In 2017 we can hope to see what impact the Insurance Act 2015 (the “Act”) will have on the insurance market both in terms of how insurance is placed and how insurers deal with claims made by businesses. The Act came into force in August 2016 so by summer 2017 many, if not most, live policies will be governed by the Act.
Getting to grips with changing obligations
The Act established a new duty of 'fair presentation' for business policyholders. This requires policyholders to perform a reasonable search of potentially relevant information. The policyholder will need to identify senior management and those responsible for its insurance. This may vary depending on the type of insurance sought and the nature of the business, so businesses will need to consider carefully who inside and outside their organisation falls within these two categories.
It will be interesting to see what, if any, impact the Act has on the economics of the insurance market. Some have speculated that the requirements of the Act make procuring insurance a more onerous task for policyholders, especially for smaller businesses. If this proves to be the case and such businesses are either deterred from buying insurance or try to cut corners when performing a reasonable search, this could lead to reduced demand for certain insurances e.g. non-business critical or non- mandatory insurances. It could also increase the risk of subsequent challenge by insurers to a claim by the policyholder on the basis that a fair presentation was not given.
Will claims payments improve?
The Act also introduced a range of new remedies for insurers. Where the policyholder has failed to give a fair presentation of the risk the insurer’s remedy will depend upon the nature of the breach and what the insurer would have done differently if the breach had not occurred. The insurer may have remedies such as avoiding the contract, inserting new terms in the policy, or, if the insurer would have charged a higher premium, proportionately reducing the amount to be paid on a claim.
The idea was to 'soften' the impact of less serious failures by the insured to disclose material information so that the insurer still has a remedy but the consequences are not so draconian for the policyholder. However, some have speculated that the new remedies actually give insurers a greater arsenal to use against the insured. For example, insurers who may previously have decided not to take a minor non-disclosure point (for fear of getting a bad claims payment reputation in the market) may now be willing to do so if they can seek one of the lesser remedies such as a reduced claim payment. Alternatively, insurers may use the remedies like a ‘menu’ of alternatives and still pursue avoidance in the first instance but fall back on reduced claims payment and imposing new terms if the avoidance argument fails.
This may just be cynicism but it is only once claims start being made under policies governed by the Act that we will find out how these remedies will be applied in practice and the effect they have on claims payment.
A quicker turnaround on valid claims?
For policies entered into on or after 4 May 2017, insurers will be required to pay valid insurance claims in a reasonable time unless there are reasonable grounds for the insurer disputing the claim. If they fail to do so, the policyholder will have a right to seek damages from the insurer.
This requirement should speed up claims that would otherwise be delayed by slow claims handling. But the requirement may result in insurers taking a different approach to challenging claims where they believe there are grounds to do so. For example, where the question of coverage is not certain, insurers may be motivated to seek legal advice at an earlier stage, or more frequently, to help determine the merits of a potential dispute and so to justify whether they should make payment or not.
In 2017 we will see the how the insurance industry adapts to these obligations and whether individual insurers take different approaches. Policyholders need to be ready to respond promptly and effectively to challenges from their insurer about their claims.