Whether you are a broker, insured or insurer/reinsurer, the changes to the insurance landscape brought in by the Insurance Act 2015 (the ‘Act’) will have a direct impact on your day to day business.
The changes to the obligations of the parties at the placing process – a new concept of “fair presentation” is introduced by the Act – are perhaps the most long overdue and will be those that will draw most attention from the industry.
However, industry participants should not overlook other important changes which might be regarded to tip the balance of interests more in favour of insureds than has been the case until now.
The world in 2015 is almost unrecognisable from the world in 1906. The insurance and reinsurance industry have had to adapt to cater for new risks, new technology and new lines of business emerging. Change is long overdue; the Act attempts to modernise the way the industry operates and to cure some of its perceived ills.
The changes under the new Act
The new duty of “fair presentation”
An insured must make a “fair presentation” of the risk to the insurer. This is a welcome development for insured and reinsured parties who have long regarded insurance law as skewed in favour of the insurer, allowing avoidance of policies seemingly for misrepresentations or non-disclosures that are anything but “material”.
Now the insured’s duty is to:
- disclose every “material circumstance” which it “knows or ought to know” (primary duty); or
- provide “sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances” (secondary duty);
- disclose information in a “reasonably clear” manner that is “accessible to a prudent insurer”.
- ensure that every material representation as to a matter of fact is “substantially correct” and made in good faith.
- This is a substantial change: the onus has shifted to the insurer who is assumed to know information that would be expected of it. Every small detail does not have to be communicated by the insured to ensure that avoidance does not become available to an insurer.
Coupled with this shift is an overhaul of the remedies available for breach of the duty of fair representation. An insurer will be able to avoid a policy only if the insured has made a deliberate or reckless breach. In other cases of innocent or negligent breach, insurers will have to respond more proportionately, by avoiding just the affected areas of cover for example rather than the whole policy.
Immediate termination of the contract of insurance for breach of a warranty is also widely considered to be unduly harsh. There has been much debate in the legal community about whether it would be fairer if insurers were able to waive certain breaches and continue with the contract.
Under the Act, breach of warranty now will no longer automatically terminate the contract. Instead, an insurer’s liability will be suspended from the time of the breach. The insurer will have no liability for losses occurring or attributable to something occurring during the period of suspension, but will be liable for losses occurring after a breach has been remedied if that is how the parties proceed.
The “basis of contract” clause commonly seen in proposal forms incorporating questions/answers into an insurance contract as warranties has also been outlawed by the Act.
The Act will also give insurers a right to elect to terminate an insurance contract with effect from the time of a “fraudulent act”, without a return of premium.
Termination will have retrospective effect to the date of the fraudulent act. If insurers elect to terminate, they are entitled to refuse to pay any legitimate claim from the insured where the relevant loss event occurs after the time of the fraudulent act. The insurer still remains liable for legitimate claims where the loss event occurs before the fraudulent act.
“Fraudulent” is not defined in the Act and therefore there is likely to be some debate surrounding this aspect of the Act once it comes into force.
The Act represents major change in the insurance industry which will have wide reaching implications for those involved buying insurance, broking and underwriting through to the claims process and interpretation of contract terms.
If you are a broker/prospective insured, – a fair, complete and non-misleading presentation has always been the goal at the pre inception stage.
For insurers, care will be needed as to what an insured’s presentation at placing would reveal to a prudent insurer. This is where there might be a real change to the placing process. Insurers should expect increasingly to be required to ask insureds for more information at the placing stage. Failure to do so could well lead to there being no recourse if information later materialises that materially affects a risk and an insurer had been put on notice as to that information at the placing stage (or ought to have known it). By the same token, insureds and brokers might ultimately end up providing much more information than previously in response to insurer questions.
Whilst the Act serves to rebalance pre-inception duties of insureds against insurer remedies, it remains to be seen whether the placing process will in terms of becoming more unwieldy and drawn out than before.
Even if it does, it might be a price that insureds and reinsureds are willing to pay.