In my last blog post, I looked in overview at the Insurance Act 2015 (the “Act“), which comes into force in England and Wales on 12 August 2016 and revolutionises insurance contract law. This post looks at the potential for disputes arising from the new provisions of the Act, and how insurers could look to manage the risks.
The Duty of Fair Presentation
Inevitably questions will arise over whether the insured has complied with the new duty of “fair presentation” of the risk when a claim is presented by the insured. This will particularly be the case when it comes to establishing whether the insured had given the insurer sufficient information to put the insurer on notice that it needed to make further enquiries for the purposes of revealing material circumstances (i.e. information which would influence the decision of an insurer in determining whether to take the risk, and if so, on what terms).
As we have seen previously, this is new law and uncharted territory. Going forward, there will be greater onus on insurers to ask more detailed questions of the insured when initially being presented with the risk. In the event of a dispute, the insurer will come under scrutiny as to whether it had been provided with sufficient information, such that it should have made further enquiry of the insured. Insurers may need to evidence the fact that they had not in fact been provided with sufficient information by the insured.
This means the insurer paying close attention to the insured’s risk presentation (n.b. data dumps are no longer acceptable), keeping careful record of the underwriting process, the questions asked of the insured and the responses provided. If the insurer asks the insured for more information but it has not been provided then insurers need to think carefully about when there they want to underwrite the risk at all or until they are totally satisfied with the information provided by the insured
The other new aspect of the Act is the concept of an insurer’s exercise of proportionate remedies in the event of an insured’s failure to comply with the duty of fair presentation. This may lead to disputes. This makes it very important for insurers to carefully record the underwriting decision, the reasons for it, and the various factors that influenced the decision. They may need to prove to a court at a later date that they would have done things differently had the risk been fairly presented to them by the insured (for example, that they would not have underwritten the risk at all, would have charged an increased premium, or applied an exclusion clause to the policy).
So insurers need to document matters such as any special facts or representations relating to the risk underwritten, any particular factors which influenced the setting of the premium and the manuals or other guidance to which the insurer had recourse during the process.
Contracting Out of the Act
It is possible for an insurer and insured to “contract out” of the majority of the provisions of the Act (save for the abolition of basis clauses). However, contracting out will mean that an insurer must comply with various transparency requirements in the Act, which include drawing disadvantageous/less favourable terms to the attention of the insured in an clear and unambiguous fashion before the policy is entered into.
Obviously commercial factors will influence whether insurers will wish to contract out of the Act and that will be influenced by market perceptions held by brokers and risk managers. But insurers can look to avoid disputes further down the road (as to whether or not they had in fact complied with the transparency requirements) by clearly spelling out in writing for an insured the default position under the Act, and any potentially disadvantageous deviations from it in the insured’s policy wording.