What is the Insurance Act 2015?
This is a new legal framework affecting every business insurance policy placed, renewed or amended after 12th August 2016.
The act modernises current insurance law and aims to make your dealings with insurers simpler and fairer in the event of claim.
However, these benefits are dependent on the customer making a ‘fair presentation of risk’ or in laymen’s terms providing all the material facts about your business, that you are aware of and at your disposal.
How does the Act affect you directly?
The biggest change for customers is to ensure a fair presentation of your company’s risk to insurers:
The existing obligations of good faith and ensuring accuracy of material information remain unchanged.
The Act, however, sets out what a customer must do for a presentation to count as fair, of which there are two key areas you should consider:
‘Reasonable Search’ – a new obligation which will vary based on business circumstances:
- The customer must make adequate enquiries within their business to identify and verify information relevant to the risk(s) concerned.
- These must include all relevant knowledge of the ‘senior management’ of the business and those involved in the buying of the insurance (including us your broker).
- Reasonable enquiries must also be made of any relevant third parties involved with the business, including external consultants, accountants, contractors and anyone insured by the policy.
‘Clear & Accessible’ – presentation of risk information
- This addresses the clarity of the information provided and how able insurers are to assess the risk to be insured. Providing too much information or ‘Data dumping’ without clearly saying what its relevance is, is unacceptable.
- There is also an additional requirement to adequately highlight unusual activities and/or known areas of concern that could affect an insurers understanding of the risk.
What happens if I make a misrepresentation?
In the event that you make a misrepresentation of information which is considered to be deliberate or reckless i.e. you were aware that you were making a misrepresentation or did not care whether or not you were misrepresenting the risk, an insurer will be allowed to avoid your policy, which means that any claims you make will not be met and no refund of the insurance premium will be made.
If however you make a misrepresentation of information which is not deliberate or reckless i.e. you appropriately carried out your duty to make a fair presentation but made an honest mistake or omission there are a number of remedies which may be applied by the insurer to achieve a fair outcome as follows:
- If the insurer can prove that it would not have written the policy at all, the insurer can avoid the policy but must return the premiums paid.
- If the insurer would have accepted the risk but on different terms, the contract is to be treated as if it included those terms.
- If the insurer would have entered into the contract but charged a higher premium, the insurer may reduce proportionately the amount to be paid on a claim.
Warranties & Terms
The Act also includes changes to the way that the law deals with insurers rights in the event of breaches of warranties and terms. These changes will affect both commercial and personal insurance contracts.
Clauses which have the effect of turning representations made by you into a warranty will be prohibited under the Act.
An insurer will no longer be able to avoid a policy where a breach of warranty occurs; instead cover will be suspended for the period that you are in breach of the warranty. This means that where it is possible you may be able to remedy the breach of warranty and continue with the insurance policy; However Insurers will not be responsible for a loss during any period where cover was suspended for a breach of warranty.
The insurer cannot avoid a policy or limit or discharge its liability for non-compliance with any terms which are not relevant to the loss or did not increase the risk of loss which has occurred.
In order to ensure that you remain fully protected, you must continue to advise us of any warranty on the policy that you cannot comply with.
An insurer may wish to contract out of certain elements of the Act subject to your understanding and agreement and we will advise you of the implications of this should the situation arise.
As your insurance broker you can rest assured that we are on hand to help you understand your obligations under the Act and to guide you through the process of gathering the information required to make a fair presentation. We will undertake to present this information to insurers on your behalf in a way which is clear and accessible.
We will contact you in good time before your next renewal to formally start the process. In the meantime if you would like to discuss the insurance act or any other related Insurance matters please contact us.
The act does permit a client to ‘contract out’, in affect waiving the protections of the act should this be relevant to your business. This would however, need to be discussed with your insurance broker and may lead to insurers rating your policy differently to one that the act applies to.
What do businesses need to do differently?
From 12th August 2016 businesses will be required to ensure that their underlying procedures for buying insurance are compliant with the Act.
Six key steps can help achieve this goal:
- Ensure clear understanding, wherever possible, of the risks being insured (which determine what information is relevant).
- Document the process of compiling and checking risk information, recording any concerns or shortcomings.
- Develop draft answers to the key define the Act to ensure search is broad enough:
- Who counts as ‘senior management’?
- Who is ‘responsible’ for insurance in the business?
- Who else has relevant information (whether internal or external)?
- Clarify sign-off requirements and what is expected at each stage.
- Engage with your brokers and insurers to understand requirements and whether any ‘contracting out’ applies, involving other specialist advisers where required.
- Start the process early enough to accommodate the additional checks required and to ensure that all information is presented clearly.
As long as you are honest and not reckless (not caring) in helping the insurer understand the risk they are covering, then the Act provides you with what should be fairer treatment if your presentation is not fair. If you have been fraudulent or reckless in your presentation then the underwriter may have a right to avoid the policy from inception, pay no claims and keep the premiums.
The insurer will look at the risk at the time of a claim and if you have not made a fair presentation and in the absence of dishonesty or recklessness, they will have three options:
- To suggest that they would have charged more premium and reduce your claim proportionately.
- To suggest that they would have written the policy but on different terms, in which case they can rewrite the policy from inception and apply those terms
- To suggest that they would not have insured you at all and avoid the policy from inception and give you back your premiums.
CAN YOU SEE NOW WHY IT IS IMPORTANT TO GET THE PRESENTATION RIGHT FROM OUTSET, EVEN IF IT TAKES MORE TIME AND A GREATER LEVEL OF ENQUIRY THAN PREVIOUSLY?
REMEMBER THE INSURERS CAN APPLY THESE REMEDIES EVEN IF THE NON-DISCLOSURE OR MISREPRESENTATION HAS NOTHING TO DO WITH THE LOSS.
ALWAYS REFER THE MATTER TO US IF THE INSURER SUGGESTS THAT THEY MIGHT NOT PAY YOUR CLAIM IN FULL