Insurance Act: understanding the changes fully
9 February 2017
RICS members should make sure they understand legislative changes that affect those arranging insurance on behalf of a client, advises James King
The Insurance Act 2015 (“the act”), which came into force on 12 August 2016, has been described by some as the most significant change to UK commercial insurance law in the past 100 years. Others claim that, in codifying existing case law, it does not do much more than tinker at the edges. Where does the truth lie?
Property professionals including brokers and RICS members – especially those who provide management services such as arranging insurance – will be required to understand fully the implications and requirements of the reforms; property owners who purchase insurance should either carry out their own research or seek the advice of their broker or property managers as well.
The government has introduced the new legislation to:
- ensure a better exchange of information between insurance purchasers and providers
- reduce the number of disputed claims, lowering legal costs and minimising disruption
- reduce the number of rejected claims
- increase purchasers’ confidence in the insurance sector.
The main changes that apply to all commercial insurance contracts arranged, renewed or amended after 12 August are as follows:
- new responsibilities for policyholders to give underwriters all relevant information
- policyholders obliged to involve all relevant senior management when compiling information for insurers
- potential remedies now available for insurers in cases of non-disclosure or fraud, levelling the playing field between insurer and policyholder
- changes to the way insurers must deal with a breach of warranty, making the position fairer for the policyholder.
Get your facts right
A “fair presentation” can be defined as “a presentation that discloses, in a reasonably clear and accessible manner, every material circumstance [that] is known, or ought to be known, by an insured’s senior management, or those responsible for arranging the insurance, following a reasonable search”.
The act does not simplify the process of arranging insurance. In fact, many are of the opinion that it is likely to make things more complicated and potentially add new areas for legal disputes, because many of the new terms are not fully defined.
The legislation replaces the duty of disclosure at the point of presenting your risk, imposing instead an ongoing responsibility to disclose facts in a clear and accessible manner, with the representation of stated facts to be “substantially correct” and made in good faith. It requires that you disclose every material circumstance you know or ought to know about the risk, which means anything that would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms.
There is no specific definition of what constitutes material circumstance, but it would typically include any factors pertaining to the risk to be insured, including prior claims, financial history, any convictions of key personnel including directors, details of the premises, fire and security arrangements and/or health and safety issues.
This puts a very broad responsibility on all parties to ensure that insurance is arranged on the correct basis, including the policyholders, directors and any other intermediary involved in the insurance process. It is too early to be sure about the levels of presentation requirements that will be expected from individual insurers but this issue may present a major challenge for the risk community in the coming years.
Brokers and managing agents may have acted for policyholders for many years, and acquired considerable knowledge of the client’s business in that time. It is therefore right that the fair presentation should include not only information known by the insured party, but also any details received or held by the broker or other property professionals in the course of acting for the policyholder. This should apply to everyone in the chain.
If a breach of fair presentation occurs, there are new rules about the way insurers must act. In the case of a deliberate breach, the contract can be voided; this includes the return of any claims already paid. However, if the breach was not deliberate or reckless, the decision will be based on what the underwriter would have done if a fair presentation had been made.
Take, for instance, the following hypothetical claim. A block of flats is presented to insurers as an insurable risk. However, following a fire claim with costs of £50,000, it is discovered that insurers had not been advised there was a takeaway restaurant on the ground floor.
Underwriters consider the use of the building to be material to the risk and that this is a breach of the duty of fair presentation. They argue that the premium charged would have been £5,000 instead of £3,000 if the risk had been stated properly, and so the insurer considers that it is only liable to cover 60% of the claim. Therefore, the claim payment would only be £30,000: a shortfall of £20,000.
Note that, if the insurer would not have taken on the risk had it been aware of all the facts, it can still void the policy.
Certainly some changes – such as the new legislation on warranties – will level the playing field. A warranty in an insurance contract is a promise by the policyholder to the insurer to do, or not do, something, or a promise to maintain a certain state of affairs. Previously, insurers could refuse to pay a claim if the policyholder breached a warranty, even if the breach was unconnected with the loss or remedied before the loss occurred. The ability to avoid claims in such circumstances is now removed, and insurers can only suspend cover for periods where the criteria of a warranty are not fulfilled.
If the warranty is designed to reduce the risk of a certain type of loss or a loss at a certain place or time and the policyholder can demonstrate that a breach could not have increased the risk of that loss occurring, insurers must still pay the claim. This now prevents the possibility of the classic scenario occurring in which an insurer could use the failure to set a burglar alarm as a reason not to pay for fire damage.
The new regime therefore offers clarity and a fairer situation for customers. If a breach is unrelated to the cause, a loss will still be covered.
Insurers opting out
One final point to consider is that insurers are given the ability to opt out of the majority of the new act. It is still too early to report on how and where this option might be exercised, and your broker should advise you appropriately, particularly when comparing quotes or marketing a risk. But we envisage that most well-known property insurers will remain compliant with the act and not opt out.
One area in which we have seen some variation is the way some insurers state they will deal with a breach of fair presentation. As an example, for a block of flats above a takeaway, some insurers state they will not reduce the amount of a claim if a breach is a genuine error or oversight. This would not usually be considered an opt-out of the law, as it should be to the customer’s benefit.
What you need to do
The new legislation introduces many elements of uncertainty. It will take the normal process of case law before the sector can interpret what all of the new provisions really mean. But insurers and their clients will need to be ahead of the curve because the legislation applies to all commercial insurance and some of the provisions also affect consumer contracts.
Policyholders and managing agents therefore need to engage closely with their brokers in the coming months to ensure they stay well clear of the contractual pitfalls. As a minimum, you should be liaising frequently with your broker to ensure that you are kept abreast of developments.
The size and complexity of some property risks may also mean action is required well in advance of the implementation date.
When you first renew a policy or make an amendment under the new act, you should take the time to identify who in your business needs to be involved in gathering the relevant information. You should also take into account changes to the information required by insurers, which now includes not only facts that you know, but those you ought to know.
James King is a senior executive at chartered property broker Clear Insurance
- Related competencies include Insurance.
- This feature is taken from the RICS Property journal (December 2016/January 2017).