The Insurance Act 2015 (the new Act) came into force on 12 August 2016 and introduced major changes in English law in relation to insurance and all forms of reinsurance. We drew attention in a previous alert to the key advantages which it offers to policyholders of commercial insurance and in this alert wanted to identify other areas of interest, particularly to those who are responsible in companies for the purchase of insurance and reinsurance. We look at two areas: knowledge of the insured for the purpose of complying with the duty to make a fair presentation, and the possibility of contracting out from the provisions of the new Act.
Knowledge of the insured Some of the more significant changes come in relation to the knowledge of the insured and the new Act defines what the insured “knows” and what the insured “ought to know”. The definitions of what a corporate insured knows or ought to know are qualified by the words “knows only” and this is an attempt to exclude the application of common law principles relating to attribution of knowledge. So, in the context of a corporate insured, it will only know what is in the knowledge of the senior management and those responsible for the company’s insurance.
The new Act expressly excludes from the insured’s knowledge any confidential knowledge obtained through a business relationship with a person who is not connected with the contract of insurance. This part of the new Act will most commonly apply to brokers or other insurance agents who may well acquire knowledge which is material to the risk but which has been acquired in the context of a different commercial relationship. Such knowledge will not fall within the ambit of knowledge which must be disclosed by the insured, unless, of course, the broker or agent has actually disclosed it to the insured, in which case the insured will have actual knowledge.
What the insured “ought to know” is defined as information which “should” have been revealed by a “reasonable search” of information available to the insured carried out by the making of enquiries or by any other means. There is, therefore, a positive obligation to search for knowledge and this is not limited to information within the insured’s own organisation but includes “any other person” and expressly names the insured’s agent or a person for whom cover is provided by the insurance.
What is a reasonable search? This is likely to be an objective standard but one which would take into account the characteristics of the insured. Thus, what is reasonable is likely to depend on the size of the organisation, its sophistication in insurance matters and its financial resources.
By defining what ought to have been known by reference to what information “should” have been revealed by a reasonable search, the obligation will not necessarily extend to information that an employee, who perhaps has been negligent, seeks to conceal. However, in view of today’s modern technology it may be that the mere making of an oral enquiry may not be enough to constitute a “reasonable search”. It may be that with today’s ability to search electronically even a negligent employee’s knowledge may be disclosable if a positive electronic search of emails, for example, would have revealed the information.
This raises another interesting issue. The new Act expressly preserves the common law rule that the knowledge of a fraudster is not to be attributed to the insured. Nonetheless, with contemporary electronic search facilities and the prevalence of an electronic record of almost every aspect of an organisation’s life, while the knowledge of a fraudster will not be attributed to an insured, what happens in circumstances where an electronic search of databases would have revealed the fraud?
Contracting out It is possible to agree with the insurers to contract out of the provisions of the new Act with the exception of those provisions which abolish the basis of contract clauses, but it remains to be seen how many insurers will attempt to exclude its provisions given that the contracting out must comply with certain requirements set out in the new Act.
In particular, the contracting out clause must be brought to the attention of the insured or its agent and secondly, such a clause must be clear and unambiguous as to the effect it will have. Accordingly, a contracting out clause is unlikely to comply with the new Act’s requirements if it is buried in the depths of a complex and lengthy policy wording; to be effective, it should be at the forefront of the documents provided to the insured and presented in a manner to draw the reader’s attention to it. Nor is such a clause likely to be compliant if it merely states that a particular section in the new Act is not to apply; to be effective, it will need to spell out to the insured the effect of contracting out of that particular section.