With The Insurance Act (2015) having come into effect on 12th August 2016, property professionals should make sure they understand the changes made by new legislation. Kevin Donegan, Clear Insurance Management Ltd gives his professional opinion on how the Insurance Act 2015 will affect the sector.
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, including Managing Agents, 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 seek the advice of their broker and Managing Agent to fully understand the new legislation.
Reasons for change
The government is introducing new legislation to:
- ensure better information exchange between insurance purchasers and insurance providers;
- reduce the number of disputed claims, lowering legal costs and minimising disruption;
- reduce the number of rejected claims; and
- increase purchasers’ confidence in the insurance sector.
So what’s changing?
In summary, the following are the main changes which apply to all commercial policies set up, renewed or amended after 12 August 2016:
- New responsibilities for policyholders to provide all relevant information to underwriters
- Policyholders must involve all relevant senior management when compiling information for insurers
- The potential remedies for insurers for non-disclosure or fraud, making a more level playing field between the insurer and policyholder
- Changes around how insurers must deal with a breach of warranty making the position fairer for the policyholder.
Get your facts right
A “fair presentation” can be defined as “a presentation that discloses, in a manner that is reasonably 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”
The Act does not really simplify the process of arranging insurance. In fact, a more common opinion is that it is likely to make things more complicated and potentially add new areas for legal disputes as 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 states that you will need to disclose every material circumstance you know or ought to know about the risk. This is anything which would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms.
There is no specific definition of material circumstance, but it would typically include any factors pertaining to the risk to be insured including prior claims, financial history, convictions of key personnel including directors, details of the premises, fire/security arrangements, health and safety issues etc
This puts a very broad responsibility on all parties to ensure that insurance is arranged on the correct basis, including the Policyholders, Directors and Managing Agents. It is too early to be sure about the levels of presentation requirements that will be expected from individual Insurers – 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.
Brokers and Managing Agents may have acted for Policyholders for many years, and acquired considerable knowledge of the client’s business. It is therefore right that the ‘Fair Presentation’ should include not only information known by the insured, but also any information received or held by the broker or Managing Agent in the course of acting for the policyholder. This should apply to everyone in the chain.
If a breach of Fair Presentation occurs, insurers have new rules around the way they must act.
In the case of a deliberate breach the contract can be voided (treated as if it never existed). This includes a return of any claims already paid. However; 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.
Note that, if the insurer would not have taken on the risk were it aware of all the facts, it can still void the policy.
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.
Many buyers of insurance are not aware that, under the current law, if they suffered a loss, even if not directly linked to a breach of warranty, insurers could refuse to pay. In the example given above, 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 does offer clarity and a fairer situation for customers. If a breach is unrelated to the cause, a loss will still be covered. In other words, a warranty cannot be used as a get-out-of-jail-free card by insurers.
Insurers opting out
One final point to consider is that insurers are given the ability to ‘opt out’ of the majority of the new Act.
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.
Conclusion so what do I need to do?
The new legislation introduces many elements of uncertainty. When the Act comes into effect in August, it will inevitably require some time to bed in. It will take the normal process of case law before the industry can interpret what all of the new provisions really 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.
Policyholders and Managing Agents 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.
We know that every customer is different, and the new requirements will affect each property in different ways. The size and complexity of some property risks may also mean action is required well in advance of the implementation date.
When you first renew a policy under the new Act (or make an amendment once the Act is in force) you should take the time to carefully identify who within your business needs to be involved in gathering the relevant information.
You should also take into account changes to the information required by insurers, which now includes not only facts that you know, but those that you ‘ought to know’.