Insurance Act 2015 heralds key changes for insurance contracts

It represents a long overdue update to the law of insurance, one that significantly improves the position both when presenting the risk to insurers and also subsequently dealing with any claims that may arise.

In summary, the main changes are:

Presenting the Risk

Insurance policies are by their nature a contract of information, one in which the insurer is totally reliant on the information presented by the client. As a result, under the old law a client, when providing information about the potential risk being underwritten, owed the insurer a duty of utmost good faith to supply all relevant information.

To comply with this, and to ensure nothing was possibly missed, often resulted in huge amounts of data being dumped on the insurer.

The above duty has been changed to a new duty of Fair Presentation. That is:

• Any prospective client must disclose every material circumstance which it knows, or ought to know; or failing that, provide the insurer with sufficient information to put a prudent insurer on notice that it needs to make further enquiries to reveal those material circumstances.
• The prospective client must now disclose information in a reasonable, clear and accessible manner to the insurer, one in which data dumping does not occur, but rather relevant information is signposted to the insurer.
• Every statement of fact must be substantially correct and, similarly, each statement of opinion and belief must be made in good faith.
• However, a prospective client need not disclose a circumstance if it diminishes the risk, or is something the insurer knows or ought to have known, or can be presumed to know, or where the Insurer has waived the need for this information.
• A business will be taken to know what is known by its senior management and individuals responsible for insurance. This may include relevant senior managers in the business, or employees who may be tasked with collecting relevant information.
• A prospective client also ‘ought to know’ what a reasonable search would have revealed.

What does this mean?

In the past, non-compliance with the duty of utmost good faith entitled insurers to avoid the policy from its outset.

Under the new law, the insurer’s rights have softened to some degree and a more proportionate regime is applied. That is:

• Where non-disclosure of a material fact is deliberate or reckless; if the insurer may avoid the policy i.e. treat as if it never existed, returning any premiums paid and to recovering any claims that have been paid.
• Where the disclosure is not wilful or reckless; if the insurer can prove it would not have entered into the policy, it may again avoid the policy and apply the remedies above. However, if the insurer would have entered into the policy but on different terms or with a higher premium, so the insurer can apply any terms it would have imposed retrospectively i.e. enforcing larger excesses or reducing any pay-out to reflect the higher premium that would have been charged (so a £300k premium instead of a £200k premium would result in the claim being reduced by 33%).

In practical terms, compliance with the new duty should mean that you ensure:

1. The papers presented to the insurer are properly structured/indexed including an explanatory narrative where necessary;

2. That you maintain a documentary audit trail so that if necessary you can show who conducted a reasonable search and how it was done.

Warranties

Under the old law, a breach of warranty by an insured discharged the insurer in full from the date of breach, whether the breach caused the loss in question or not.

The effect of this remedy was tempered to some degree by the courts in how they construed warranties, but nevertheless insurers had the benefit of a very draconian remedy, one often made worse by the use of ‘Basis of Contract’ clauses designed to convert all the insured’s statements on the proposal form into warranties.

Under the new law, warranties are now to be treated as ‘suspensive’ in effect only, so that if a breach is remedied before the loss, policy cover will remain in place.

An insurer also cannot rely on a breach, or a Condition Precedent in the policy, if it can be shown that this did not increase the risk of loss to the insurer e.g. if all ground floor access doors are subject to a 5 lock bolts warranty that is breached, but intruders access through a 1st floor window. Finally, Basis of Contract clauses are abolished.

It is important therefore that an insured party keeps warranties under review and retains documents to show any breach has been remedied.

Fraudulent Claims

The new Act clarifies the remedies available to insurers for fraudulent claims. An insurer in receipt of a fraudulent claim may refuse to pay the claim and recover any sums that have already been paid in respect of the claim.

The insured may also treat the policy as at an end and retain any premium paid. However, insurers will remain liable for losses suffered before the fraudulent act.

Having received the above clarification, many insurers are now defining what they regard as fraudulent, this typically involving: the submission of a false or exaggerated claim, the submission of false or forged documents in support of a claim, suppressing information that would entitle the insurer to refuse the claim, or not updating the insurer when having made a genuine claim, it transpires no loss is actually suffered.

Contracting Out

The new Act is to be treated as the default regime, but it does allow insurers to contract out of the new Act in business insurance contracts.

However, an insurer can only do so if it ensures any disadvantageous term is brought to the insured’s attention and any such term is clear and unambiguous.

To what extent insurers do seek to contract out of the new act, save in respect of particular bespoke contracts, is unclear. Indeed, given the new regime was only implemented after a prolonged period of discussion with the industry and to a large degree reflects what has been the practices of many good insurers for some time, it is expected that instances of contracting out will be few and far between.

Late payment of claims

One glaring deficiency under the Insurance Act 2015 was the failure to address the problem of late payment of claims by insurers. This is therefore being addressed by the Enterprise Act 2016, which comes into effect in early May 2017.

Under this statute, a term will be implied into each insurance policy requiring insurers to pay claims within a reasonable time.

What amounts to ‘reasonable’ will depend on the facts of each case, but factors identified will include: the size and complexity of the claim, compliance with statutory rules and guidance, plus factors outside the insurer’s control.

Any breach by insurers will entitle the insured to recover damages from the insurer resulting from the late payment.

How can I find out more?

For further advice and guidance on the issues raised in this update, please contact Tim Toomey.