• The Insurance Act goes into effect on 12th August 2016 and affects all commercial insurance policies governed by UK law.
• The Act introduces a new ‘duty of fair presentation’, requiring insureds to capture more knowledge from more people in their organisations.
Many industry insiders are hailing the Insurance Act as the most significant change to UK insurance contract law in more than a century.
What Changes Does the Act Bring?
1. The Duty of Fair Presentation
You must make a fair presentation of your business to insurers so that they can assess the risks and offer terms. We will help to do this on your behalf but we cannot fully assume what is a legal duty on the insured: you know your business best and we need you to supply us with all the relevant information. Some of the information we will require will come from the completion of a fact find or a proposal form. However, as every business has unique aspects you must advise of any material circumstances known to you or arising from your enquiries. In particular, this should include any unusual activities or additional facts that may influence any underwriter’s decision in accepting the risk.
• Such information should be disclosed before any insurance is taken out.
• You must disclose all material information known to senior management and the people who arrange insurance at your company.
• You will also need to disclose information revealed by a reasonable search.
2. Warranties and Conditions
Under the law applying to insurance placed before the 12th August 2016, should you breach a warranty noted under a policy, an insurer is automatically discharged from any liability, regardless of whether the breach was related to the loss or not, i.e. they will not have to pay any claim.
The new Act allows insurers to suspend cover where there has been a breach of warranty rather than discharge the liability altogether, i.e. if something you originally disclosed or agreed to do turns out to be false or not done, the insurer will not pay out for any claim you may make. However, under the new Act, cover is reinstated as and when the breach has been rectified.
In addition, where the warranties are designed to reduce a specific risk of loss and these warranties are breached the insurer will only be able to refuse cover if the warranty was relevant to the loss that occurred. However, it is up to the insured to show that the breach of warranty could not have increased the risk of loss that occurred in the circumstance in which it occurred.
3. Fraudulent Claims
Currently, insurers faced with a fraudulent claim may be able to recover any claims payments previously made under the insurance contract for entirely legitimate claims.
The Act provides that the insurer:
• Will not be liable to pay fraudulent claims;
• Can elect to terminate the insurance contract and refuse to pay claims relating to losses suffered after the fraudulent act and can keep any premiums already paid;
• But, importantly, will remain liable for all legitimate losses suffered before the fraud (a change to the previous legal position).
4. Contracting Out
Although insurers do have the option to opt out of most parts of the Act, they are obliged to take sufficient steps to draw attention to any “disadvantageous terms” before you take out the contract of insurance. Note that insurers do not need to specifically identify such terms as deviating from the Act, provided they are clearly explained.
How to Comply
Although the new Act may seem complex, it only requires you to make small changes to your insurance-buying process. It does place more responsibility on your shoulders, but in return, the Act protects your business and ensures your cover is as effective as possible. The Act can be easily applied provided you take certain measures, such as the following:
• Investigate whether there is anything special or unique about the risk your business faces that should be clearly indicated to insurers.
• Identify who counts as ‘senior management’ and those who buy insurance in your business.
• Assess your data-gathering process—does it need to be more in-depth to ensure insurers have all the necessary information to write your policy?
• Determine whom in your business needs to be consulted as part of a reasonable search for information related to the insurance you purchase as a business.
• Ensure that you consult with any third parties or individuals in your business that may have material information that may need to be shared with insurers (external consultants, contractors, etc.).
• Establish a process for documenting that you undertook a reasonable search for information.
• Leave more time for renewing your insurance, especially for gathering the necessary data for insurers, as now you will likely need more data, presented in a clear and accessible manner.
• Research your business’ risks so you have a comprehensive understanding of what data insurers may need.
• Talk to us! We’re here to help you translate some of the complexities of the changes that this Act brings to both businesses and business owners.
If there is anything that A-Plan can do to assist your understanding of the Insurance Act, we will be more than happy to help. We are also happy to guide you through the fact finding process to ensure that you are offered insurance that is both competitive and properly covers your business risks.
In addition, we have published a guide which aims to inform you in more detail about the key changes. Although it is not intended to advise you on your legal rights and obligations, it will, hopefully, provide a good background to inform your conversations with us about your insurance business. There is also a glossary of key terms, used here and in the guide.