The Insurance Act 2015 (“the Act”)

The Act comes into effect on 12 August 2016, replacing law that has been in place since 1906. It overhauls the existing law, and aims to rebalance the position between the buyers of insurance and Insurers. Whilst it puts an Insured in a better position than currently, it does impose a new duty on them, the ‘duty of fair presentation’.  This new duty will require you (the Insured) to change how information is provided to Insurers, and is explicit regarding who needs to be consulted when gathering such information.

The Act applies to policies that incept or renew on or after 12th August 2016; however, the new ‘duty of fair presentation’ applies to variations made to existing policies on or after 12 August 2016.  Examples of such variations include: change in type of work undertaken, significant acquisitions, substantial work to property or change in its use, and  other matters that materially increase the risk of loss,  damage or injury that may give rise to a claim under the policy.  (Please note: these are examples only and not an exhaustive list).

This document gives an overview of the most significant changes, with practical guidance on how to prepare for the new rules. For further information, including more detailed guidance, please contact your usual adviser.

Key points to consider are:

  • Data gathering and renewal preparations may take you longer.
  • You may need to devise new processes for data collection and submission, which are likely to involve more people.
  • Senior managers will need to be involved and need to be aware that they may not have cover if they do not get involved
  • You may need to consult other parties outside your organisation, e.g. consultants, agents, suppliers or those performing outsourced functions, to collect any material information that they may hold.
  • Keep a record of all information that is disclosed to Insurers and the process you took in order to meet your reasonable search requirement.

Contact

If you wish to discuss any of the information in this bulletin in further detail please contact your usual Aon contact

This publication is intended for the general guidance of UK-based clients only.  While this publication uses sources that are believed to be reliable, it is provided with no warranty or representation as to its accuracy, adequacy, completeness or fitness for any purpose and with no acceptance of liability for any loss whatsoever incurred by any person who may rely on it, regardless of the cause of the loss. Recipients shall be entirely responsible for the use to which they put this publication.  This publication has been compiled using information available to us up to March 2016.

The new “duty of fair presentation”

The duty of disclosure is now a “duty of fair presentation”.  This requires a slightly different approach to renewal.  Importantly, a “reasonable search” must be undertaken, senior managers and the (internal and external) insurance team must be involved in the information sweep.


Current law The Insurance Act 2015 What does it mean in practice?
Disclosure General duty to disclose all material facts Duty of fair presentation  
What is material? A circumstance that the policyholder knows or ought to know in usual business practice, which would have an effect on the mind of the prudent Insurer when assessing the risk

Full disclosure of every material circumstance that you know or ought to know;

Or, you must provide sufficient information to a prudent Insurer, so they are aware of the need to make further enquires to reveal material circumstances

(You must always aim to disclose all material circumstances)

The type of information that needs to be disclosed is not changing.

It includes specific or unusual facts relating to the risk to be insured and any particular concerns that led you to seek insurance cover for the risk.

Whose knowledge is relevant? No explicit requirement

Material circumstances known by:

 

-Your organisation’s ‘senior management’

- Anyone involved in the process of procuring your insurance on your behalf (both employees  and agents)

 

And

 

Material circumstance that would be revealed by a reasonable search of information:

 

-Known by others within your organisation

-Held by others

 

Senior management includes those individuals who play a significant role in the decision making about how your activities are to be managed or organised.  It includes the highest level of management e.g. the board, but will vary depending on your organisation’s structure and management arrangements.  There is no “one size fits all”

 

Those “involved in the process of procuring your insurance” is intended to include all those who participate in the insurance buying process, collate information about the risk, and negotiate with Insurer, whether as your employee or as an agent.

 

The reasonable search will vary based on the size and type of your business.  It is intended to include information held by persons or entities who are covered by the insurance plus others who may hold information e.g. outside advisers and consultants, suppliers/service providers, and outsourced service partners.  

 

It will be important to maintain a clear audit trail

- How disclosure is made?

No explicit requirement

Must be presented in a clear, accessible and structured manner to the Insurer.

- It must not be too brief or cryptic.  No ‘data-dumping’ allowed i.e. the provision of large amounts of undigested information.

Submit all information to Aon  in clear and organised documents


What happens if you fail to meet the new duty of fair presentation?

Under current law Insurers have only one remedy where the duty to disclose material information is not met, namely, full avoidance of the insurance policy. This is changing so that the consequences will vary depending on the reasons for failing to meet the duty of fair presentation, and depending on what the Insurer would have done differently had the duty been met at the outset.

N.B. The following describes the default legal position. Your policy may not reflect this position, so it is important to check your own policy. If in doubt, please speak with your usual Aon adviser.


 

Current law> The Insurance Act 2015 What does it mean in practice?

Any deliberate or reckless failure

The Insurer can avoid the policy

The Insurer can:

- Avoid the contract

- Refuse claims

- Keep the premium

 

A reckless breach of duty is defined as not caring whether or not the duty is fulfilled

Your policy may be invalidated

 

Not deliberate or reckless failure but

- the Insurer would not have provided any insurance

The Insurer can avoid the policy

The Insurer can:

- Avoid the contract

-Refuse claims

-Return the premium

 

Your policy may be invalidated

Not deliberate or reckless failure but

- the Insurer would have applied different terms (e.g. exclusions, and conditions but not  premium)

The Insurer can avoid the policy

The Insurer can continue with the insurance but will apply those terms that they would have wanted.

The policy terms may be worse than initially agreed and the policy may not respond as you expected.

This remedy can apply in addition to the insurer proportionately reducing a claim payment (described below).

Not deliberate or reckless failure but

-the Insurer would have charged a higher premium

The Insurer can avoid the policy

The Insurer can reduce the claim payment significantly.

A claim may be proportionately reduced.  For example, if the premium charged is 75% of what the insurer would have charged, the claim payment will be adjusted to 75% of the total claim.

 

This remedy can apply in addition to applying different terms.


Other important changes

The Act changes the law on warranties, and loss mitigation terms.  It also abolishes Basis of Contract clauses.  These changes improve the position for Insureds.

N.B. The following describes the default legal position.  Your policy may not reflect this position, so it is important to check your own policy.  If in doubt, please speak with your usual Aon adviser.


 

Current law The Insurance Act 2015 What does it mean in practice?

Warranties

Non-compliance automatically terminates the policy

Warranties become “suspensive conditions”.

Cover is suspended only whilst the policyholder is in breach of the warranty.

Non-compliance of a ‘loss mitigation’ policy term  that has no bearing on the claim

Any breach whether or not relevant to the loss can affect the way the policy responds.  This depends on the type of policy term breached, but could, in the most severe case, terminate the policy.

For ‘loss mitigation’ terms (this includes warranties as well as conditions precedent and other policy terms), Insurers cannot limit or avoid a claim unless the breach is relevant and increased the risk of loss

‘Loss mitigation’ terms are those that relate specifically to a particular type of loss or a loss at a particular location or time

Fairer protection for you, because an Insurer can no longer use non-compliance of an unrelated warranty or other term to avoid paying a claim

Basis of contract (BoC)

BoC clauses are allowed and the Insurer can avoid the policy for any misstatement within the information provided to them

BoC clauses are prohibited

All information provided to Insurers (including answers to questions on a proposal form) can no longer be treated as a warranty, whereby any incorrect information automatically terminates the policy.


Practical tips

The Act has intentionally been written vaguely, allowing for flexible interpretation, and to suit the many different types of policyholders and insurances to which it will apply. As an unfortunate consequence, this makes provision of a definitive guide impossible.  The suggestions included here are intended as a helpful guide, to assist you as you prepare for the new duty.

General

  • Review your existing data collection and disclosure strategy and consider how this will need to be modified.
  • The process of data collection, validation and submission is likely to take longer, so you may need to start your renewal process earlier. 
  • Note:  A proposal form does not negate the new duty to make fair presentation.  A proposal form focuses on the typical, basic, material circumstances relevant to the type of insurance sought, but will normally also require you to declare any other material circumstances that is known or ought to be known by you.
  • Consider how details of new or changing material circumstances will be reported during the year.  (Most policies have an ongoing disclosure requirement). 
  • Be prepared to spend longer discussing the details of your organisation with us.
  • Consider how information will be documented and stored.  An audit trail will be vital to evidence that a client has met its duty to make a fair presentation of risk.
  • Do not point Insurers to company web-sites without direction.  Where particular information is provided on web-pages, consider how to accurately keep a record of its content for future reference.  This may be required at a later date to evidence what information was provided to Insurers.
  • Take early action to identify and document ‘senior management’ and ‘those involved in the insurance procurement process’. This ought to be by office or role, rather than individual name.  Consider what action is required to ensure the listings are maintained to reflect subsequent appointments and departures.
  • Raise awareness now to ensure senior management and insurance personnel know what is expected of them and ensure they are aware of the importance to meet the new duty of fair presentation and the potential consequences of not doing so.
  • Identify the types of operating areas or specialist functions that may be an in-house source of material circumstances.
  • Decide what process will be adopted to collect information from within your organisation, with due consideration to any inherent reporting issues.
  • Review policy wordings to identify the scope of insured parties and additional beneficiaries.  For example co-insureds, subsidiaries, additional insured’s, beneficiaries etc. or current and former directors under a directors and officers (D&O) liability policy.
  • Consider who else, outside your organisation, might hold details of material circumstances e.g. outsourced functions, suppliers, partners, financiers etc.  Take steps to ensure all such parties can in fact be identified and contacted. 
  • Decide how you will make a search for information held outside your organisation.

The information sweep

  • Take early action to identify and document ‘senior management’ and ‘those involved in the insurance procurement process’. This ought to be by office or role, rather than individual name.  Consider what action is required to ensure the listings are maintained to reflect subsequent appointments and departures.
  • Raise awareness now to ensure senior management and insurance personnel know what is expected of them and ensure they are aware of the importance to meet the new duty of fair presentation and the potential consequences of not doing so.
  • Identify the types of operating areas or specialist functions that may be an in-house source of material circumstances.
  • Decide what process will be adopted to collect information from within your organisation, with due consideration to any inherent reporting issues.
  • Review policy wordings to identify the scope of insured parties and additional beneficiaries.  For example co-insureds, subsidiaries, additional insured’s, beneficiaries etc. or current and former directors under a directors and officers (D&O) liability policy.
  • Consider who else, outside your organisation, might hold details of material circumstances e.g. outsourced functions, suppliers, partners, financiers etc.  Take steps to ensure all such parties can in fact be identified and contacted. 
  • Decide how you will make a search for information held outside your organisation.