The Insurance Act 2015 comes into force on 12 August 2016 and will apply to all contracts of insurance (and any variations of existing contracts) entered into from that date. Reform was driven by the Law Commissions north and south of the border and significant amendments will be made to key aspects of insurance contract law. In this update, Douglas McGregor looks at the duty of fair presentation of risk.
Pre-contractual disclosure and the duty of fair presentation of risk
The general underlying principle that insurance contracts are based upon utmost good faith remains. However, the Act alters the law in relation to pre-contractual disclosure, creating a new duty of fair presentation of risk. The aim of the new duty is to clarify and refine the duty on business policyholders (as distinct from consumers) to volunteer information when entering into an insurance contract.
What does “fair presentation of risk” require of businesses?
Businesses must present information to the insurer clearly, accessibly and in good faith. In practice, they must, either: (a) disclose to the insurer every material circumstance which the business knows or ought to know about or (b) give the insurer sufficient information to put a prudent insurer on notice that further enquiries are needed to reveal those material circumstances.
In addition, any material representations as to matters of fact must be substantially correct and material representations as to matters of expectation or belief must be made in good faith.
Ordinarily, there is no duty on a business to disclose any material circumstances which (a) diminishes the risk; (b) the insurer knows about, ought to know about or is presumed to know; or (c) where; the insurer has waived the need for information. However, if an insurer specifically asks a business about matters which fall into one of these categories, the business must disclose that information.
What does “material” mean?
Circumstances or representations as to fact or belief are material if they would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms.
What does “know or ought to know” mean?
The Act contains detailed provisions explaining and defining what is meant by “knowledge”.
In summary, businesses will be taken to know about material circumstances which are actually known either to individuals within senior management or to individuals responsible for the business’ insurance e.g. their broker. In the absence of actual knowledge, a business “ought to know” about a material circumstance if it should reasonably have been revealed by a reasonable search of information available to the business.
The Act creates an increased onus on business policy holders to investigate their risks internally and to feed clear information to insurers. Brokers will play a key role in this process and will be expected to know the ‘ins and outs’ of their client’s business. To ensure the duty is complied with and breach avoided it will be important for businesses and brokers to maintain a close working relationship. Ideally, policy holders should look to introduce their own protocols for collating and presenting relevant information.
In our next bulletin we will look at an insurer’s remedies where a breach of the duty of fair presentation has occurred.