The Insurance Act 2015 (“the Act”) has been described by some as the most significant change to UK commercial insurance law in the past 100 years. Others claim that, in codifying existing case law, it doesn’t do much more than tinker at the edges. Where does the truth lie? Insurance professionals, such as brokers and insurers, will be required to understand fully the implications and requirements of the reforms, and property owners who purchase insurance should either carry out their own research or rely on the advice of their broker to fully understand the new legislation.
Get your facts right
The Act does not really simplify the process of arranging insurance. In fact a more common opinion is that it will make things more complicated and add areas for legal disputes; many of the new terms are not fully defined.
The new legislation replaces the duty of disclosure when presenting your risk. It imposes an ongoing responsibility that calls for disclosure of facts in a reasonably clear and accessible manner with the representation of stated facts being “substantially correct” and made in good faith. It also states that 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, particularly in relation to any special facts about the risk that might influence the insurer’s judgment.
This puts a very broad responsibility on all parties to ensure that insurance is arranged on the correct basis, including the buyer. It is too early to be sure about the levels of presentation requirements that will be expected from individual companies – we need to wait and see how insurers and/or brokers fact-find to avoid presentation pitfalls – but this issue may present a major challenge for the risk community over the coming years.
A “fair presentation” can be defined as “a presentation that discloses, in a manner that is reasonable, clear and accessible, every material circumstance which is known, or ought to be known, by an insured’s senior management, or those responsible for arranging the insurance, following a reasonable search”.
Case study
If a breach occurs, insurers have more options than just making the policy void. This could be prejudicial or beneficial to the buyer. In the case of a deliberate breach the contract can be treated as if it never existed. 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.
Take, for instance, this hypothetical claim. A risk is presented to insurers as a block of flats. However, following a fire claim with costs of £50,000, it is discovered that insurers had not been advised there was a takeaway on the ground floor.
Underwriters consider the use of the building to be material to the risk and that this is a breach of the duty of fair presentation. They argue that the premium charged would have been £5,000 instead of £3,000 if the risk had been stated properly and so the insurer considers it is only liable to cover 60% of the claim. Therefore the claim payment would only be £30,000: a shortfall of £20,000.
Warranties
The current legislation regarding “warranties” can be seen to favour insurers in rejecting claims. Warranties are policy requirements that, if breached, discharge insurers from their liability in the event of a claim. An example is a deep-fat frying warranty requiring the extraction system to be cleaned by a professional on a regular basis, where the frequency is usually specified.
Consequently many buyers of insurance are not aware that if they suffered a loss, even if not directly linked to a breach of warranty, insurers could refuse to pay. In the example given, a claim could be declined for a fire caused by something completely unrelated to the extraction system, simply because the warranty was not adhered to.
The new regime, as long as your insurer is contracted in, does offer clarity. If a breach is unrelated to the cause, it will still be covered. In other words, a warranty cannot be used as a get-out-of-jail-free card by insurers.
Contracting out
Insurers are given the ability to contract out. It is still early to report on how and where this option might be used and your insurance broker needs to keep abreast of developments in order to advise you appropriately, particularly when comparing quotes or marketing a risk.
The new legislation introduces many elements of uncertainty. When the Act comes into effect in August 2016, 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 really mean. But insurers and their clients will need to be well 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.
Property owners will, therefore, need to engage closely with their brokers in the coming months to ensure they stay well clear of the contractual pitfalls. As a minimum you should be liaising frequently with your broker to keep you abreast of developments and the implications of the Act across the industry.
Peter Morse is executive director at property broker Clear Insurance
