Insurance Act 2015: A Guide for Businesses
The Insurance Act 2015, which came into force on 12th August 2016, is the biggest change in insurance law for over 100 years. The Act is directed at businesses in the United Kingdom and aims to address the imbalance between the insurer’s rights and your rights by making significant changes to several areas, including the following:
- The duty of disclosure and the remedies available to the insurer in the event of material non-disclosure and misrepresentation
- The interpretation of warranties and terms that are not relevant to the loss
- Fraudulent claims
- The abolition of basis of contract clauses
For businesses it means more information will be needed in order to enable your insurers to be fully aware of the risks they are underwriting.
So what do you need to be aware of under the new Act?
The changes start with the principal of fair presentation being:
‘A fair presentation of the risk requires disclosure, without misrepresentation, of every material circumstance that the insured knows or ought to know.’
There are six key elements of fair presentation – which must include:
- Knowledge of senior management
- Knowledge of individuals responsible for insurance, including information held by your insurance broker
- Information that should be revealed by a reasonable search
- Information presented in a clear and accessible manner
- No information considered insurer knowledge
- Sufficient information to put a prudent insurer on notice that it needs to make further enquiries to reveal material circumstances
A range of proportionate remedies will be available to the insurer in the event of non-disclosure:
If the non-disclosure is deliberate or reckless:
- The insurer can avoid the contract, refuse all claims and retain the premium;
If the non-disclosure is careless (not deliberate or reckless):
- The insurer may avoid the contract, refuse all claims, and return the premiums paid, if the insurer would not have entered into the contract
- If the insurer would have entered into the contract, but on different terms, the contract is to be treated as if written on those terms from the outset
- If the insurer would have entered into the contract at a higher premium, the insurer may proportionately reduce the amount to be paid on a claim
Warranties and other conditions
Previously, a breach of a warranty could result in an insurer avoiding the policy. Under the new Act, warranties are now “suspensive conditions”, which means an insurer cannot avoid the policy from the moment of breach. Instead, a breach will be treated as a suspension of the insurer’s liability while the insured is in breach but, if and when the breach is remedied, the insurer will be back on risk.
The insurer is no longer able to avoid the policy, in its entirety, if the breach of warranty is not relevant to the loss. For example:
A firm which has a no smoking policy suffers a burst water pipe which gives rise to a claim. Under the current legislation, the insurer could avoid the entire policy from inception if evidence of smoking at the premises was discovered, and may not pay the claim. The new Act will restrict the insurer’s ability to suspend the relevant section of the policy unless the breach of warranty is directly related to the loss and the claim will be paid as the breach was not relevant to the loss.
The Act provides clarity for the insurer in the event of a fraudulent claim being made.
Where the insured has committed fraud in relation to a claim the insurer:
- Will have no liability to pay the claim
- Can recover any payments already made in relation to the fraudulent claim
- Can terminate the contract from the time of fraud, and refuse to pay claims for losses occurring after the fraud
- Remains liable for all claims for losses suffered before the fraud
- Can retain premiums already paid
In group policies the above applies, but only with regards to the fraudulent claimant: therefore, innocent members of the group policy are not prejudiced.
Abolition of Basis of Contract Clauses
The basis of contract clause makes the declarations contained in an insurance proposal form the basis of any contract of insurance. Such declarations are currently converted into warranties by the insurer. If one of them is found to be untrue the insurer may disclaim all liability under the relevant contract, from the date of the breach, regardless of whether the false declaration was material to the underwriting of the contract or causative of any loss.
The new Act abolishes the use of these clauses.
The insurer and the insured can choose to contract out of the provisions of the Act (except for the abolition of basis of contract clauses) by mutual agreement. Any policy term which would put you in a worse position than under the Act must comply with certain transparency requirements. This means the terms must be brought to your attention before the contract is entered into and must be clear and unambiguous as to their effect.
In practice what does this mean for you?
As an insurance broker, our approach; when applying the measures of the new Act to any prospective, or currently retained, business account, will be to look at your business closely and ask you for detailed information about your requirements, such as:
- Insured interest – are we covering all parts of your business and any group company(ies)?
- Key changes – what has changed since last year?
- Business / operational description – what are the processes, products and services? Does your business description fully set out everything that you do?
- Risk exposure – how will your risk be rated by the insurer and review how these metrics help in risk management?
- Exposures explained – what are you insuring under your policy?
- Risk Management – how your business is governed and your risks managed?
- Loss experience – what does your loss record look like? Any trends, notable losses and lessons learnt?
We will then put all of this information into a standard format for the insurance companies to review, they will then have the opportunity to ask questions and ‘make further enquiries to reveal those material circumstances’ if necessary.
Once this process is complete we would be in a position to offer you competitive and appropriate terms – all the while keeping you updated on the progress of your quote.
We hope this guide has helped you to understand the new Insurance Act 2015 and how it will affect you and your business insurance. If you would like to speak with one of our experts about the new Act, or if you would like to discuss how we can assist you with your insurance requirements, please contact us. We have offices in Exeter (01392 363 111) and Barnstaple (01271 320 320)