The Insurance Act 2015 – Important changes for policyholders

Changes brought about by the Insurance Act 2015 come into effect in August this year. Many businesses are still unsure as to how the Act will affect them and what their obligations may be.

Tim Johnson is a partner at law firm Browne Jacobson. He specialises in insurance policy drafting, policy coverage advice and defending professional liability claims. He has drafted policies in relation all classes of business insurance. Here, he provides an outline of the new Insurance Act and why policyholders should get familiar with the changes ahead of August 2016 to avoid any costly errors.

The Insurance Act 2015 (“the Act”) introduces the most significant change in non-consumer insurance law since 1906. The changes aim to modernise non-consumer insurance and are generally positive for policyholders. Nevertheless, there are potential traps for those that do not get to grips with the new regime or take advice.

Why change? Why now?

Insurance law as we currently know it is over 100 years old, but the way of doing business has changed radically since it was introduced. The need for insurance to move with the times has led to the new Act.

What do I need to know?

The Act introduces the requirement upon all policyholders to “make a fair presentation of the risk”, which is one that discloses, in a manner that is reasonably clear and accessible, every material circumstance which is known or ought to be known by the insured’s senior management, or those responsible for arranging insurance, following a reasonable search.

Breaking that down, the key components are:

material circumstance – anything which would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms.

known or ought to be known – you are obliged to disclose circumstances that you actually know but also those that you ought to know. This means that if the information is readily available to you but you fail to disclose it (owing to either a lack of enquiry or by ‘“turning a blind eye”, you will have breached your duty to fairly present the risk.

senior management – your knowledge includes (but is not limited to) that of all senior management, i.e anyone who has a key role in making decisions on behalf of the business, even if they do not sit on the board or do not officially have a management role.

reasonable search – what is reasonable will depend upon the nature of your business and the policy you are purchasing.

reasonably clear and accessible – you must present the risk in a reasonably clear and accessible format, i.e. you must refrain from simply providing large amounts of information to insurers in a disordered way.

What if I don’t comply?

The Act introduces a range of potential consequences including:

• If you deliberately or recklessly fail to present the risk fairly, the insurer can avoid the policy (i.e. treat it as if it never existed) and retain the premium. No claims made under that policy would be paid.
• If your failure was neither deliberate nor reckless, insurers can still avoid the policy if they can establish that they would not have granted the policy if the risk had been presented fairly. Again, no claims under the policy would be paid, but insurers would have to repay the premium.
• If insurers would have granted the policy but on different terms, the policy is treated as if those terms had been incorporated. The additional term could, for example, be an additional exclusion or higher policy excess. Note that those additional terms could still result in a particular claim not being paid.
• If insurers would have charged a higher premium, the amount insurers pay on a claim will be reduced by proportion to the difference between the premium actually paid and the premium that would have been charged, had the risk been fairly presented. For example, if insurers would have charged double the premium, the claims payment will halve. This can have an extremely significant effect on any claims payment, particularly following a substantial loss or liability.

Are there any other changes?

Yes, the Act has also changed the law on warranties and fraud, making it fairer for policyholders.

Warranties are contractual promises to do or not do something or to maintain a state of affairs. A common example is the use of an intruder alarm when premises are unoccupied. Under the current position, if a warranty is breached, insurers can escape all liability under the policy from the date of the breach. Insurers are entitled to this remedy even if the breach has been remedied or if the breach has no connection to the event giving rise to the loss. Under the changes:

• a breach of warranty only suspends liability during the period of no-compliance (so insurers liability is re-engaged as soon as compliance with the warranty is re-established); and
• insurers must still pay a claim if the insured can demonstrate that the breach could not have increased the risk of the loss occurring.

In the event of a fraudulent claim, insurers are currently entitled to avoid the policy entirely and refuse to pay all claims. Under the new regime, insurers must still pay genuine claims that were made before the fraudulent act.

What do I need to do?

The most important action point is to take advice. Although the new position is largely more favourable to policyholders, the obligations, particularly in relation to search requirements and how a risk is to be presented, are different and the consequences for non-compliance can be severe.

For the first renewal after August 2016 I recommend all policyholders start the renewal process earlier than normal to allow time to undertake the additional searches that may be required and to understand the new procedures in good time.

Policyholders would be well advised to start thinking now about who within their organisation has requisite knowledge of the different risks that are to be underwritten and who comprises the senior management. The answers to these questions are often not straightforward.

Policyholders that are organised, actively engaged with these changes and take good quality advice should see these changes positively.

If you would like more legal information please contact Tim Johnson at tim.johnson@brownejacobson.com

If you are unsure as to how the Insurance Act may impact on your organisation or would just like to know more then please get in touch with us for an informal chat. Please call Mike Dickinson at Russell Scanlan on 0115 983 8833.