The Insurance Act is designed to make it harder for insurers to wriggle out of paying claims. Consultancy group Mactavish estimates that 45 per cent of large or strategically significant commercial insurance claims are disputed. And on average, these disputes take three years to resolve and result in only 60 per cent of the amount claimed.
This article looks at the 4 broad changes brought about by the Act.
1. The Duty of Fair Presentation: The duty of fair presentation replaces the previous duty of disclosure and further specifies whose knowledge needs to be captured for the insurer when applying for cover. The actual Act states, ‘Before a contract of insurance is entered into, the insured must make to the insurer a fair presentation of the risk.’ It then specifies that the ‘fair presentation of risk’ must:
• Be ‘clear and accessible to a prudent insurer’, meaning that sending overly brief or huge ‘dumps’ of data to an insurer when applying for cover is unacceptable;
• Be ‘substantially correct, and[…]made in good faith’; and
• Include ‘every material circumstance which the insured knows or ought to know’, or failing that, include ‘sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purposing of revealing those material circumstances’.
The Act defines information that the insured ‘ought to know’ as anything which would be revealed by a reasonable search of available information. This means that the Act will require insureds to make adequate enquiries within their business to identify and verify information relevant to the risks they are trying to insure. These enquiries should capture all relevant knowledge of the business’ senior management (those who ‘play significant roles’ in making management or organisational decisions) and those involved in buying the insurance (including the broker).
Depending on your organisation, these relevant enquiries could also extend to third parties involved with the business, such as external consultants, contractors and other people insured by the policy.
Should an insured fail the duty of fair presentation, insurers have a new system of proportionate remedies that replaces the previous avoidance-only regime. These ‘remedies for breach’ depend on whether the breach was deliberate or reckless, or not.
• If the breach was deliberate or reckless, the insurer ‘may avoid the contract and refuse all claims’ as well as keep the premium. However, it falls on the insurer to prove that the breach was deliberate or reckless.
• If the breach was not deliberate or reckless, the insurer has several options:
o If the insurer would not have written the policy based on the uncovered information, it may avoid the policy but must return the premium.
o If the insurer would have charged a higher premium based on the uncovered information, it may proportionately reduce claim payments.
o If the insurer would have written the policy but on different terms based on the uncovered information, the contract is to be treated as if it had been entered into on those terms.
2. Warranties and Conditions: The Act abolishes ‘basis of the contract’ clauses, which automatically transform pre-contractual information supplied to insurers into a warranty. Under the Marine Insurance Act, any change in the information supplied to insurers (even if trivial or immaterial) would lead to termination of the policy. Abolishing these clauses helps shift more power back to the insured.
In the event that the insured does breach a warranty, the cover is merely suspended rather than automatically terminated under the Marine Insurance Act. The Insurance Act allows the insured to remedy the breach, and then cover will be automatically reinstated. However, not all breaches can be remedied, so policyholders should still make every effort to comply. The British Insurance Brokers’ Association uses the example that, if there is a warranty that a building is made of bricks and mortar when it is actually built of wood, then that breach can never be remedied and the policy would be effectively suspended for the rest of the policy term (i.e. terminated).
Lastly, the Insurance Act eliminates insurers’ ability to avoid a policy for any breach of warranty even when that breach was not relevant to the actual loss. For example, if an insured breached a warranty in their policy that they must have working fire alarms but suffered a flood, the insurer would not be able to avoid paying the flood claim just because the insured did not install fire alarms. This is referred to as ‘terms not relevant to the actual loss’.
3. Fraudulent Claims: The Act clarifies and harmonises insurers’ remedies in the event of fraudulent claims. Under the Act, insurers do not need to pay fraudulent claims (even if there are honest elements to it) but are still liable for losses occurring before the fraudulent act. Insurers have the option of terminating the policy at the time when the fraudulent act was committed, and may recoup anything paid out after the fraudulent act.
4. Contracting Out: Think of the Insurance Act as a ‘default regime’—insurers must follow it, but they are allowed to contract out of requirements (except for the abolition of the basis of contract clauses) provided that any alternative terms (or, as the Act classifies them, ‘disadvantageous terms’) meet certain transparency requirements:
• Insurers must take sufficient steps to draw the disadvantageous terms to the insured’s attention before the contract is entered into or the variation agreed.
• Disadvantageous terms must be clear and unambiguous.