Trustees take note – last Friday, 12 August, marked the day that the Insurance Act 2015 came into force. This is the most significant reform of UK insurance law in over 100 years and impacts any business entity, including pension trustees, taking out a contract of insurance. The Act will apply to all new insurance and reinsurance policies that are entered into (including renewals) and to any variations agreed to existing policies, unless agreed otherwise by the parties. From a trustee perspective the Act will have most import when entering into buy-in contracts and when seeking trustee indemnity insurance (such as run-off cover during a wind-up, or to mitigate against potential claims from overlooked beneficiaries).
This E-Bulletin looks at the Act from a pensions perspective. For a full review of the Act and its implications from a general insurance viewpoint (written at the time that the Act received Royal Assent), please click here.
Please feel free to pass a copy of either E-Bulletin to any colleagues who may be interested, or to suggest that they subscribe for regular editions. And if you have any queries regarding the Act or its impact on your business, do get in touch.
PRACTICAL IMPLICATIONS OF THE ACT FOR PENSION SCHEME TRUSTEES
The new regime re-balances the obligations upon and protections afforded to insurer and insured alike and in particular modifies the remedies available to both parties in the event of a breach of the policy terms. As such, the new regime will affect both parties to a policy negotiation. Trustees will need to understand in particular the duties on them to make a fair representation of risk and the remedies available to the insurer should they fail to do so.
1. Duty of ‘fair presentation of risk’
The new regime requires the insured to disclose (in a reasonably clear and accessible manner), every material circumstance which it knows or ought to know would influence the insurer in deciding whether to insure the risk, or which would be sufficient to put the insurer on notice to make further enquiries. The insured will be deemed to have knowledge of facts and circumstances which would have been identified by him from a reasonable search.
Whilst this duty is more clearly specified than the previous obligation to disclose all relevant information, it will nevertheless raise a number of issues for Trustees to consider. These are likely to include the following:
- The matters which will comprise a “material circumstance”. Whilst this may be clear in cases where Trustees are buying indemnity or run off insurance, it may be less clear for bulk annuity and longevity reinsurance transactions. Trustees may wish to ask insurers to specify the types of information which they would consider to be material for these circumstances.
- Whose knowledge is relevant for satisfying the disclosure obligation. Whilst this will include, at least, the knowledge of the existing trustees or trustee directors, it is likely to also include any individuals responsible for insurance (such as a pensions or risk manager) and potentially others. Consideration will need to be given to this on a case by case basis.
- The extent of a reasonable search. What constitutes a reasonable search will be scheme specific and is likely to depend upon how data and records are held. At the very least, however, it is likely to include information which would be identified from a search of the employer’s and administrators’ records. Given the range of entities which can hold scheme related information, trustees may wish to consider trying to agree with the insurer what constitutes a “reasonable search” in any particular circumstances.
Specific consideration will also need to be given in any case where the insurance policy is intended to be “all risk”.
The remedies for breach of the disclosure obligation have been modified and extended to include a range of “proportionate remedies”. This means that there will not be automatic avoidance of the policy in the event of breach. These additional remedies include the ability for the insurer to substitute additional terms or adjust benefit payments, in order to compensate for the breach. In practice we expect to see amendments to policy conditions to reflect this aspect of the new regime.
The remedy for breach of warranty will now be suspension of the policy during the period of breach, rather than avoidance of the policy. This is a material improvement of position for policy holders.
4. Damages for late payment
Under the previous regime, the insured was not able to claim damages from the insurer in the event of late payment under the policy. In a pensions context this often led to negotiations between Trustees and insurers about indemnities and other remedies to cater for this circumstance.
From 4 May 2017 it will be an implied term in every insurance contract that the insurer will pay sums due within a reasonable time. In the event of a breach of this term, the insured will have a potential claim in damages for late payment.
5. Contracting-out of the Act’s requirements
The new regime is overriding. If parties do not wish the regime, or any part of it, to apply to a policy then (with certain limited exceptions) they may agree to exclude those terms. But note that if insurers do wish to exclude any terms such that the Trustees are disadvantaged as compared with the position under the Act, the insurer must draw this to the Trustees’ attention. They must do so in a clear and unambiguous way.
6. “What do I need to do to comply?”
In our experience most Trustees already effectively comply with the new regime when entering into policies of insurance. However, there is likely to be at least an initial period during which parties are very focused on the nature of fair presentation of risk and the scope of reasonable search, and it will be necessary for Trustees to pay particular attention to such areas – particularly in those ‘early days’ – when contracting with insurers.