Implications of the Insurance Act 2015 for commercial insureds

The Insurance Act 2015 received Royal Assent in February 2015 and is due to come into effect on 12 August 2016. 

The purpose of the Act is to update the current law (which is over 100 years old) to reflect the way in which the insurance market has evolved, the aim being to achieve a fair and balanced regime between insurers and insureds.

The Act includes fundamental changes to the approach which will need to be taken by insureds and insurers in presenting/assessing risks, and in addressing coverage issues post inception.  Are you ready?

Key changes

1. The pre-contract duty of disclosure has been replaced by a new duty of fair presentation;
2. The law on breach of warranty has been changed;
3. The law on fraudulent claims is clarified and remedies for such claims have been set out in the Act; and
4. Provisions for contracting out are included, subject to compliance with transparency requirements.  

New duty of fair presentation

The duty of disclosure is the cornerstone of the insured's duty of good faith to insurers.  Under the Act the core obligation of disclosure remains broadly similar.  The insured is still required to disclose information which would affect the judgment of a prudent insurer in deciding whether to accept a risk and, if so, on what terms.

However, the Act sets out whose knowledge on behalf of an insured is relevant in presenting a risk to insurers.  It also imposes obligations on insurers to make their own inquiries - a significant shift for insurers.  

The insured's new duty of disclosure

Under the Act, the insured will be required to either:

• disclose every material circumstance which the insured knows or ought to know; or
• give the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries.

This latter requirement imposes an obligation on insurers to make their own inquiries, an issue which will need to be front of mind for insurers in assessing risks. 

What constitutes a fair presentation?

The fair presentation should:

• be made in a manner which is reasonably clear and accessible to a prudent insurer; and
• ensure that (a) every material representation as to a matter of fact is substantially correct, and (b) every material representation as to a matter of expectation or belief is made in good faith. 

Exception: An insured does not need to disclose a circumstance if (a) it diminishes the risk (b) is known or ought to be known by the insurer (c) the insurer is presumed to know it or (d) it is something as to which the insurer waives information.

Knowledge of insured 

The Act clarifies what an insured knows or ought to know in terms of its duty of fair presentation. In that regard, a distinction is drawn between insureds who are "individuals" and those who are not (eg companies and organisations). 

• For individuals: knowledge includes what is known to (a) the individual and (b) one or more of the individuals who are responsible for the insured's insurance. 
• For organisations: knowledge is limited to what is known to one or more of the individuals who are (a) part of the insured's senior management (ie key decision makers) and (b) responsible for the insured's insurance. 

NB. the insured is deemed to know what should reasonably have been revealed by a reasonable search of information available to the insured. This includes information held within their organisation or by other parties (eg their broker).

Knowledge of insurer

• An insurer is only deemed to know something if it is known to one or more of the individuals who participate in the decision whether to take the risk on and, if so, on what terms.
• An insurer ought to know something, only if the relevant information has been passed to/is readily available to individuals participating in the decision to take on the risk. 

Remedies 

An insurer has a remedy for breach of duty of fair presentation by an insured if the insurer shows that, but for the breach, the insurer:

• would not have entered into a contract at all; or
• would have done so only on different terms.

Such breaches are known as "qualifying breaches" under the Act.

Remedies available to the insurer if an insured breaches the duty of fair presentation depend on whether or not the breach was deliberate or reckless.

Deliberate or reckless breach

• A qualifying breach is deliberate or reckless if the insured (a) knew that it was in breach of the duty of fair presentation or (b) did not care whether or not it was in breach of that duty.
• An insurer can avoid the policy and keep premiums paid.

Breach not deliberate or reckless 

• Where the insurer can prove that it would not have written the policy at all, the insurer can avoid the policy but must return the premiums paid. 
• If the insurer would have accepted the risk but on different terms, the contract is to be treated as if it included those terms.
• If the insurer would have entered into the contract but charged a higher premium, the insurer may reduce proportionately the amount to be paid on a claim. 

Duty of fair presentation practical tips

• The new regime imposes on commercial insureds and insurers various obligations relating to the presentation/assessment of the risk and therefore the risk presentation process will need to commence in good time prior to inception/renewal of the policy. For a commercial insured it is therefore imperative to liaise with your insurance broker on the information you need to collate some time before renewal.
• Information supplied by insureds should be provided in a manner that is reasonably clear and accessible, to allow the risk to be understood by insurers. Insurers will not accept “data dumps” by insureds presenting a risk, and therefore commercial insureds should take time to distinguish between material and trivial information. If in doubt about what to disclose, insureds should liaise with their brokers at an early stage.
• It should be made clear from the outset who at the commercial insured's business is responsible for the insurance, and who is considered to be part of the “senior management” for the purpose of disclosure. This could be recorded on the proposal form/policy documentation to limit the scope for dispute with your insurers.
• To comply with the duty of fair presentation commercial insureds will need to consider and consult with all parts of their business – this could include gathering information from international offices and foreign subsidiaries. Insureds will also have to disclose material held by third parties, which could include not just their brokers, but other parties such as subsidiaries, consultants, contractors, sub-consultants/contractors and other professionals or service providers.  Commercial insureds should consider these aspects carefully with their broker.  For example, if the insured is a large corporate with an international reach and numerous subsidiaries, it may be appropriate to try to agree with insurers (in advance of renewal of the policy) disclosure protocols which narrow the search parameters. This should assist in avoiding coverage issues.
• If the Insured's risk presentation is not clear, this may prompt insurers to make further inquiries and commercial insureds should bear in mind that such questions, and the responses received will be recorded on the risk file.

Warranties 

Basis of contract clauses

Some insurance proposal forms include "basis of contract" clauses, which have the effect of turning representations made by the insured into a warranty. This allows the insurer to avoid paying a claim if any statement on the proposal form is inaccurate (even if the statement is minor and immaterial).

Under the Act, "basis of contract" clauses are prohibited for business contracts. 

Remedies for breach of warranties & other terms

• Under the current law, a breach of warranty allows insurers to automatically discharge liability. However, this is no longer possible.  The liability of the insurer will be suspended until the breach is remedied.
• The insurer cannot exclude, limit or discharge its liability in respect of terms which reduce the risk of loss of a particular kind/location/time, if the insured can show that non-compliance with such terms should not have increased the risk of loss which occurred.   

Practical tips

• Commercial insureds should check that proposal forms submitted to them by insurers have been updated so that basis of contract clauses have been removed. If not, insureds should raise this with their insurer/broker to make sure they are removed before signing.
• Commercial insureds should keep records of when a warranty has been breached and when it has been remedied, and should take note of the warranties in the policy to ensure that key individuals within the business are aware of them.

Fraudulent claims 

Under the Act, if the insured makes a fraudulent claim:

• the insurer is not liable to pay the claim;
• the insurer may recover sums paid by the insurer to the insured in respect of the claim; and
• the insurer may by notice to the insured, treat the contract as having been terminated from the time of the fraudulent act. 

NB. if the insurer treats the contract as having been terminated, the insurer (a) can refuse all liability to the insured in respect of a relevant event* occurring after the time of the fraudulent act, and (b) retain any premiums paid by the insured under the contract.
* Relevant event refers to whatever gives rise to the insurer's liability under the contract (eg notification of a potential claim).

Practical tips

• Clearly few insureds intend to make fraudulent claims. For commercial insureds, it is worth checking that those individuals within the business who are providing the information to insurers understand the need for complete honesty, even where the information is sensitive or embarrassing, given the consequences of a fraudulent claim (ie no insurance cover).

Contracting out

• For business insurance contracts, the Act allows insurers to contract out of the new law and introduce less favourable terms to the insured (ie disadvantageous terms).
• To do this, the insurer must meet the following transparency requirements:
• The insurer must take sufficient steps to draw the disadvantageous term to the insured's attention, before the contract is entered into or the variation agreed; and
• The insurer must ensure that the disadvantageous term is clear and unambiguous as to its effect. 

NB. Insurers cannot contract out of the abolition of the "basis of contract" clause, and cannot include a clause with a similar effect.

Practical tips

• In the event an insurer wishes to contract out of any term of the Act, insureds should make sure that the term has been brought to their attention as early as possible. In any event, this must be before the contract or variation is concluded.
• If the term the insurer wishes to introduce is unclear or ambiguous to its effect, insureds should discuss the term with their insurer/broker before agreeing to them. 
• Commercial insureds should also seek advice from their insurance broker on whether a contracted out policy is the only option available to them. There may be circumstances in which the broker is able to procure better/less disadvantageous cover from an alternative insurer.