IMPORTANT LEGISLATION CHANGES THAT WILL AFFECT YOUR INSURANCE ARRANGEMENTS
INSURANCE ACT 2015
In February last year the Insurance Act 2015 received Royal Assent and
will become effective from August 12, 2016. The Act will change the
UK’s commercial insurance law. The current regime, underpinned by the
Marine Insurance Act 1906, will continue to apply to policies incepted
or renewed for a period of 18 months but thereafter the 2015 Act will
apply, by default, to commercial (‘non-consumer’) insurance policies.
The simple guide below has been developed by Romero Insurance Brokers
to provide a concise update of what these changes will mean to you.
The Act Deals with
- Duty of Fair presentation
- Knowledge of the Insured &
- Remedies for breach of duty of
- Remedies for Fraudulent Claims
Duty of fair presentation
- What is a ‘fair presentation’?
Disclosure made in a manner that would be reasonably clear and
accessible to a prudent insurer. Representations of facts must be
‘substantially correct’ and representations of expectations or
belief must be made in good faith. The requirement that disclosure
be reasonably accessible to insurers is intended to prevent the
practice of ‘data dumping’ i.e. swamping insurers with data
without highlighting the key aspects.
Knowledge of Insured and
- What disclosure needs to be made
An insured will need to disclose either (a) every material
circumstance the insured knows or ought to know or (b) sufficient
information to put a prudent insurer on notice that the insurer
needs to make further enquiries for the purpose of revealing those
- What are ‘material
Any circumstances (including information held by or communications
made to insureds) that would influence the judgment of a prudent
insurer in determining whether to take the risk and, if so, on
what terms. These include special or unusual facts about the risk,
any particular concerns which led the insured to seek cover and ‘…
anything which those concerned with the class of insurance and
field of activity in question would generally understand as being
something that should be dealt with in a fair presentation of the
risks of the type in question’. The Law Commission’s vision in
drafting the Act was that insurers, brokers and policyholder
bodies should ‘work together to develop guidance and protocols
setting out what a standard presentation of the risk should
include in particular circumstances’. This is a challenge for the
risk community to address over the next 8 months.
- If only material circumstances
that are known or ought to be known by the insured have to be
disclosed, whose knowledge at the insured is relevant?
To be disclosable, material circumstances either have to be known
or ought to be known by:
a) the insured’s senior management, i.e. individuals who play
significant roles in the making of decisions about how the
insured’s activities are to be managed or organised; or
b) individuals who participate on behalf of the insured in the
process of procuring the insurance (including brokers and other
Remedies for breach of duty of
- Can clients/policyholders adopt a
‘don’t ask don’t tell’ approach to internal investigations of
material circumstances ahead of placement?
No. Material circumstances which are ‘suspected’, or which would
have been known if the relevant individual had not deliberately
refrained from confirming them or enquiring about them, will have
to be disclosed.
- How extensive a search must
insureds make for material circumstances?
Insureds have to make a ‘reasonable search’ of the information
available to them, including information held by their agents or
others who will be covered by the insurance. Any material
circumstances that a ‘reasonable search’ would have revealed are
- What if the duty of fair
presentation is breached?
a) If the breach was either deliberate or reckless, the insurer
can avoid the contract (i.e. treat the contract as if it never
existed), keep the premium and refuse to pay all claims.
b) If the breach was not deliberate or reckless, the remedy
depends on what the underwriter would have done if a fair
presentation had been made. If the insurer:
i. would not have entered the contract at all…
…it can return the premium, avoid the contract and refuse all
ii. would have entered the contract on different terms…
…the contract is treated as if those different terms applied.
iii. would have charged higher premium…
… the insurer can proportionately reduce the amount it pays on a
- Will warranties still exist?
Yes, but it will be harder to create them, they will be more limited
in scope and the effect of a breach of warranty will be softened.
- Why will it be harder to create a
Clauses in proposal forms that turn an insured’s representations
into warranties (so-called ‘basis of contract’ clauses) will no
longer have any effect. Proposal forms and wordings will need to
be revised to take this into account.
- Why will they be more limited in
Breaches of warranty that are irrelevant to the loss that occurs
will no longer discharge insurers from liability – one of the key
issues insureds have with the existing law. If the insured can
show that failure to comply with any term in the contract
(including warranties) could not have increased the risk of the
loss which actually occurred in the circumstances in which it occurred,
insurers will no longer be able to rely on the breach to exclude,
limit or discharge its liability.
- What are the changes to the
remedy for breach of warranty?
A breach of warranty will discharge the insurer from liability for
losses occurring, or attributable to something happening, after
the breach occurs. It will not discharge the insurer from
liability for anything that happens before the breach – or after
the breach has been remedied.
- So an insured can now remedy a
breach of warranty?
Yes. If the breach of warranty is remedied before the loss occurs,
the insurer cannot rely on it.
- What counts as ‘remedying’ the
If the warranty requires something to be done by a certain time,
or a condition to be fulfilled, or something to be the case (e.g.
installing a certain sprinkler system in case of fire) then a
breach of that warranty is ‘remedied’ if the risk to which the
warranty relates becomes essentially the same as the risk
originally contemplated by the parties (e.g. installing a
comparable sprinkler system). For other warranties, a breach is
deemed to be remedied simply if the insured ceases to be in breach
of the warranty.
Remedies for fraudulent claims
- What will change?
Insurers will be entitled (on notice) to treat the contract as
having been terminated from the date of the fraudulent act and
need not return any premiums paid under the contract. Of course,
insurers will still not be liable for any fraudulent claim and
will be able to recover any payments made to the insured in
respect of fraudulent claims.
- What about valid claims made
before the fraud?
These will be unaffected – which clarifies some potential
confusion arising from the case law.
For non-consumer insurance, the provisions of the Act are intended to
provide default rules. However, parties are free to agree contract
terms which are less favourable than those in the Act, provided that
the insurer satisfies two transparency requirements. This ability to
contract out is not true of consumer insurance contracts. An insurer
will not be able to use a contractual term to put a consumer in a worse
position that they would be in under the terms of the Act.
- What are the transparency
requirements for contracting out?
Where insurers do intend to opt
out (and hence include a “disadvantages term” they must take sufficient
- To draw it to the insured’s
attention before the contract is entered into, and
- The disadvantages term must be
“clear and unambiguous as to its effect”.
What is sufficient to meet the above two requirements will depend on
the characteristics of the insured and the circumstances of the
transaction (where and how is the contract made).
- What cannot be contracted out?
The contracting-out provisions will
not apply to settlement agreements or the prohibition in respect of
basis of the contract clauses.
In many respects the new Act codifies existing case law rather than
effecting wholesale revisions to the status quo, although some changes
– such as the new law on warranties – will be significant. The Act
will, however, take time to bed in and there are bound to be test cases
in years to come about what some of the new provisions mean.
For further information please speak to your usual Romero contact or for new customers, please contact Richard Nicholson or Robin Kinkead on 0113 281 8110.