On the 12th August 2016 a new piece of legislation came into force affecting all Commercial Insurance policies (Insurance Act 2015) requiring businesses to make fundamental changes to ensure that their insurance policies are effective and that their claims are paid in full.
The Act transforms Commercial Insurance Law in the UK and is the most significant reform to insurance contract law for over a hundred years.
Why is Commercial Insurance Law being changed?
The Act is seeking to create a new and fairer balance between insured and insurer. Whilst accurate disclosure by the insured remains central to the new law, the Act provides for a more reasonable approach for insurers to follow in the event of a breach of policy requirements and/or duty to present information to the insurer. This is intended to give the insured more protection in the event that an insurer seeks to reject a claim and generally make it easier for businesses to get their claim paid by insurers.
The intention is for businesses to get fairer outcomes in the event of a claim but only if they demonstrate an adequate approach to disclosing information about their risk to insurers before the insurance is agreed.
What changes does the new Act introduce?
Under the old law, policyholders had a duty to disclose “all material facts” and an insurer could avoid a policy entirely if there had been a non-disclosure of relevant information – this means that claims will not be paid.
Under the current law, if the insurer believes that there has not been a “fair presentation”, it may now have to deal with any claims, but this will depend on the seriousness of the breach of the duty of disclosure.
If the non-disclosure is:
- deliberate or reckless, the insurer can still avoid the policy, refuse to deal with claims, and keep the premium.
- innocent, but the insurer would not have taken the risk if it knew the true facts, it can still avoid the policy and refuse to deal with claims, but it must return the premium.
- innocent, and the insurer would have provided cover, but at different terms, it will pay the claim, but make adjustments in proportion to the degree of breach.
It is therefore essential that the insured provides a fair presentation when making any request for insurance.
There are 3 key elements that constitute a fair presentation:
- Complete and Accurate – the insured must fully disclose all material information that could influence the insurer’s decision to offer cover, or at what terms. The insured must highlight unusual activities or known areas of concern that could adversely affect the business.
- Clear and Accessible – information must be presented in a manner that is reasonably clear and accessible. Dumping of large amounts of data without drawing the attention of the underwriter to key points is now unacceptable.
- Reasonable Search – the insured company must provide information which it ought to know following a “reasonable search” of information available to it. This means that it is not just information known to the person within the organisation who is responsible for placing the insurance, but also other members of “senior management” who play significant roles in the company’s activities and decision making, and also external parties such as managing agents or consultants to the business.
What should businesses do in order to comply with the Act?
In order to make a fair presentation to the insurer, the insured should :
- understand the risk that is to be insured, as that will identify what information is relevant to the underwriter
- identify who counts as “senior management” within its business, and also any external sources that hold any relevant information
- make sure that “senior management” and other sources of information, provide it to the person responsible for placing the insurance
- engage with its insurance Broker to discuss specific requirements and to understand what is expected of it
- start the process early enough to ensure that the appropriate information is identified and provided to the broker/insurer in a timely manner
Benefits of the new Act
- Proportionate Remedies – rather than avoiding the policy in full due to non-disclosure, the insurer may have to pay the claim in part based on the proportion of the premium paid when compared to the premium that would have been required based on the true facts. If the premium would have doubled, half the required premium would have been paid and therefore half of any claim will be received.
- Warranties to be abolished – warranties must be replaced with “Suspensive Conditions” under which cover will only be suspended during the period the condition is being breached, but will be in place once the breach has been rectified.
- Terms not Relevant to the Loss – the insurer cannot refuse to deal with a claim due to non-compliance with a condition if such non-compliance could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred.
How might this affect construction contracts and professional appointments?
Given the nature of construction it is likely that the parties will have a number of offices throughout the UK, and possible overseas, and for group companies a number of subsidiaries, carrying on activities throughout the UK / world all required to be covered under the one or number of policies that the insured seeks to take out and renew.
In practice, the amount and quality of information that policyholders, and their brokers, will be required to provide to insurers will increase and key to this will be the close working relationship between the insured and its broker / insurer.
The insured should therefore be prepared to spend longer discussing the details of its organisation with the insurer, and focus on the key requirements of the Act with a view to identifying every activity and circumstance within its business that is relevant to achieving a fair presentation of your risk.
Mark your diary
On 04 May 2017 the Enterprise Act 2016 will bring into force sections in the Insurance Act 2015 that will imply terms into insurance contracts allowing the insured to claim damages against its insurer for late payment of insurance claims where they have not been paid or settled within a reasonable period of time.
The ‘reasonable period of time’ is to allow insurers to investigate and assess the claim fully. What is reasonable will depend on all the relevant circumstances, likely to include the type of insurance, size and complexity of the claim, parties involved, compliance with any relevant statutory or regulatory guidance, or perhaps factors outside the insurer’s control.
The insured will be able to claim for late payment of damages up to one year after a claim has been paid or settled by the insurer.