The Insurance Act 2015 will come into force this week on 12 August 2016. It represents the first major overhaul of the law of business insurance since the Marine Insurance Act 1906.
The new Act applies to all business insurance that incepts on or after 12 August 2016. The imminent changes in the law will have an impact on the way policyholders buy insurance, their obligations and the payment of any claims made.
This article is intended to highlight some of the key changes which the new Act will introduce.
What do policyholders need to do differently when buying insurance?
Fair presentation of the risk
The policyholder will be under a new duty to make a fair presentation of the risk. This relates to the information which needs to be provided to an insurer by the policyholder prior to inception of a policy, on amendment and at renewal.
The new duty means that the policyholder must disclose, in a reasonably clear and accessible manner, every material circumstance which is known or ought to be known by the policyholder's senior management or those responsible for the business' insurance (or failing that, the policyholder must disclose sufficient information to put a prudent insurer on notice that it needs to make further enquiries).
Policyholders should think carefully about how they will comply with the new duty. This may include evaluating the steps taken to obtain information from internal and external sources and keeping records to demonstrate that reasonable searches for information have been made. Policyholders might also consider approaching their insurer to seek to agree the specific individuals who will be considered responsible for the business' insurance and whose knowledge will be relevant.
In any event, policyholders must make sure that they disclose information in a manner that is reasonably clear and accessible to a prudent insurer. The aim is to prevent unfocused submissions of large quantities of documentation by a policyholder (known as "data dumping").
What happens if a policyholder fails to comply with the new duty?
The new Act introduces a range of potential consequences where a breach is established:
- If a policyholder deliberately or recklessly fails to comply, the insurer may avoid the policy (i.e. treat it as if it never existed), refuse all claims and retain the premium.
- In all other cases (even where there has been an innocent mistake), the consequences will depend on what the insurer would have done had it known the true facts. For example, if the insurer would have charged a higher premium, the amount the insurer pays on a claim will be reduced in proportion to the difference between the premium actually paid and the premium that would have been charged, had the risk been fairly presented.
Are there any other changes?
The new Act also makes a number of other key changes which are largely favourable to policyholders, particularly in relation to warranties and basis of contract clauses.
Warranties in an insurance policy are typically contractual terms whereby the policyholder promises either that a given state of affairs existed prior to inception of the insurance or that it will continue to exist during the currency of the risk. Under the new Act, warranties are to be treated as suspensive conditions, meaning that if the policyholder breaches a warranty, the insurer's liability will only be suspended during the period of breach and the insurer will be liable for losses that take place after a breach of warranty has been remedied (assuming that this is possible).
Basis of contract clauses are also to be abolished. These clauses currently operate to turn the policyholder's pre-contractual representations, including answers to proposal form questions, into warranties.
Can insurers contract out of the new Act?
Insurers are not permitted to contract out of the prohibition on basis of contract clauses.
If insurers wish to contract out of other provisions in the new Act such that the policyholder would be placed in a worse position, that disadvantageous term will only be effective if it is clear and unambiguous and sufficient steps are taken to draw it to the attention of the policyholder before it is agreed.
In the period immediately after 12 August 2016, the most important step for policyholders to take is to make sure that they fully understand how to comply with the duty to make a fair presentation of the risk, particularly in relation to search requirements and understanding who within the business will constitute the "senior management" and "those responsible for procuring insurance".
Policyholders should also be careful to check any updated terms of business that are put in place with their brokers in light of the new Act, as well as the wording of their insurance policies.