The LMA have produced guidance on the Duty of Fair Presentation (DFP) introduced by the Insurance Act 2015. The full bulletin can be found here.
The DFP requires an insured to make a presentation which makes disclosure of every material circumstance which the insured knows or ought to know at either the inception, renewal or variation of the policy. This includes information known to people in the insured's senior management, people responsible for the insured's insurance, and information which is available to the insured; that is, would have been found through a reasonable search of information available within the insured's organisation. Failing that, the disclosure must give the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances.
Unless specifically asked by the underwriter, the Insured does not need to disclose a circumstance if it diminishes the risk, the insurer knows/ought to know it or the insurer has waived information about it. In this regard, the knowledge of the claims team on the business of the insured may be attributed to the underwriters.
The presentation must be made in a manner which would be reasonably clear and accessible to a prudent insurer (i.e. not hidden in a mass of text), every material representation as to a matter of fact must be substantially correct and every material representation as to a matter of expectation or belief must be made in good faith.
Even where the breach was neither deliberate nor reckless, there may be severe consequences. If the underwriter would never have written the risk the policy can be avoided; if different terms would have been applied, those terms will be treated as if they had always been in the policy (even if the insured would have rejected them); and if a higher premium would have been charged then any claim payment can be reduced in proportion to the "discount" the insured received on the premium.
As with any new legislation, there will be a period of uncertainty as to how the provisions are interpreted. In particular, the reasonable search of the information available within the insurer's organisation, the knowledge of people in "senior management" and how accessible the information is to underwriters are likely to be subject to disputes in the coming years. To avoid being a test case, clarity as between the Insured and Insurers is vital.
The LMA has a suite of model clauses to deal with the potential areas of dispute. For instance, Model clause LMA9120 allows the parties to define "senior management", so there can be no ambiguity as to who should be consulted and whose knowledge is being shared with the underwriter. Similarly, LMA9119 allows the parties to define the "insured's organisation" to ensure that the relevant sources are consulted and exclude arguments as to the extent of the search. This will be particularly important where a project policy has a wide definition of "insured". As to the accessibility of the information provided, customers should work closely with their brokers to ensure the information is appropriately clear, and if possible try and keep an audit trail of the searches carried out to enable you to prove that you have conducted a reasonable search.
On the insurer side, underwriters and claims teams are likely to increase and formalise the sharing of information. Knowledge of a potential insured's business gathered on a claim which was resolved within the deductible may be vital information for establishing details of the risk in the next policy year – and the insured can legitimately leave it out of the DFP as it ought to be known to the insurer.
Ultimately, the aim of the provisions is to ensure that all parties appreciate the nature and importance of information being provided in placing insurance.