The Insurance Act 2015 – What Commercial Insurance Buyers Need to Know
What is it?
The Insurance Act 2015 is a result of a fundamental review of insurance law that should lead to fairer outcomes to customers. It will help to modernise the insurance industry and improve the service that brokers and insurers provide to our customers. The Act aims to make recovery from insurers simpler and fairer in the event of a claim.
The most significant change in the new law is that insurers were previously able to avoid an entire policy if there had been a non- disclosure of material information. With the Insurance Act there is a new system of proportionate remedies in place.
A new legal framework will be in place for every business insurance policy placed, renewed or amended after 12thAugust 2016. Insurers have been updating policies to incorporate new clauses and to remove any non – compliant clauses.
Why are Anthony Jones telling you about this?
The Act directly addresses the contract you enter into with your insurer BUT in addressing simplicity it does so on the basis that you as a customer makes a “fair presentation of risk information”.
The existing obligations of good faith and accuracy of material information/facts will remain BUT there are two key elements that we must draw your attention to;
- You must make adequate enquiries within your business to identify and verify that information relevant to the risks concerned is disclosed.
- This must include knowledge of “senior management” of your business and those involved in buying insurance ( including us as brokers)
- Reasonable enquiries must also be made of any relevant third parties involved with your business, including external consultants, contractors and anyone insured by the policy.
- Clear and Accessible
- Risk information should be clearly seen by insurers and brokers and not masked in large amounts of information.
- You must highlight unusual activities and /or known areas of concern that could affect risk.
What is Material Information or Fact?
This is a circumstance or representation that would influence an insurer to offer insurance and, if so, on what terms. If you are unsure about what that means we recommend you talk to us as your broker.
You are not required to disclose matters which the insurer knows, ought to know, or is presumed to know.
Customers Procedures for buying insurance to comply with the act should change:
- Ensure clear understanding is made of the risks to be insured
- Document the process of compiling and presenting risk information to your broker and any concerns or shortcomings
- Understand who counts as senior management , who is responsible for insurance buying and who has relevant information
- Clarify sign off arrangements
- Start the process early enough to give your broker time to understand and place your covers
- Engage fully with your broker and understand whether insurers have “contracted out “ of any aspect of the Act
What else do you need to know…. and this is really important….
Insurer Remedies – Proportionate Settlement
An insurer must show that it would have acted differently if the policyholder had made a fair representation. Unless there has been deliberate or reckless behaviour (that means an insurer could still avoid a policy) insurers are able to apply terms with hindsight and past, present and future claims will be dealt with as if such terms applied to the policy.
Critically, if a higher premium would have been charged, any claims can be reduced proportionately. Zurich Insurance are the only major insurer (to date) to have “contracted out” of this element and replaced this with adjusting the premium due to facts that come to light. So, customers choosing to pay the increased premium have claims settled in full.
Charging additional premium is not a remedy available to insurers under the Act. Under the Act, if you fail to make a fair presentation or risk (and this is not deliberate or reckless) and the insurer would have charged additional premium if it had been aware of the relevant material facts, the insurer has the right to reduce the amount to be paid on any claim during the period of cover in proportion to the amount of premium that would have been charged. This remedy is often referred to as ‘proportionate reduction of claim’ or ‘proportional settlement’.
Warranties and Conditions
The 2015 Act abolishes “basis of contract” clauses – statements of facts in a proposal for insurance into strict warranties. In the event of a breach of a warranty an insurer’s liability will be merely suspended rather than discharged. In practical terms it will often fall to the customer to prove that a breach has been rectified.
The customer is helped by preventing risk mitigation terms being applied where they are irrelevant.
Insurers cannot contract out of “basis of contract” clauses.
The 2015 Act clarifies the remedies an insurer has when a policyholder submits a fraudulent claim. The policyholder will forfeit the whole of that claim and insurers may terminate the policy with effect from the date of the fraudulent act, but previous claims are unaffected.
This is a summary of the key changes to insurance contract law. The Act is new and has no case law or precedent as yet so we have no evidence to test its intent. Should you wish to discuss any aspect of this and/or wish more detail then please contact us and we will be happy to discuss.