The changes to the ICAEW’s minimum wording will take effect on 12 August 2016, the date that the Insurance Act 2015 (IA 2015) comes into force.
IA 2015’s headlines which impact directly on ICEAW’s minimum terms are the introduction of the duty to make a "fair presentation of risk", the abolition of basis clauses and changes to the consequences of making a fraudulent or false claim.
Fair presentation of risk – a new duty
The insured will owe a duty to insurers to make a fair presentation of the risk. For the insured this means fully disclosing every material circumstance that the insured both knows and ought to know, or providing sufficient information to put the insurer on notice that it needs to make further enquiries. An insured must also present information to insurers in a reasonably clear and accessible manner. Importantly for insurers, the onus will be on them to ask appropriate questions and to show that but for a breach of the duty, the insurer would not have entered into the insurance contract or would have done so, but on different terms.
The non-avoidance special condition set out within the minimum terms has been amended to incorporate the new duty. Importantly it also clearly places the burden of proof on insurers to establish that a breach resulted from any fraudulent conduct or intent to deceive.
Fraudulent claims – more scope for insurers?
The minimum terms previously provided that insurers could void the policy ab initio (as if it had never been incepted) in respect of an insured who had knowingly made a fraudulent claim.
The amended terms give insurers the right to:
- Refuse payment of the fraudulent claim
- Recover any sums already paid from the insured making the false or fraudulent claim
Insurers may also treat the policy as at an end (and retain the premium) in respect of the insured who made the false or fraudulent claim. If insurers do treat the policy as terminated, they can refuse all liability for claims notified after the date of the fraudulent act. They will however, still be required to cover claims notified before the date of the fraudulent act. The terms make it clear that all other (non-fraudulent) insureds will remain covered by the policy.
IA 2015 changes the effect of a breach of a warranty so that instead of discharging insurers from liability from the date of the breach, the insurer will have no liability between the date of the breach and the date on which the breach is remedied. The insurer will be back on risk once the breach is remedied.
Currently where there is a breach of warranty it does not matter whether the breach is material to the risk, the contract can be discharged. However, once IA 2015 is in force insurers can only rely on a breach of a term (including a warranty) if the non-compliance of that term increased the risk of the loss that actually occurred. In other words, there must be a causal connection between the breach and the loss. A clause has been added to the amended minimum terms to confirm that nothing in the policy should be construed as a warranty.
IA 2015 abolishes basis of contract clauses which have the effect of transforming all terms in a policy into warranties. The preamble to the minimum terms could have been interpreted as transforming the insured’s proposal form into a warranty and as a consequence, the preamble to the minimum terms has been deleted.
The amended minimum terms continue to fulfil their primary aim of ensuring protection for the profession and the public. However powerful rights are still afforded to insurers to limit their liability under the policy should the insured fail to clearly disclose material circumstance, fail to promptly notify a claim or circumstance or make a claim for indemnity in respect of a fraudulent or false claim.
Insurers should continue to assess policy coverage when a notification is made as a priority, issuing timely reservations of rights as necessary.