2. Insurance Act 2015

Outlining the changes of the Insurance Act 2015 and how organisations can prepare for it.

From 12 August 2016, the Insurance Act comes into effect and represents a significant change to the legal framework of insurance contracts. Although the Act places a new obligation of fair disclosure on the Insured, the Act also makes the remedies available to Insurers less onerous upon the insured.

The possible reality for clients of Chartered Insurance Brokers is that our normal practice already meets the new obligation on the horizon.

Fair Disclosure

The general obligation upon the Insured to disclose all material facts will be replaced by a duty to disclose every material circumstance that they ought to know (not what they necessarily do know) as well as the disclosure of sufficient information that would provoke further enquiry from a prudent Underwriter. What is unchanged, is that disclosures must be made from the point of approaching an Insurer for insurance cover and throughout the life of the contract and any subsequent renewals.

In terms of what an insured ought to know, this will include the knowledge that all people should have who are senior management, directors and anyone playing a significant role in how activities are managed in the organisation and of course anyone arranging the insurances.

Disclosure must be in a manner that is reasonably clear and accessible to an Insurer. This is to now prevent masses of data being disclosed in an attempt conceal important information.

All representation must be substantially correct and all representation of expectations or beliefs must be made in the utmost good faith.

Avoidance

At present, the remedy for non-disclosure of a material fact is to avoid the policy. Generally, if an insured does not disclose a material fact, the insurer will treat the policy as though it never existed with no obligation to return the premium.

The current remedy of avoidance will be abolished, except in certain circumstances, and replaced by new proportionate remedies for non-disclosure.

New Proportionate Remedies for non-disclosure

The Act will now introduce proportionate remedies;

If after discovering the non-disclosure the Insurer decides that they would not have entered into the contract on any terms, then the insurer may avoid the contract and refuse all claims, but they must return all of the premium.

If after discovering the non-disclosure the Insurer decides that they would have entered into the contract but on different terms other than those relating to the amount of premium charged for the risk, the contract will be treated as entered into on those terms. This will be the case even if the insured would not have accepted those new terms at inception.

Additionally, if the Insurer would have entered into the contract and charged additional premium, the insurer can proportionately reduce the amount to be paid on claim. This is often relevant as non-disclosure generally tends to become apparent when a claim has been made.

Warranties and Other Insurance Terms

Certain onerous policy terms have now been replaced.

Warranties

Under the existing legal framework, a breach of a warranty will automatically discharge the Insurer of any liability from that point. Liability is avoided even if the breach is not relevant to a loss that has been suffered.

Under the new Act, all warranties become suspensive conditions. This means that the insurer is not liable for losses only when the warranty has been breached, and if the breach can be remedied, the insurer will be liable once again from the point that the warranty is no longer being breached.

Basis of Contract warranties will no longer be valid under the new Act. At present, information gathered by an Insurer prior to incepting cover is also classified as a warranty, meaning that if any information is not correct then the insurer is not liable for losses. From 12 August 2016, Basis of Contract warranties will be ineffective.

Fraudulent Claims

Essentially, what has not changed is the Insurer’s remedy for fraudulent claims. If a claim is in any way fraudulent or there is any fraudulent action, the insured will not be entitled to any cover in respect of the whole claim, meaning they cannot recover the part of the claim that would genuinely have been payable. The insurer will not return premium following notice of termination based upon the submission of a fraudulent claim.

Group Insurances and Fraudulent Claims

The new Act will make special provisions for a situation where a member of a group insurance policy, being one arranged by one insured in the name of joint insureds. In such circumstances where there has been fraud, the Insurer will on have a remedy against the fraudulent joint Insured and cannot affect the other joint Insureds.