With effect from the 12th August 2016 the law affecting the placement of every business insurance policy will change. The new Act applies to all business insurance policies placed or renewed after the 12th August 2016, but also to any alterations to a policy after that date even if the policy was taken out before then. This is the biggest change in insurance law since the advent of the Marine Insurance Act 1906, although many businesses may be unaware of the change and how it will affect them. By the end of this article, you should be aware of the main changes to the law and what you need to do in order to benefit from it.
Change in the Law
The new Act aims to modernise the law in order to bring it in line with modern commercial practice, and to make recovery from insurers simpler and fairer in the event of a claim. There is however a balance between the protection to both Policyholders and Insurers, and the benefits to Policyholders are consequent upon making a “fair presentation” of the risk involved.
Under the current law, policyholders have a duty to disclose “all material facts” and an insurer can avoid a policy entirely if there has been a non-disclosure of all relevant information – this means that claims will not be paid. Under the new law, if the insurer believes that there has not been a “fair presentation” it may now have to deal with any claims, but this will depend on the seriousness of the breach of the duty of disclosure:-
- If the non-disclosure is deliberate or reckless, the insurer can still avoid the policy, refuse to deal with claims, and keep the premium
- If the non-disclosure is innocent, but the insurer would not have taken the risk if it knew the true facts, it can still avoid the policy and refuse to deal with claims, but it must return the premium
- If the non-disclosure is innocent, and the insurer would have provided cover, but at different terms, it will pay the claim, but make adjustments in proportion to the degree of breach
It is therefore essential that you provide a “fair presentation” when making any request for insurance.
As there are so many potential differences between businesses, it is impossible to specify every piece of information that could be required and the Act therefore does not define exactly what constitutes a “fair presentation”. It does however clarify the nature of information that is required, and how it should be obtained.
There are 3 key elements that constitute a fair presentation:-
Complete and Accurate
In line with the current law, you must fully disclose all material information that could influence the insurers decision to offer cover to you, or at what terms. You must highlight unusual activities or known areas of concern that could affect the business.
Clear and Accessible
The information must be presented in a manner that is reasonably clear and accessible. The dumping of large amounts of data without drawing the attention of the underwriter to key points is now unacceptable within the new statute.
Where the policyholder is not an individual, the Act makes it clear that the company must provide information which it ought to know following a reasonable search of information available to it. This means that it is not just information known to the person responsible for placing the insurance, but also other members of “senior management” who play significant roles in the company’s activities and decision making, and also external parties such as managing agents or consultants to the business.
What should businesses do in order to comply with the Act?
In order that you can make a “fair presentation” to the insurer, you should :-
- understand the risk that is to be insured, as that will identify what information is relevant to the underwriter
- identify who counts as “senior management” within the business, and also any external sources that hold any relevant information
- make sure that “senior management” and other sources of information provide it to person responsible for placing the insurance
- engage with your insurance Broker to discuss your specific requirements and to understand what is expected of you
- start the process early enough to ensure that the appropriate information is identified and provided to your broker/insurer in a timely manner
Benefits of the Act
Rather than avoiding the policy in full due to non-disclosure, the insurer may have to pay the claim in part based on the proportion of the premium paid when compared to the premium that would have been required based on the true facts. If the premium would have doubled, you have only paid half the required premium and would therefore receive half of any claim. Whilst this is not an ideal situation, there is already talk in the industry that some insurers may decide to pay claims in full where there is innocent non-disclosure. We expect to hear more about this as the Act implementation date draws nearer.
Warranties to be abolished
Under the current law, a policy can be avoided from the time a Warranty is breached, and even if it is subsequently rectified, the policy remains invalid. Under the new Act, Warranties must be replaced with “Suspensive Conditions” under which cover will only be suspended during the period the condition is being breached, but will be in place once the breach has been rectified.
Terms not Relevant to the Loss
Under the current law a claim can be refused due to non-compliance with a policy condition. Under the new Act, the insurer can not refuse to deal with a claim due to non-compliance with a condition if such non-compliance could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred
We hope this has explained the main features of the Act, but if you have any questions or queries our General Insurance team will be more than happy to assist.