Insurance Act 2015 – Changes to the insurance landscape

August 15th 2016

The Insurance Act 2015 came into effect from 12th August 2016 and introduced a new regime for the transaction of all general insurance contracts in the UK. Replacing the 1906 Marine Insurance Act, the aim is to bring more balance into the relationship between insurers and their customers.

The Act results in changes that alter the way insurers, intermediaries and their clients need to approach the arrangement of insurance, as well as making some fundamental changes to how breaches of warranties and controversial claims are managed. While many of the changes might appear arcane from the perspective of the insurance buying community, there is no doubt that the Insurance Act 2015 will result in changes to the ways in which insurers and intermediaries operate, and subsequent case law will give rise to a changed insurance landscape.

The principal areas of change relate to the standard and type of information that needs to be provided, and who is deemed to have that knowledge. In addition the Act makes fundamental changes to the rules in respect of what happens when things go wrong and what remedies are open to the insurer following a breach of warranty. The Act allows insurers to contract out of these terms, for example in complex or unique circumstances, but only if the terms are made clear to the customer.

As land agents and valuers, the Act places clear responsibilities on you, when transacting insurance on behalf of your clients.

 

The Duty of Fair Presentation

The 2015 Act introduces a Duty of Fair Presentation, which applies at inception of the policy, each subsequent renewal and at any change during the period of insurance. This may seem to be a small change from the previous regime as the duty to disclose information to an insurer has always been essential to the insurance process.

Indeed any text book will emphasise the principle of Uberrima Fides (Utmost Good Faith) as being the core of the relationship between insurers and their customers. Prior to the 2015 Act, the duty of disclosure meant that the customer had a duty to disclose all material facts. A material fact is one which would affect the judgement of a prudent insurer in deciding whether to provide cover for a risk, and, if so, on what terms.

However, the 2015 Act has brought clarity to the question of what information a commercial customer, or an insurer, or indeed an intermediary should provide. Importantly, the Duty of Fair Presentation does not apply to consumer insurance contracts, but only to non-consumer contracts (i.e. commercial ones). Consumer insurance is defined as insurance bought by individuals “wholly or mainly for purposes unrelated to their trade, business or profession”. Disclosure for consumer insurance is dealt with under the Consumer Insurance (Disclosure and Presentations) Act 2012, under which an insurer must enquire for specific information, and a consumer has a duty to disclose the answers without being careless or reckless, or make deliberate omissions.

For non-consumer insurance the Act sets out who should have the relevant knowledge and how it should be represented. The customer’s duty is still to disclose every circumstance material to the risk that they either know or should know, or to disclose enough information to put a prudent insurer on notice that it needs to make further enquiries. Where the Act departs from the 1906 Act is to define who is deemed to hold the appropriate knowledge. This would be the senior management of a business and the person responsible for arranging insurance. It includes insurance brokers who are part of the insurance chain, and agents to the extent that they have knowledge specific to the client, i.e. excluding knowledge acquired through professional contacts with third parties. Knowledge that could be obtained through reasonable research is also included.

From the insurer’s perspective, they are expected to already hold information about the specific customer (claims details or survey reports) or, more generally, about their type and class of business, for example the typical risks associated with particular processes. In addition the insurer is assumed to have information that is deemed to be common knowledge.

Fair Presentation also means that the customer and their advisors must put forward the relevant information about the risk in a clear and accessible manner. In other words, it is not acceptable to either dump large quantities of unsorted data on the insurer, or to provide only skeleton information. In the first instance the insurer may not be able to establish what material information is lurking in the mass of data, and in the latter, the customer cannot rely on an assumption that they have put the insurer on notice to make further enquiry. Overall the aim is to make the responsibilities of the insurer and their customer clear.

 

Warranties, breaches and remedies

The Act’s quest for balance between parties is reflected in changes where there has been a failure to disclose information, or if there has been a breach of a warranty. Prior to the 2015 Act, an insurer was able to void a policy where the provision of all material facts was warranted in the policy – even if the breach was not related to a potential claim. Further, the ability to void the policy affected not only the claim under discussion, but also any prior claim during the insurance period, even if the event occurred at a different location.

This draconian state of affairs has been brought into balance by the 2015 Act. Instead the remedies for material non-disclosure or misrepresentation have been linked to the nature of the failure.

If the non-disclosure has been as a result of a deliberate or reckless attempt to obscure or omit relevant facts the insurer can avoid the contract, refuse all claims and does not need to return the premium to the customer.

However, if the breach was not reckless, or was non-deliberate, the Act allows for proportionate remedies that more accurately reflect the circumstances. The aim of the Act is to put both parties in the same position that they would have been, but for the breach.

 

There are three categories of such breaches:

  • Firstly, where the insurer would not have entered into the contract had it been aware of the now discovered circumstances. In this scenario, the insurer may refuse to pay any claim and avoid the contract, but, should it do so, it must return the premium paid.
  • Secondly, where it is clear that the insurer would still have provided cover, but that the terms would have been different (other than in respect of premium). Under the Act, the policy will continue, with those revised terms implied into the contract. This is the case even if the customer would not have accepted such terms at the outset.
  • Thirdly, if a claim arises where the insurer would have accepted the risk, but at a higher premium, the insurer would have the right to reduce the quantum of the settlement in the same proportion as the actual and the revised premiums. This is similar to the calculation applied for average in the event of underinsurance:

Settlement     =   Total Claim    x    Charged premium ÷  Revised premium

The Act also introduces the ability for a breached warranty or condition to suspend an insurer’s liability until such time as the breach has been put right. Previously, a breach of warranty led to automatic avoidance of the policy. Now, if a warranty, for example an inspection warranty, has not been complied with, then cover is suspended, but only until the inspection regime has been reinstated. Further, the Act confirms that an insurer can only rely on failed warranty or condition in turning down a claim if the loss was directly influenced by that failure.

The Insurance Act 2015 has redrawn the relationship between insurer, customer and intermediary to produce a fairer and more balanced regime. However, it is likely that the Act will be tested in case law sooner rather than later and thus all parties to the contract of insurance need to ensure that they have sensible procedures that reflect this new environment. The intermediary’s role has changed, and there is a need for third parties transacting insurance on behalf of their client to ensure that the information they provide is sufficient to facilitate fair representation. This may require detailed and accurate enquiry from the client, and careful recording of this information is of utmost importance.

 

William Barne

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