Life InsuranceApr 16 2015

New insurance Act keeps policyholders covered

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New insurance Act keeps policyholders covered

The new Insurance Act 2015, which received Royal Assent last month, will be the most substantial reform of UK business insurance law in more than a century.

The Act was prompted by concerns that the current law is out of date and imbalanced in favour of insurers, putting the UK’s commercial insurance market at a competitive disadvantage in the global arena.

The new Act seeks to address this in a number of ways by reforming the law on the duty of disclosure, warranties and fraudulent claims (among other issues).

The impact of the Act should not be underestimated. Although it will automatically apply to insurance policies entered into from August 2016, it is expected that some market participants will seek to take advantage of the Act’s provisions sooner than this. Everyone involved in the placing and underwriting process needs to take note now and invest time in understanding the new legislation to ensure they are fully aware of its implications for their business.

Under the new Act, an insured party is required to make a “fair presentation of the risk” to its insurer. The insured must disclose all material circumstances relating to the risk – as is the current position – or, failing that, give the insurer sufficient information to put it on notice that it needs to make further enquiries for the purpose of revealing any material circumstances. This puts an onus on insurers, who have traditionally been criticised for taking a passive role in the disclosure process. Insurers will be required to be more proactive and searching in their enquiries into the insured.

The burden on the insured to disclose every material circumstance that he “knows” or “ought to know” is retained. The Act, however, prescribes whose knowledge is relevant when considering the knowledge of a corporate: it is only the knowledge of the senior management and those responsible for the insured’s insurance. This would capture risk managers and any employee who assists in the collection of data or negotiates the terms of the insurance.

The insured “ought to know” what is revealed by a “reasonable search”. Policyholders will need to consider how best to conduct a reasonable search, including what information should be collected from whom and, importantly, how the search is recorded should evidence of it be needed at a later date.

The Act also requires policyholders to disclose information in a manner that is reasonably clear and accessible. This is intended to discourage the trend of so-called “data-dumping” when a policyholder bombards insurers with vast quantities of information in the hope that “material circumstances” will be found somewhere within it.

One of the headline changes brought about by the Act is that insurers will no longer be able to automatically avoid an insurance policy if a material fact was not disclosed to them (which meant they could treat it as though it never existed).

Insurers will no longer be able to automatically avoid an insurance policy if a material fact was not disclosed to them

This was considered to be a severe measure in circumstances where a policyholder may have innocently failed to disclose something material. Under the Act, there are different, proportionate remedies available to insurers in the event the insured innocently fails to make a fair presentation of the risk. The onus is on the insurer to show what it would have done had it received a fair presentation of the risk.

Insurers will need to think about their underwriting guidelines and how best to record underwriting decisions that are taken in order to take advantage of these new remedies under the Act.

Breach of warranty currently allows an insurer to avoid its liability entirely under a policy from the date of breach, irrespective of whether the breach of warranty was material or in any way relates to the insured’s loss. This was again considered unduly harsh for policyholders.

The Act changes this and makes warranties “suspensive conditions” which means that the insurer’s liability is suspended while the insured is in breach of warranty, but the insurer will come back on risk again if and when the breach is remedied.

The Act also abolishes “basis of the contract” clauses, which operate to turn a policyholder’s representations made pre-contract – including answers to questions on a proposal form – into warranties.

The Act provides that where there is a policy term – including a warranty – designed to reduce the risk of loss of a particular kind at a particular location or time then an insurer may not rely on a breach of such a term to avoid paying a claim if the breach could not have increased the risk of the loss.

To take an example, if a property policy requires a burglar alarm to be maintained and the insured fails to do so, insurers would not be able to rely on the breach to avoid liability in the event of damage due to flooding, because the failure to maintain the burglar alarm could not have increased the risk of that loss. In contrast, the insurer would be able to rely on such a breach to avoid liability for a theft claim as this was the type of loss the burglar alarm was intended to prevent.

Fraudulent claims

The Act clarifies the law in relation to insurers’ remedies for fraudulent claims. It provides that the insurer:

• will not be liable to pay fraudulent claims;

• can elect to terminate the contract and refuse to pay claims relating to losses suffered after the fraud; but

• will remain liable for all legitimate losses suffered before the fraud.

The Act is intended to be the default position for commercial insurance law contracts although there are provisions in the Act as to how parties may contract out of its terms should they wish to do so.

One provision which has not made it into the Act as it did not have the requisite support across the market, was a provision that provided policyholders with a right to damages for late payment of claims. It remains to be seen if this will be addressed in any later legislation.

Clearly the Act is a positive development intended to bring the law up-to-date with the commercial realities of placing insurance in the modern day. There are bound to be teething problems as those involved in placing insurance get to grips with the new legislation, but those who invest time sooner rather than later in understanding the Act’s impact will be better placed to take advantage of the benefits it offers.

Paul Lewis is a partner in the insurance and reinsurance disputes group at commercial law firm Herbert Smith Freehills

Key Points

The Insurance Act was prompted by concerns that the current law is out-of-date and imbalanced in favour of insurers putting the commercial insurance market at a competitive disadvantage.

Policyholders will need to consider how best to conduct a reasonable search.

The Act is intended to be the default position for commercial insurance law contracts.