Insurance Act 2015: good news or bad?

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We take a look at the way these changes are going to affect insureds.

What is it?

The first substantial reform of English insurance contract law since 1906; it has been planned for over 50 years.

Will it affect your business?

Yes. Your commercial contractual insurance cover from an insurer will be directly affected by the Act. All of the Act’s provisions apply to the type of non-consumer insurance contracts that food and agribusinesses are likely to hold as a matter of course, including property and similar policies, employer’s and public liability, product liability, occupier’s liability, business interruption policies and motor liability. Some parts of it also apply to consumer insurance contracts, so may also affect you personally.

When will it affect you?

The Act came into force on 12 August 2016 and applies to all insurance contracts incepted, renewed or varied in the UK from that date onwards. Similarly, any amendments to existing policies which occur after that date will also be affected. Most policies are still renewed annually, so the chances are the Act will apply to your insurance cover by August 2017 at the latest, and possibly much sooner. However, the provisions will not be retrospective, so they will not apply to policies incepted before 12 August 2016, except for amendments since that date.

How will it affect you?

Arguably the three key changes for insureds include:

(1) Duty of fair presentation

An 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 either knows or “ought to know”, or providing sufficient information to put the insurer on notice that it needs to make further enquiries.

An insured ”ought to know” what it would have found out by a “reasonable search” for information; this is a significant change. Although an individual or small trader is not likely to have much difficulty in carrying out a reasonable search, larger and corporate businesses will need to ensure that they have a structured and trackable system in place for enquiring of all staff and contractors about information which might need to be disclosed before taking out or renewing an insurance policy. This is likely to increase the burden on such businesses.

The Act also aims to prevent “data-dumping” on insurers, or unclear disclosures by insured. So, although an insured can provide the insurer with information which was enough to prompt the insurer to make further enquiries, the insured must also present that information in a reasonably clear and accessible manner: handing over the metaphorical key to the filing cabinet (or a link to a website) just won’t work, so (for example) simply providing a website link for an insurer to search through to find details of the operations you run will be inadequate.

(2) Remedies for breaches

Obviously the best position for an insured is not to get itself in the position of failing to present the risk fairly in the first place, but what are the consequences if it doesn’t get this quite right and there is a material non-disclosure or misrepresentation? This is the (slightly) better news. Under the old law, if the insurer could show that it would not have written the policy or would have written it differently, then it can treat the policy as if it never existed (“avoid” the policy) and it has no future liability at all, even if the non-disclosure or misrepresentation was innocent.

In future, the critical questions are whether the insurer would have entered into the policy at all or only on different terms, and whether or not the breach was deliberate, reckless or neither. Where the breach is deliberate or reckless, an insurer can still avoid the policy and refuse all future claims provided it can demonstrate the insured knew it was breaching its duty or did not care whether it was or not. If it can’t show this, then the remedy will depend on what the insurer would have done if the correct information had been disclosed. If the insurer would not have entered into the contract at all, then it may avoid the policy but must repay the premium. If different terms would have been used, the insurer can treat the contract as if those terms had been used. If the premium would have been higher, the insurer can proportionally reduce the amount of indemnity for the claim; so if for example the insurer would have charged twice the premium for the true risk, it will only have to offer half the indemnity: this could have a significant impact on the amount an insured can claim from an insurer in the event of a claim.

(3) Warranties and other terms

Again, more (slightly) better news for insureds. Under the old law, if a warranty (a promise to do or not do a particular thing) is breached, then an insurer is discharged from all liability under the policy from the date of the breach, even if the insured corrects the breach. For example, if an insured warrants that a sprinkler system is in operation 24 hours a day, and in fact it is turned off overnight, then the insurer is not required to meet a claim even if the insured subsequently corrects the breach and the sprinkler system is working as warranted when a fire occurs. Under the Act, the effect of such a breach is to “suspend” cover while the breach occurs, meaning that insurers will remain liable for losses occurring before the breach, and will become liable again if the breach is remedied.

The Act also requires a causal connection between breach of any term (not just a warranty) and the insurer’s entitlement to refuse cover. Thus, for instance, breach of a term requiring the insured to maintain a sprinkler system will not relieve the insurer from liability for a burglary.

Damages for late payment of claims

More recently, the Act has been amended to allow an insured to claim damages (and not just interest as previously) where an insurer unreasonably delays payment of a claim. This may be significant for property damage or loss claims.

Conclusion

While the Act contains a number of new concepts and different requirements which mean insureds need to review how they approach taking out and maintaining insurance contracts, once these changes are understood, overall the Act offers guidance and benefits which should help individual and corporate businesses in the future. It will however require the active engagement of insureds to ensure their insurance needs are carefully and fully secured.

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