The Insurance Act 2015 came into force on 12 August 2016 and made substantial changes to insurance law in England & Wales. In particular, policyholders are now under a duty to make a ‘fair presentation of the risk’ to insurers when taking out insurance (including renewals and variations).
There has been much debate as to whether the requirement of fair presentation differs significantly from the previous disclosure obligations of policyholders but what is certain is that it is important to comply with the Act to ensure effective insurance cover is obtained.
This briefing considers two key elements of the duty of fair presentation: the requirement to disclose;
- every material circumstance the policyholder knows; and
- that it ought to know.
The duty of fair presentation
Before a contract of insurance is entered into, the policyholder must make to the insurer a fair presentation of the risk.
The disclosure must be of every material circumstance which the policyholder knows or ought to know.
Failing that, 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.
It may well be difficult for policyholders to rely on this fall-back and it is important that care is taken to disclose to insurers the material information that will discharge the duty of fair presentation. This requires those procuring insurance and those providing information for the fair presentation to understand what is a material circumstance – an issue which caused problems prior to the Insurance Act and is likely to continue to do so.
While the Act provides some guidance on what amounts to a material circumstance it does not go as far as some would have liked in defining what a material circumstance is. A policyholder is obliged to disclose material circumstances that it knows or ought to know and the Insurance Act provides guidance on both of these points.
What a policyholder knows
For an organisation or business (ie not an individual) it only knows what is actually known to individuals who are:
- part of its senior management; or
- responsible for its insurance.
Senior management means those individuals who play significant roles in the making of decisions about how the policyholder’s activities are to be managed or organised.
An individual is responsible for the policyholder’s insurance if the individual participates on behalf of the policyholder in the process of procuring the policyholder’s insurance (whether the individual does so as the policyholder’s employee or agent, as an employee of the policyholder’s agent or in any other capacity).
In practice, therefore, businesses will need to consider carefully who inside and outside their organisation falls within these two categories.
Identifying those responsible for insurance procurement may be relatively straightforward in most cases. But identifying senior management may be more complex – especially in larger organisations.
This will include the board (or equivalent) and potentially other senior executives within the operational parts of the business. But it may also include other senior management who hold relevant information, such as senior management in risk and compliance, legal, finance and HR.
In this respect, it is important to consider what type of insurance the business is buying as the "senior management" may differ depending on the insurance in question. For example, senior members of the HR and/or health and safety function may be "senior management" when procuring public and employers' liability insurance. But they may not be senior management for the purposes of procuring, say, professional indemnity insurance.
In some cases it may be possible to agree with insurers who senior management is for the purposes of disclosure which will remove this area of uncertainty.
What a policyholder ought to know
In addition to disclosing what it does know, the policyholder must disclose material information that it ought to know. The Act provides that:
‘… an insured ought to know what should reasonably have been revealed by a reasonable search of information available to the insured (whether the search is conducted by making enquiries or by any other means)’ (emphasis added).
This means a policyholder cannot solely rely on what senior managers know, nor can they turn a blind eye to information.
A policyholder will have to actively plan and conduct a reasonable search of information available.
What is a reasonable search?
The Act does not define what is meant by a reasonable search save for providing that:
- Information includes information held within the policyholder’s organisation or by any other person, eg by third parties.
- The search can take many forms; whether by enquiries ‘or any other means’.
What is a reasonable search will depend on the particular circumstances. It requires the policyholder to determine what is necessary to meet their obligations of fair presentation.
A ‘reasonable search’ should be proportionate to the type of insurance and to the size, nature and complexity of the business. For example, a reasonable search for a single site business will be very different to a multi-national company with multiple offices in a number of jurisdictions.
Policyholders may also need to make enquiries of third parties including brokers, consultants, and accountants.
For some policyholders, the reasonable search is likely to be a lengthy process that involves various stages. The ambit of the reasonable search may change over time depending on what results each stage of the reasonable search produces.
In practice, policyholders should be ready at every stage of planning and conducting the reasonable search to amend their search methods to take account of new information.
It is also important for policyholders to carefully document what steps they have taken to plan and conduct the search.
Appropriately documented reasonable searches will also allow policyholders to quality check the results and see if further enquiries need to be made.
This will also provide a record for the policyholder of the steps taken to satisfy the duty of fair presentation. While many insurers will be unwilling to confirm to a policyholder that the steps taken constitute a fair presentation, providing this information to insurers will provide them with the opportunity to engage with the policyholder in the presentation process. This might ultimately provide a basis for a policyholder to argue that a fair presentation was given because the insurer was on notice that it needed to make further enquiries.
Policyholders should at the very least seek guidance from their brokers (and, where appropriate, their lawyers) as to what a reasonable search entails in the context of their business and insurance requirements. However, ultimately the responsibility to provide a fair disclosure of the risk belongs to the policyholder so it must satisfy itself that it has fulfilled its obligations.