The Insurance Act 2015 comes into force in August this year. With it come the most significant statutory changes to insurance for over 100 years. Key among these are changes to the disclosure obligations on a non-consumer insured and the remedies available for breach, both of which redress the perceived imbalance of risk between insured and insurer.
But what does it mean for the construction industry? And what steps need to be taken now to get ready and take advantage of the new rules?
What needs to be done?
The key principle introduced by the Act is the requirement to provide a "fair presentation of the risk". This means a company has to:
- Disclose material circumstances which it knows or ought to know or, failing that, provide the insurer with sufficient information to put a prudent insurer on notice that it needs to make further enquiries;
- Do so in a way which is reasonably clear and accessible to a prudent insurer;
- Ensure that any representations of fact are substantially correct, and any representations as to matter of expectation or belief are made in good faith.
Key changes under the new legislation include how you collect and present that information, and the impact if you get it wrong.
How do we collect the information?
Key to this question is whose knowledge is relevant. For a company, it is necessary to look to the senior management and those responsible for the insured's insurance.
A company ought to know anything that "should reasonably have been revealed by a reasonable search of information available to the insured". This is different to what a company should know in the "ordinary course of business" and includes information held by a third party. What is "reasonable" will be different for each business.
Examples of material circumstances include special or unusual facts relating to the risk; any particular concerns which led the insured to seek cover for the risk; anything which those concerned with the class of insurance and field of activity would understand as being something that should be dealt with in a fair presentation of risks of the type in question.
How do we present it?
The presentation must be reasonably clear and accessible. You will not get away with "data dumping" (i.e. providing significant amounts of information without identifying what is material) but it need not be contained in only one document or oral presentation. A clear index and identifying what is material will be key in putting the insurer on notice of all relevant material circumstances.
What happens if we get it wrong?
This is where there have been the most significant changes, away from a one size fits all approach. An insurer will no longer be able to simply avoid a policy in the event of any material non-disclosure or misrepresentation.
If there is a deliberate or reckless failure to comply, the policy can be avoided and the premium need not be returned.
In any other circumstance, the insurer must look at what it would have done had it been made aware of the facts omitted. If it would not have offered cover, it can avoid the policy but this time must return the premium. If it would have offered cover but on different terms, those terms are implied from the start of the policy.
If it would have charged a higher premium, the insurer may reduce proportionately the amount to be paid on a claim. For example, if the premium of £50,000 would have been doubled to £100,000 on a fair presentation of the risk, a claim for £1million could be reduced by half to £500k.
The first point to note is that these rules are only the default position for non-consumer insurance contracts and can be contracted out of provided that the transparency requirements in the Act are met. It will therefore be vital to look at the terms being offered. No doubt appropriately retained brokers will seek favourable terms for their clients, not just in the context of premiums sought, but also with regard to policy terms and conditions.
Practically, contractors should review and revise their internal processes to ensure, that they minimise the risk of policy avoidance and make a fair presentation of the risk. Contractors and their brokers need to understand the new rules against which they will be measured and be clear about who, both within and outside their organisation, needs to be consulted in order to gather information for a fair presentation.