Changes to insurance law in England and Wales will occur on 12 August 2016 when the Insurance Act 2015 comes into force. We look at some of the practical issues and industry guidance available.
Buying insurance – the insured’s new duty of fair presentation of the risk
The Act will replace the existing duty of disclosure in the Marine Insurance Act 1906 with a duty to make a ‘fair presentation of the risk’ to the insurer before the policy commences.
A fair presentation requires the insured to disclose every material circumstance the insured knows or ought to know. An insured ought to know what should have reasonably been revealed by a reasonable search.
The Law Commission and industry bodies such as Airmic have encouraged insurers and insureds / their brokers to discuss and, if possible, agree what the insured needs to do to meet this duty including what constitutes a reasonable search.
While some insurers may be willing to engage in such discussions, they may not be prepared to confirm that the insured has satisfied its duty of fair presentation.
As such, insureds should start planning on:
- where relevant knowledge resides (i.e. identifying ‘senior management’ and those responsible for the insured’s insurance)
- what a reasonable search will require for their business
- how to present the risk in a clear and accessible manner.
The Act entitles insurers to proportionate remedies when an insured breaches their duty to make fair presentation of the risk.
For example, if an underwriter would have increased the premium by double had the insured complied with their duty of fair presentation of the risk, the insurer is entitled to reduce the amount to be paid on the claim proportionately, i.e. by half.
However, if the insured breaches their duty of fair presentation of the risk, some insurers and insureds may prefer for the insured to pay a higher premium rather than have their claim payment reduced.
The International Underwriters’ Association has published an example clause to this effect. Airmic intends to publish its own example clause also. Whilst example clauses from industry are useful, it should be remembered that they may not always be appropriate, so parties should consider their own individual circumstances and risk profile, and seek advice where necessary.
Fewer opportunities to avoid liability
Under the previous law, if an insured breached a warranty under the insurance policy this would automatically discharge the insurer from liability under the policy from the date of breach.
Anecdotally we understand that draconian remedies were rarely used but were actively discussed when parties discussed settlement of claims.
Under the Act, the insurer will only be alleviated of liability under a policy if:
- an insured’s breach of warranty is ongoing at the time the loss occurs; and
- the breach of warranty is relevant to the loss that has occurred. In the latter case, for example, an insurer could not rely on a breach of a warranty which requires 5 lever mortise locks on a property to escape a claim for flood damage.
The changes to insurers’ remedies are welcome to policyholders. There is some concern in the market that insurers may now apply the remedies under the Act strictly. But it is hoped that the changes implemented by the Act will result in better placement of insurance by underwriters and policyholders.
Contracting out of the Act
It is possible to contract out of individual or multiple provisions in the Act (apart from those relating to basis of contract clauses) by including terms in the policy which are more onerous to the insured than the Act. It is uncertain how many insurers will attempt to contract out but this is likely to happen in speciality insurance.
If an insurer does want to contract out of the Act, the Act requires the insurer to take sufficient steps to bring each disadvantageous term to the attention of the insured so the insured understands the term’s effect. What constitutes sufficient steps will depend on the circumstances, including the nature of the insured and type of insurance. It is likely that different approaches will be adopted across the market. As such, insureds should ensure they fully understand the terms of their insurance and the effects of each term.
Obviously, insurance contracts can contain terms which are more favourable to the policyholder than what is required by the Act. This means current contracts may already be fit for purpose and that each provision should be considered against the requirements of the Act.