Insurance Act now in force

Recap – key changes

The key changes arising out of the Act are:

• The insured has a duty to give a “fair presentation” of the risk pre-inception. 
• Remedies for a breach of the duty of fair presentation are proportionate: insurers can only avoid a policy (and keep the premium) where the breach was deliberate or reckless. If the breach was not deliberate or reckless then: 
  • If insurers would have imposed a higher premium, that premium will apply. 
  • If insurers would have imposed a different term, that term will be imposed. 
  • If insurers would not have entered the contract, they may avoid and refuse all claims, but must return the premium. 
• A breach of warranty now has a suspensive effect. Insurers remain liable for losses occurring before the breach and after the breach has been remedied. 
• Insurers can only rely on a breach of warranty or other term which is causative of the loss to decline cover. 
• Basis of contract clauses have been abolished. 
• The Act allows parties to “contract out” of many of the reforms in commercial policies.

Potential risk areas for brokers

So where might a broker be vulnerable to a claim as a result of these changes?

There is no sign of any fundamental shift in the core duties of insurance brokers. Nonetheless, there are a few areas where brokers should be aware of how the Act’s changes could give rise to the need for their role to be tweaked.

Insofar as pre-contract disclosure is concerned, the broker’s role and the advice a broker needs to provide to clients has not materially changed. Brokers still need to ensure that they understand their client’s business in order to ensure that appropriate information is provided to insurers, and the right cover is obtained.

When explaining the terms of a policy, brokers will need to ensure that they recognise any attempt by insurers to “contract out” of provisions which would otherwise be required under the Act and to give clear advice accordingly. Brokers should also be wise to ambiguous provisions which could be attempts by insurers to “contract out”. If a policyholder’s claim would have been covered under the new provisions of the Act but is not because the insurer has contracted out, then there will be clear implications for a broker who has not so advised.

The sources of information relevant to the client’s risk are now defined as including senior management and anyone involved in the procurement of insurance which might include an insurance manager but it could also include accountants or lawyers. While a broker is probably not expected to make those enquiries, they need to be sure that those who provide instructions are speaking with the right people in the business.

To satisfy the fair presentation of the risk, insureds must carry out a “reasonable search” for information. What constitutes “reasonable” will be different for every business but it is important that brokers advise clients on the process and that evidence of the search undertaken is preserved since that could be crucial evidence in the event of a future dispute with insurers.

In the event of a loss, if insurers indicate that there was not a fair presentation of the risk pre-inception, brokers will need to make sure that they understand the way that Insurers’ proportionate remedies will work. The position is fairly straightforward when there is one claim under a policy, but there is potential for the situation to become more complicated when there is more than one loss, and brokers will need to be able to explain to their clients how the relevant policy will apply.

We foresee the potential for real uncertainty after a loss, while insurers decide what they would have done if a fair presentation of the risk had been made. The onus of proof is on the insurer but the broker will need to do what he can to manage that process, protect the insured’s interests as far as possible, and manage the insured’s expectations as to the likely effect of the alleged failure to provide a fair presentation.

The requirement for proportionate remedies should lead to fewer opportunities for insurers to reject claims on the basis of minor non-conformities with their disclosure obligations. And where insurers do have a remedy, it is likely to be more proportionate. In short, insurers are likely to be obliged to pay more claims that might have been avoided under the old law. This will have obvious benefits for brokers and their clients.