In our last article, we introduced the aims and objectives of the Insurance Act 2015's general changes to the 'Duty of Fair Presentation'.
Our Insurance experts have been closely studying commentary and analysis from leading insurers alike on the challenges, hurdles and benefits to business of what has been billed as the most significant insurance "makeover" in more than a century. To find out more, download our free Business Guide to the new Insurance Act.
In this second part, Richard Marshall, senior associate within Shoosmiths' insurance team, takes a closer look at the impact of the new duty on insureds.
A new duty
The Duty of Fair Presentation replaces an insured's blanket duty to disclose all material information to underwriters. Up until now, the law has required insureds to crystal ball gaze as to what may be material to an underwriter. The harshness of the outgoing default regime is obvious: how can a lay insured with no knowledge of insurance underwriting really second guess what is material? The consequence of 'getting it wrong' has been severe - insurers' remedy has been to void the policy as if it did not exist.
Needless to say, the new Duty of Fair Presentation which both (a) removes some of the guesswork as to what an underwriter would consider material; and (b) provides for less onerous consequences for non-disclosure / misrepresentation is to be welcomed.
What is the Duty of Fair Presentation?
The Act is prescriptive as to what amounts to a Fair Presentation. The duty is as follows:
(a) to disclose to the insurer every material circumstance which the business knows or ought to know about; or (b) at the very least, to give the insurer sufficient information to put a prudent insurer on notice that further enquiries are needed by them to reveal those material circumstances.
It is the second limb which removes the guesswork on the insured as to what information the underwriter would actually need, although it is worth noting that the insured is still required to provide enough information to alert the insurer about potentially relevant matters before the onus shifts to the insurer to tell the insured what further information it wants.
Additionally, 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.
The meaning of 'material' is unchanged. Broadly, information is 'material' if it would influence a prudent underwriter when making a decision to underwrite the insurance policy, and if so, on what terms.
Knowledge & the reasonable search.
The requirement to disclose information which the business knows or ought to know dovetails with a need to undertake a reasonable search for information. In a nutshell, the overarching principle is to ensure that insureds undertake a diligent search for information at all appropriate levels of a business.
The parameters of what constitutes a reasonable search goes hand in hand with an understanding of whose knowledge matters within the insured. The Act is prescriptive about who these people are:
- senior management (described as those individuals who play significant roles in the making of decisions about how the insured's activities are to be managed or organised),
- those with insurance responsibilities (e.g. individuals procuring insurance policies or collating information about risk. NB such employees could be junior). This category also encapsulates agents, for example, an insured's broker.
In theory, there should be fewer denials of policy coverage from insurers. However, it would be dangerous to view the Duty of Fair Presentation as a panacea to all disclosure related concerns. For example, the format and quality of the presentation now assumes heightened relevance. Side stepping obligations by 'data dumping' has now been expressly prohibited. In other words, there is a requirement for insured and broker to think through the relevance of the presentation made - this 'subjective' exercise carries obvious peril for remiss / stretched organisations.
Failure to make a Fair Presentation
Deliberate or reckless failure to make a Fair Presentation will still give insurers the right to avoid a policy.
Otherwise, insurer's remedy will now be commensurate to the position the insurer would have been in 'but for' the failure to give a Fair Presentation. Here, the onus will be on an insurer to assert what it would have done differently (for example, changing the terms or the policy or charging a higher premium or even, in extreme cases, refusing cover altogether). Where an insurer can establish it would have acted differently, it will be able to reduce the policy indemnity available accordingly.
Fair Presentation: steps to success
- Formulate a written plan as to how the business will coordinate disclosure exercises at policy inceptions / renewals. The document should identify specific roles / members of personnel who shall be relevant to that exercise. Consider seeking feedback on your disclosure plan from your broker.
- Plan ahead - it sounds obvious, but last minute searches risk internal deference / corner cutting. Ensure searches occur in a timely manner.
- Ensure the presentation of information is well structured and digestible for a prudent insurer. If you are unsure whether data is relevant or not, speak to your broker / insurer directly. Ensure that critical data is not obscured by documentation / information added "for completeness".
- Make sure every representation made is substantially correct and statements of expectation or belief are made in good faith. As a broad rule of thumb, place yourself in the shoes of the insurer - would you feel misled by what is being represented
Overall, whilst the Duty of Fair Presentation is no doubt good news for insureds, the positive requirements to ensure relevance and presentational quality arguably create new perils. This heightens the need for insureds to engage high quality, proactive brokers.