The new Insurance Act has been described by some as the most significant statutory change to UK commercial insurance law in over 100 years.
So what impact will the new Act, which comes into force in August 2016, have on local business?
Certainly some changes – such as the new legislation on warranties – will introduce a much more level playing field. That’s very good news for our clients.
For South Yorkshire firms, the warranty issue was the main springboard for this new legislation.
Warranties will exist, but in a much limited form and it will be harder to create them.
That’s because the so-called ‘basis of contract’ clauses in insurance proposal forms will no longer have any effect.
Wordings will have to be substantively revised to take this into account.
The Act also limits the scope of warranties by ensuring that breaches that are irrelevant to the loss will no longer discharge insurers from liability.
If you can show that your failure to comply with any term in the contract would not have increased the risk of the loss that occurred, then the insurer cannot use the breach to limit liability.
What’s more you now have the power to remedy a breach by, say, installing the required sprinkler or alarm system. Once installed you cease to be in breach and the risk is insured as originally stated.
In essence the new legislation replaces the duty of disclosure with a ‘duty of fair presentation’. In other words it calls for disclosure of facts in a reasonably clear and accessible manner with the representation of stated facts being ‘substantially correct’ and expectations made in good faith. This is partly designed to stamp out practices such as ‘data dumping’, sometimes used to conceal key aspects of the risk.
In future you will need to disclose either every material circumstance you know or ought to know, or provide sufficient information to make the insurer aware that they need to make further enquiries to reveal the salient facts. That includes any special facts about the risk that might influence the judgment of a so-called ‘prudent insurer’.
This introduces a very broad responsibility. The vision behind the Act was to bring together insurers, brokers and policyholders to develop their own protocols for setting out what a standard presentation of the risk should encompass.
In the light of the presentation requirements this is likely to create a major challenge for the risk community to address over the coming months. If, for example, only material circumstances that are ‘known or ought be known’ have to be disclosed, who is responsible for providing this information and making decisions about its relevance? Your senior management team? Your risk manager? Your broker or other advisers? It is likely that your company will need to change processes and protocols in order to accommodate the legislation.
The Act states that the insured has to make a ‘reasonable search’ of the information available, including data held by their agents or others who will be covered by the insurance.
‘Reasonable search’ is clearly a term which will be open to interpretation as will the issue of internal investigations of material circumstances. It appears that if circumstances are merely ‘suspected’ of being relevant they must be disclosed.
What is clear is that if the duty of fair presentation is breached the insurer may avoid the contract.
In the case of a deliberate breach the contract can be treated as if it never existed.
And if fraud is involved an insurer can terminate the contract from the date of the fraudulent act and need not return any premiums paid.
Even if the breach was not deliberate or reckless, the decision will be based on what the underwriter would have done if a fair presentation had been made.
When the Act comes into effect, it will inevitably require some time to bed in. It will take the normal process of case law before we can interpret what all of the new provisions mean.
But insurers and their clients will need to be ahead of the curve because, once the legislation takes effect, it will apply to all commercial insurance and renewals and some of the provisions will also impact on consumer contracts.
It’s true that, for some complex and high risk non-consumer contracts, insurers can opt out of key provisions of the Act – but only if any less favourable terms are clearly and unambiguously drawn to the insured’s attention.
In my view the new legislation is broadly good news for local firms. But it introduces many elements of uncertainty. They will need to engage closely with their brokers in the coming months to ensure they stay ahead of the contractual game.