The Insurance Act 2015 has received substantial publicity, often to the effect that it will now be easier for commercial insureds to have claims paid as insurers will be unable to rely on certain coverage arguments under the Marine Insurance Act 1906.
The act places the burden on the insurer to justify a denial of cover, or a reduction in the value of a claim, in the event of a material misrepresentation or non-disclosure by the insured which gives rise to a breach of its "duty of fair presentation" under section 3 of the law (presentation disputes). This article considers the potential issues for insurers' compliance systems and controls from presentation disputes. These issues could also affect the relationships between insurers and intermediaries acting as their underwriting agents (such as coverholders and managing general agents – MGAs).
In short, the Act poses significant control and compliance challenges. In particular, if the relevant underwriter for an insurer is unable to prove that an unfair presentation induced him / her to enter into a particular contract on particular terms, such as the premium, then the insurer will be obliged to pay the claim as presented by the insured.
Even though the claim itself might have been fully reserved, the presentation dispute could reveal issues as to underwriting strategy and methods that might raise questions about an insurer's business planning, personnel and outsourcing management, and risk/capital management, and even assumptions in its ORSA or internal model.
Section 3 of the Act explains that: "… A fair presentation of the risk is one … which makes the disclosure … in a manner which would be reasonably clear and accessible to a prudent insurer … of every material circumstance which the insured knows or ought to know, or gives 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 …"
The above immediately begs the question as to what is "a prudent insurer" for the purposes of 'clarity' and 'accessibility', and also being put "on notice". There is little authority or commentary on the meaning of prudent insurer. For instance, MacGillivray on Insurance Law, 8th Ed, Pt 1 para 17-046 states: "The … prudent insurer should not … follow the usages of his profession without question any more than the … "reasonable man" of tort law is permitted to follow the usages of a given profession … without reflecting upon them …"
These comments potentially raise some interesting questions as to London Market practices, including the role of leading and following underwriters on subscription risks, and the concept of centralised prudential and conduct rules or guidance, such as Lloyd's 'Minimum Standards'.
A circumstance is material, under section 7 of the Act, "… if it would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms [such as] special or unusual facts relating to the risk … any particular concerns which led the insured to seek insurance … anything which those concerned with the class of insurance and field of activity in question would generally understand as [needing to] be dealt with in a fair presentation ..."
The above provisions hint at the importance of underwriting expertise in resolving presentation disputes. Further emphasis in this regard is provided by sections 3(5) and 5 of the Act: "In the absence of enquiry … the insured [is not required] to disclose a circumstance if … the insurer knows it… ought to know it, [or] is presumed to know it …
… an insurer ought to know something only if … an employee or agent of the insurer knows it, and ought reasonably to have passed [it] on … [[to any] individual … who participate[s] on behalf of the insurer in the decision whether to take the Risk … whether as the insurer's employee or agent, as an employee of the insurer's agent or in any other capacity …] or … the relevant information is held by the insurer and is readily available to [such] individual …
… an insurer is presumed to know … things which … an insurer offering insurance of the class in question to insureds in the field of activity in question would reasonably be expected to know in the ordinary course of business."
The above provisions carry the potential for insureds to challenge information flows and the quality of expertise within underwriting operations, including within MGAs ("the insurer's … agent, [or] employee of [such] agent …") and between them and their insurer principals. Such challenges have the potential to raise issues as to insurers' and MGAs' operational systems and controls, including training on relevant industry know-how, and recruitment. These issues in turn have implications for key decision-makers' 'fitness and propriety', not least in the light of the extended Senior Managers and Certification Regime.
Insureds' ability to challenge claims, and consequently underwriting, decisions made by or on behalf of insurers is given greatest force by section 8 of the Act: "The insurer has a remedy against the insured for a breach of the duty of fair presentation only if the insurer shows that, but for the breach, the insurer –
- would not have entered into the contract of insurance at all, or
- would have done so only on different terms."
This provision affects the actual insurer on the relevant risk, not just the hypothetical "prudent insurer". This applies the traditional concept of 'inducement' in presentation disputes, but modifies it by requiring the insurer to show that, in the absence of a "deliberate or reckless" unfair presentation:
- "… the insurer would not have entered into the contract on any terms …"; or
- "… the insurer would have entered into the contract, but on different terms (other than terms relating to the premium) …" and/or
- "… the insurer would have entered into the contract (whether the terms relating to matters other than the premium would have been the same or different), but would have charged a higher premium …"
These provisions enable insureds to argue that key personnel acting for insurers made underwriting decisions for reasons other than any unfair presentation. Recent cases show how these arguments may develop:
- In Involnert Management v Aprilgrange  EWHC 2225 (Comm) it was argued that the underwriter effected a policy in order to achieve higher premium income; this argument did not succeed, but in the current 'soft market' might resonate with some.
- In AXA Versicherung AG v Arab Insurance Group  EWHC 1939 (Comm), the court decided that the underwriter was not induced to effect reinsurance by reason of a material non-disclosure of loss statistics; in particular, the court noted the importance to the underwriter of developing and maintaining a relationship with a well-regarded insurer, plus inconsistencies in the underwriter's evidence as to levels of deductible, which led the court to doubt the underwriter's arguments as to his inducement from the undisclosed loss statistics.
These cases highlight the potential for presentation disputes under the Act to result in forensic litigation and regulatory scrutiny of underwriting plans, personnel and activities, and the effectiveness of related governance, risk, compliance and audit functions.
This article was first published on the Thomson Reuters Accelus (’Complinet’) website