The Insurance Act 2015 received Royal Assent on 12 February 2015 and comes into force in full on 12 August 2016 after a transitional period of 18 months.
The 2015 Act signifies the greatest statutory change to commercial insurance contract law for over one hundred years. The most notable changes relate to disclosure in non-consumer insurance contracts; warranties and other contractual terms; and the remedies available to insurers for fraudulent claims.
This article examines the key changes introduced by the 2015 Act and sets out how it will affect insurers as well as insured parties in practice.
New Duties of Disclosure
Part 2 section 2 of the 2015 Act introduces the duty of fair presentation. This section only applies to non-consumer insurance contracts i.e. business insurance contracts. The purpose of this section is to encourage pro-active engagement by insurers as well as identifying known or presumed to be known matters.
Once the Act comes into force, prior to entering into a business insurance contract insured parties must make a fair presentation of the risk to the insurer and will have to disclose:
- Every matter which they know, or should know, that would influence the judgment of an insurer making a decision in relation to insuring the risk and upon what terms (broadly reflects the current position); OR
- Sufficient information to put an insurer on notice that they need to make further enquiries about potentially material circumstances.
Part 2 section 4 of the 2015 Act clarifies what insured parties will be considered to have known, or ought to have known. In summary, it is as follows:
- Matters which could be expected to be revealed by a reasonable search of information available to the insured e.g. information held within an organisation and is therefore easy to access.
- Anything known by a person responsible for their insurance
- Insured organisations will be deemed to have knowledge of anyone who is a part of the organisation’s senior management, or who is responsible for their insurance.
- Part 2 section 5 of the 2015 Act sets out what insurers will be considered to have known, or ought to have known as follows: Matters known to individuals who participate on behalf of the insurer in assessing whether to take the risk and upon what terms e.g. teams of underwriters;
- Knowledge held by the insurer and readily available to the person deciding whether to take the risk;
- Matters known by an employee or agent of the insurer and which should reasonably have been passed on to the person deciding whether to take the risk.
It is important to note that Part 2 section 7 provides that disclosure must be made in a reasonably clear and accessible manner, material representations of fact are required to be ‘substantially correct’ and material representations of expectation or belief must be made in ‘good faith’.
As a result of the new disclosure duties, commercially insured parties should review their disclosure processes to ensure that those responsible for obtaining insurance disclose all matters that they will be presumed to know. It is worth considering keeping internal records of names and roles of those responsible for procuring insurance cover as matters within their knowledge will need to be disclosed.
Insurers will not be able to adopt a passive approach to disclosure if they are seeking to exercise remedies for non-disclosure. Insurers will be encouraged to actively engage and should consider implementing systems and processes which flag when further enquiries should be made prior to underwriting risks.
Warranties and other contractual terms
Part 3 of the 2015 Act has now abolished ‘basis of contract’ clauses from non-consumer insurance contracts. Rather than discharging liability upon a breach of a warranty, this will now result in insurance cover being suspended for the duration of the breach and re-instated once the breach has been fixed.
Therefore, insurers will no longer be able to rely on non-compliance with a warranty or any other term relating to loss of a particular kind or at a particular location or time, if the non-compliance could not have increased the risk of loss that occurred in the circumstances in which it occurred.
Part 2 section 8 of the 2015 Act provides that insurers will have a remedy against an insured party who breaches their pre-contractual duty of fair presentation. Schedule 1 sets out the following remedies for insurers:
- In respect of deliberate and reckless breaches, insurers may avoid the contract, refuse all claims and retain any premiums paid.
- If the breach was neither deliberate nor reckless, insurers may avoid the contract and refuse all claims but must return any premiums paid.
- If the contract would have been entered into but on different terms, the contract will be treated as if it had been entered into on those different terms if the insurer requires.
- If the insurer would have entered into the contract but would have charged a higher premium, the insurer is permitted to reduce proportionately the amount to be paid on a claim using the calculation set out in Schedule 1 section 6.
In practical terms, to bring an action for relief for non-disclosure, insurers will need to be able to prove how they would have acted differently if the breach had not occurred. Accordingly, underwriting guides and records of how underwriting decisions have been made may now be required to be produced. Some of these documents may be commercially sensitive and insurers will have to consider the extent to which they are willing to disclose the same.
Part 4 provides the following remedies in respect of fraudulent claims made by insured parties:
- The insurer is not liable to pay the claim;
- The insurer may recover from the insured any sums paid by the insurer to the insured in respect of the fraudulent claim; and
- The insurer may, with notice to the insured, treat the contract as having been terminated. In these circumstance, the insurer may refuse all liability to the insured under the contract in respect of a relevant event occurring after the time of the fraudulent act and the insurer does not have to return any of the premiums paid under the contract.
In contrast to the previous position, Part 4 provides unequivocal guidance on the remedies available to insurers in the event of fraudulent claims.