The Insurance Act 2015

The Insurance Act 2015 will apply to all Commercial Insurance policies placed or varied on or after 12 August 2016. The purpose of the Act is to modernise and clarify insurance law, it will reform Insurance Contract Law in the following areas:-

• Disclosure And Misrepresentation Including Fair Presentation
• Insurance Warranties, Conditions And Other Terms
• Insurers' Remedies For Fraudulent Claims
• Contracting Out Of The Insurance Act
• Disclosure And Misrepresentation Including Fair Presentation
  - The Act updates standards for how insureds disclose information to insurers, moving from a principle of "utmost good faith" to a principle of "fair presentation" of the risk.
  - Insurers may avoid a contract if there is any fault in the insured’s representations. In some cases the act will limit insurers to more proportionate remedies
• Insurance Warranties, Conditions And Other Terms
  The act abolishes "basis clauses" - the standard practice of converting insureds' representations into warranties, for which any breach might void the whole contractBreach of warranty by the insured will no longer permanently discharge an insurer's liability, but may only suspend it for the duration of the breach
• Insurers' Remedies For Fraudulent Claims
  The act provides remedies for fraudulent claims by policy holders
• Contracting Out Of The Insurance Act
  It remains open to any insurer to 'contract out' of the terms of the insurance act

This is intended to be a summary of the new Act. Please contact us if you require more detailed information.

As under the current law, the Act will not detract from your right to try to negotiate different policy terms and to put yourself in a better position than you would be under the Act. It will still be open to insureds to try to negotiate more beneficial terms with insurers.

The Insurance Act 2015 will apply to all Commercial Insurance policies placed or varied after 12 August 2016. The purpose of the Act is to modernise and clarify insurance law, it will reform Insurance Contract Law in the following areas:-

• Disclosure and Misrepresentation in commercial and other non consumer insurance contracts.
• Insurance Warranties and other terms
• Insurers' remedies for fraudulent claims.

Disclosure and Misrepresentation

Insurance contract law is governed by the principle of Uberrima Fides (Utmost Good Faith). Currently this principle requires the insured to disclose every material circumstance they know or ought to know about the risk.

The duty of disclosure currently only applies to commercial insurance contracts (based on the Marine Insurance Act 1906). A material circumstance is defined as something that would affect the judgement of a prudent insurer in deciding to take the risk and on what terms.

The Insurance Act creates a new duty - the duty of fair presentation and specifies whose knowledge needs to be captured when preparing a risk presentation and applies proportionate remedies where the principle of utmost good faith has been breached.

The duty of fair presentation is a realistic approach and is aimed at encouraging active rather than passive engagement by insurers as well as clarifying and specifying known or presumed to be known facts.

A fair presentation of a risk is defined as one which makes a disclosure of every material circumstance which the insured knows or ought to know or; a disclosure which makes the insurers aware that they need to make further enquiries to reveal every material circumstance. The need to make 'further enquiries' is consistent with the current approach adopted by the courts and, tackles concerns about underwriting once a claim has happened.

Any disclosure needs to be made in a clear and accessible way. This should prevent brief submissions but should also combat the reverse where too much information is provided with no clarification on what is material. A fair presentation does not need to be contained in only one document or oral presentation.

A fair presentation of risk requires that every material representation about a fact must be substantially correct and every material representation about an expectation or belief is made in good faith.

It should be noted that if the insurer is made aware that further enquiries are necessary and they do not follow up on this then the Act does not require the insured to disclose circumstances if:-

• It diminishes the risk
• The insurer knows it:- An insurer will know something only if it is known to one or more of the individuals who participate, on behalf of the insurer, in the decision whether to take the risk and if so on what terms.
• The insurer ought to know it: - An insurer ought to know if, an employee or agent of the insurer knows it and ought to have passed on the relevant information to an individual or, the information is held by the insurer and is readily available to an individual who participates in the decision whether to underwrite the risk.
• The insurer is presumed to know it:- an insurer is presumed to know things which are common knowledge and things which an insurer offering this class of insurance would reasonably be expected to know in the ordinary course of business.
• It is something to which the insurer waives information

The Act specifies the information the insurer should be able to find out within their own organisation and reflects the reality that insurers already hold information about the risk itself or the type of risk in general.

What a client is expected to know (Knowledge of the insured)

What a client is expected to know will vary depending on the size and complexity of the business.

A client who is an individual will obviously be expected to know what they themselves know! But also what is known to one or more of the individuals who are responsible for the insured’s insurance which may include their insurance broker.

A client who is not an individual is expected to know what is known to one or more of the individuals who are:-

• Part of the insured's senior management team
OR
• Responsible for the insured’s insurance

The Act acknowledges that businesses are now much more complex than they were in 1906 with knowledge spread right the way across organisations. The Act defines whose knowledge counts. It recognises that it is unreasonable to expect every material fact known by an intern or engineer to be available to those purchasing insurance but acknowledges that insurers do need this information to price and evaluate the risk. The Act distinguishes between information known to the senior management and if different, buyers of insurance and information held by other areas of the business.

A client / the insured ought to know what could have been revealed by a reasonable search of information available. Information includes information held within the insured's organisation or by any other person such as the insured's agent or a person for whom cover is provided by the contract of insurance. What constitutes a 'reasonable search' will be determined by the size and complexity of the business. The safest approach is for a client to assume that the insurer holds no prior knowledge.

A client is not expected to know confidential information known to an individual if the individual is the insured’s agent and the information was acquired by the insured’s agent through a business relationship not connected with the contract of insurance.

It will be essential to involve people who know the risk, people who can present the information and senior people who can sign the information off as accurate. It is important the insured understands the new disclosure process and is aware of the information submitted to insurers.

Knowledge: General

Reference to an individual’s knowledge includes not only actual knowledge but also matters which they suspected and could have substantiated but instead they deliberately refrained from confirming them or enquiring about them.

Practical implications for Clients:

Firms should be aware of (and keep an internal record of the names and roles of individuals responsible for decisions.)

Remedies for a breach of duty of pre contractual disclosure

The Act introduces a system of proportionate remedies where the duty of fair presentation has been breached. The remedies reflect the nature of the non-disclosure and the circumstances that gave rise to the non-disclosure. The remedies mirror those under the Consumer Insurance (Disclosures and Representations) Act 2012

A breach for which the insurer has a remedy is referred to as a Qualifying breach.

A qualifying breach is either deliberate or reckless or neither deliberate or reckless.

A breach is Deliberate if the insured knew that it was a breach of the duty of fair presentation. A breach is Reckless if the insured did not care whether or not it was a breach of the duty of fair presentation. It is up to the insurer to show that the qualifying breach is either deliberate or reckless.

If a qualifying breach is deliberate or reckless the insurer may avoid the contract and refuse all claims and does not need to return any of the premiums. Or the insurer may terminate the contract with effect from the time when the variation was made and need not return any of the premiums paid.

If a qualifying breach was neither deliberate nor reckless but the insurer would not have underwritten the risk had they known all the facts then the insurer may avoid the contract and refuse all claims but must return the premiums paid. If the insurer would have underwritten the risk but on different terms the contract is to be treated as if it had been entered into on those different terms e.g. a higher excess applies.

If the insurer would have underwritten the risk but would have charged a higher premium the insurer may reduce proportionately the amount to be paid on a claim. The Act has set down a formula for working out what is proportionate reduction. Previously an insurer was able to refuse all claims if the pre contractual disclosure duty was breached.

To bring an action for non disclosure insurers must show that, if there had been a fair presentation of the risk, they would not have underwritten the policy at all or if they had they would have underwritten it on different terms. To prove how they would have acted if there had been a fair presentation of risk may mean disclosing underwriting guides and other relevant documents and underwriting records of decisions made and factors considered in a particular case.

Insurance Warranties and other Clauses

The Act has made three adjustments in respect of warranties, terms and other clauses:-

1. The Act abolishes Basis of Contract Clauses for commercial customers. These have already been abolished for consumers. This means that insurers will no longer be able to convert pre contractual information supplied into warranties that must be complied with.
2. The Act also allows for cover to continue where a breach of a warranty is remedied. Rather than a policy being terminated due to a breach of warranty cover will be suspended until the breach is remedied. However, clients should still take care to adhere to warranties as some breaches can never be remedied. Also if a loss is suffered once liability is resumed, and the insurer can prove something that occurred during the suspended period contributed to the loss then, the claim can still be repudiated.
3. The Act also prevents insurers using a breach of warranty or condition precedent or other term to exclude or limit or discharge liability if the insured can show that the non compliance had no impact on the loss that occurred.

These changes are fairer to clients however, they may result in longer negotiations in the event of a claim rather than an immediate repudiation. Also terms may be enforced more stringently whereas currently judges construe terms in a more favourable light for policyholders with insurers often waving some of their rights to preserve relationships.

Remedies for Fraudulent Claims

The Act provides remedies for fraudulent claims by policy holders under consumer and non consumer contracts:-

If the insured makes a fraudulent claim under a contract of insurance

1. The insurer is not liable to pay the claim
2. The insurer may recover from the insured any sums paid in respect of the fraudulent claim and
3. The insurer may treat the contract as terminated with effect from the time of the fraudulent act. If the insurer does treat the insurance as terminated the insurer may refuse liability and retain any premiums paid. Treating an insurance contract as terminated does not affect the rights and obligations of the parties to the contract in respect of a relevant event occurring before the time of the fraudulent act.

Previously in the event of fraud an insured would forfeit the whole claim and insurers could avoid the whole contract.

The same remedies apply in respect of fraudulent claims made by persons under group insurance policies although; only in respect of those persons who committed fraudulent acts. Therefore, insurers will have to serve notice on the fraudulent member and the person who took out the policy. Sums paid in respect of the claim may be recovered from the person who committed the fraudulent act or the person who took out the policy on behalf of the group if they have not passed sums on to the fraudulent person. If the cover is to be terminated it is in respect of the fraudulent person and it is their premiums that do not need to be returned and it is them who no longer has cover.

Contracting out of the Insurance Act:

It remains open to any insurer to ‘contract out’ of the terms of the Insurance Act:

• However, to contract out, the insurer must take certain steps to draw the insured’s attention to the fact that there is a term in their contract that is potentially disadvantageous to the insured, before the contract is entered into or the variation is agreed
• The disadvantageous term must be clear and unambiguous as to its effect
• Even if contracting out, the insurer cannot escape the effects of the Act with regard to basis clauses