field of activity in question would reasonably be expected to know in the ordinary course of business.
This could include anything from public information and ‘big data’ to details of previous claims involving the client. Insurers will be considered to know something only if it is known or ought to have been known to one or more of the individuals who participate on behalf of the insurer in the decision whether to take the risk (including employees and underwriting agents) and, if so, on what terms.
You should not therefore make sweeping assumptions about what the underwriter might already know. In providing information for a risk presentation it is probably safest to assume that the insurers have little or no prior knowledge of the risk.
Overall, though, it’s about balance of information that delivers a more rounded, realistic and relevant picture of risk. Your insurer will have to take on partial responsibility for validation and assessment – and that can only be helpful for you.
Breach of warranty
The new remedies where there is a disclosure breach will become much more sensitive to the complexities you face today. After all, the original Marine Insurance Act dates back to 1906 and so much has changed since then. Currently, non-compliance with a warranty under your policy invalidates the policy from the time of the breach, even if the warranty bears no relation to the risk of loss. Under the new Act, insurers remain at liberty to apply warranties but a breach by the insured will not automatically terminate the policy; rather, it will lead to suspension of liability. If the breach is remedied, the insurance will automatically be reinstated.
Furthermore, insurers will not be able to avoid liability for non-compliance with a warranty or any other term of the contract (other than a term defining the risk as a whole) if you can show that non-compliance could not have increased the risk of that loss occurring in the same circumstances. For example, where a requirement in a policy to set an intruder alarm is not complied with and the insured suffers a loss caused by lightning, the insurer will not be able to rely on the insured’s non-compliance to avoid liability for the lightning damage.
A breach of warranty can still lead to claims being refused and some breaches can never be remedied. It therefore remains essential that when we draw warranties to your attention that they must be fully complied with.
Remedies for fraud and misrepresentation
The Act sets out remedies which insurers can apply for breach of the duty of ‘fair representation’ and in the event that an insured commits fraud. The Act provides a range of proportionate remedies depending on the nature of the breach. Such remedies are available if the insurer would not have entered into the insurance contract had the breach not occurred, or would have done so on different terms.
Where the breach is deliberate or reckless the insurer will be able to avoid the contract and keep any premiums, but in other circumstances the remedy may involve avoiding the contract but returning any premiums, applying different terms, or reducing cover proportionately.
Insurers will need to be in a position to prove how they would have acted differently if the breach had not occurred.
Insurers can contract out of the Act and introduce more disadvantageous terms. If an insurer chooses to do this, they must notify the client’s broker, and the Act also requires that the insurer must check that the broker has notified the client of any such terms
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.
Contracting out might be an option where the risk is otherwise difficult or impossible to place, or when cheaper premiums are essential, but broker and client must both be aware of the any changed requirements prior to conclusion of any contract.