The duty of fair presentation - a reminder
The duty of fair presentation replaces the old blanket duty on insureds to disclose all material information to underwriters.
The main aim of the new duty is to remove some of the unfairness of the old regime for policyholders. Insureds used to have to try to work out themselves what information might be relevant to the insurer, which was not always an easy task.
Under the new system, it is enough for an insured to give the insurer sufficient information to put them on notice that they need to ask further questions. This provides insureds with a certain amount of leeway and there is now more of an emphasis on insurers having to ask relevant questions, so that policyholders are pointed in the direction of what they need to provide.
However, whilst the Act is undoubtedly insured-friendly in many respects, it also aims to create a fairer and more balanced regime for insurers. Policyholders therefore need to be aware of the new duties they now face, which represent potential traps for the unwary.
No more 'data dumping'
A side effect of the old requirement on insureds to disclose all material information was that they would often provide a large volume of data to insurers, much of which was not relevant, to make sure that they did not inadvertently overlook material information.
This practice became known as 'data-dumping' and created a significant headache for insurers. Underwriters were often required to commit vast resources to sifting through documents to identify the information they needed.
Information-dumping of this kind has now been outlawed by the Act, which requires insureds to make disclosure:
'in a manner which would be reasonably clear and accessible to a prudent insurer'.
This duty applies whether disclosure is made online or on paper. Policyholders are likely to fall foul of this requirement not only if they provide submissions which are too short and cryptic, but also where submissions are overly large and messy.
Policyholders therefore need to put systems in place quickly to ensure that they get this balance right and avoid arguments that they have failed to make a fair presentation of the risk.
It is important to remember that disclosing a large volume of data is not always the same as data dumping. There will be situations where lengthy submissions are required. But what policyholders now need to ensure is that their submissions, however voluminous, are relevant and most importantly of all presented in a digestible format.
'Clear and accessible' disclosure - steps to success
The Act is designed to cover the full range of commercial insurance and so it is no surprise that it does not provide any guidance as to what constitutes reasonably clear and accessible disclosure.
Clearly, what constitutes a clear and accessible presentation of the risk will be very different for a small business compared to a large multinational and each case is likely to turn on its own facts. It will be interesting to see whether the courts step in to provide any guiding principles to help policyholders navigate the new requirements.
In general terms, however, we would recommend the following steps to success:
- Engage with insurers at an early stage. It may sound obvious, but the best guide to what an insurer will consider clear and accessible is the insurer itself. Insurers may require information to be presented in a certain way, so it makes sense to ask what they are looking for at the outset. It may take time to make changes to existing processes so this should happen as early on as possible.
- Avoid the 'regurgitation' trap. The duty of fair presentation arises at each policy renewal so it is very important to check that information is updated, particularly now that the rules on disclosure have changed. Consider treating your next policy renewal as a 'fresh start' in terms of disclosure and make sure that submissions are actively audited against the requirements of the Act.
- Signpost and structure your submissions as much as possible. Whether the submission is to be made online or on paper, it needs to be user-friendly and easy to navigate. Contents lists and indexing will be important and electronic files should be well organised and easy to search and download. Your broker should be able to assist you with this.
- Use exception reporting. Make sure that the relevance of the information you are providing is made clear, particularly where there are issues which are out of the ordinary or specific to your business. It is important to highlight any particular concerns or known risks which led you to take out the cover in the first place. Avoid playing down aspects of the risk which you think insurers might not like.
- Manage changes carefully. It is important to record any changes to a submission in a way which is easy for insurers to follow. Make sure that you retain the original data as well so that there is a clear and visible audit trail.
Overall, the Act's introduction of a requirement on policyholders to ensure the quality, as well as the completeness, of their disclosure submissions marks a real step-change in insurance law. Insureds would be well advised to start taking steps now to make sure they are in a good position to keep in line with the new regime.