It was back in March 2015 we reported that Parliament had passed the Insurance Act 2015, bringing in reforms that would spell the most significant changes to be introduced to UK insurance contract law since 1906.
At the time we were preparing for an 18-month preparation period. This is now over, and the Insurance Act is, as of 12 August 2016, in force.
What Does it Mean Now the Act is in Force?
One of the key changes brought about by the Act is connected with duty of disclosure for commercial insurance contracts. The Act has updated the law with a view to making processes fairer and more balanced between the insurer and the insured party.
The Insurance Act has not changed the fact that insurance contracts are based on good faith. This means that for businesses taking out a commercial policy, there is still a duty to make a fair presentation of the risk to the insurer.
This will need to include disclosure of every material circumstance that you would be expected to know or ought to know concerning the risk for which you are looking to be insured. You will also need to provide adequate information so that an insurer is in a position to make further enquiries in order to reveal those material circumstances.
Disclosure: The Information You Must Provide to Your Insurer
The information you provide to your insurer should be correct ‘to the best of your knowledge’. You will be expected to conduct reasonable research in order to conclude that the information you are providing is correct, and we would recommend that you retain evidence of this research and the sources that have led to your conclusions. It may mean that you will need to obtain or verify information through numerous sources that may hold or be able to access essential information about the insurance risk.
These sources may include us as your insurance broker as well as:
- Risk managers
- Outsourced service providers and contractors
- Employees with specialist or significant knowledge of your organisation’s processes and procedures
- Senior personnel with the responsibility of overseeing the tasks associated with the risk to be insured
- Anyone who may be involved in arranging your company’s insurance
- Those covered by the insurance, for example subcontractors
If you make a misrepresentation of information, then the insurer will be able to reject any claim you make on a policy if your misrepresentation is considered deliberate or reckless. In other words, if you were aware that you were not telling the complete truth or providing the full facts, or you were not concerned whether the risk was being misrepresented when arranging the policy, then the insurer has the right to avoid the policy and you will not receive any refund of the premium.
However, if you accidentally misrepresent information, and can prove that you diligently carried out your duty to research the facts and that your mistake was an honest one, then there are various remedies that can be applied by the insurer with a view to reaching a fair outcome. These remedies are as follows:
- The insurer can prove it would not have written the policy at all if it was in possession of the true facts. In this case it can avoid the policy, but it must refund the premium paid.
- The insurer would have accepted the risk, but the terms would have varied. In this case the insurance contract should be treated as if it included those terms.
- The insurer would have entered into the contract, but the premium charged would have been higher. In this case the insurer may reduce the amount payable on a claim on a pro rata basis.
Warranties & Terms
Another major change brought about by the Insurance Act 2015 concerns the rights of the insurer in circumstances where there have been breaches of warranties and terms. This set of changes affects personal as well as commercial insurance.
Almost 2 years ago, when the Insurance Act was still the Insurance Bill, we looked at the subject of insurance warranties. A warranty is a promise you make to your insurer to do or not do something, and the validity of your policy depends upon your compliance with that promise. For example, you may promise to set an intruder alarm when your premises are unoccupied, or employ security personnel.
The law previously stated that any breach of warranty would discharge the insurer from liability from the date of the breach. This meant that even if amends were made to remedy the breach before a loss occurred, the insurer could still avoid the policy.
Now however, insurers are no longer able to avoid a policy where a breach of warranty has occurred. Instead they can suspend cover for the period of the breach. It allows insured parties the opportunity to remedy the breach and continue with the policy, although insurers will not be responsible for any losses suffered during the period of suspension.
Additionally, insurers can no longer avoid a policy in situations where terms that are irrelevant to the loss are not complied with. So if a fire occurs and it transpires that a warranty to use an intruder alarm was breached, the insurer will not be able to discharge its liability, as it was previously.
We advise all our clients, commercial and individual, to study the warranties listed within their policies and to advise us straight away if there are any that cannot be complied with.
This is because there is no statutory requirement for insurers to follow the guidance contained within the new Act. Some of them may well contract out of certain elements, but you can rest assured we will keep you fully informed if this affects you.
If you are in any way unsure as to your obligations under the Insurance Act 2015 then you will be able to rely upon our guidance, in particular when it comes to compiling the information you will need to make your fair presentation. This information will be presented to your insurers in a clear and understandable format to reduce the risk of uncertainty.
If you have any questions about the Insurance Act and how it may affect your business or personal insurance, please do not hesitate to get in touch for tailored advice.