The Insurance Act 2015, which came into force in August 2016, has been described as the most significant update to commercial insurance law to enter the statute books in the last 100 years, significantly overhauling principles originally laid down in the Marine Insurance Act 1906. It is designed to offer greater protection and claims certainty for commercial policyholders.
The underlying objective of the Act is to reinforce professional standards, and is viewed by many as an opportunity for brokers to differentiate themselves and deliver real value to their clients. For many businesses, the broker is the expert adviser on all matters concerning insurance, and will be expected to provide guidance concerning obligations arising under the Act.
What did the Act set out to do?
The changes in the Act have a significant impact on how insureds and insurers approach policies, and have created new duties for insurers and policyholders to comply with.
In simple terms, the Act reinforced the duty of the insured and their agents to describe the risk they wish to insure in such a manner that the underwriter can know and understand what they are insuring.
The key areas covered are
- Duty of disclosure – the Act redefines the customer duty of disclosure as one requiring a ‘fair presentation of risk’. The insured needs to disclose every material circumstance which they know or ought to know
- Warranties – The Act abolishes “basis of contract” clauses. A breach of warranty no longer permanently discharges the insurer’s liability. If the breach is remedied prior to loss, cover will remain in place. A breach of warranty unconnected with the loss is no longer a ground for terminating cover
- Fraudulent claims by insured – if the insured makes a fraudulent claim, the insurer is not liable to pay the claim
- Contracting out of the Act – parties are entitled to agree terms which are less favourable to the insured, subject to certain transparency requirements.
Where are we now?
As with any new legislation, there is still some uncertainty over the interpretation of all the new concepts the Act introduces.
According to a report issued by the UK risk management association Airmic, market practice still has some way to go before insurers, brokers and their customers can take full advantage of the terms enshrined in the new act. The findings show that there are three areas where, in their opinion, more work needs to be done. These cover fair presentation of risk, proportionate remedies and conditions precedent.
There needs to be a clear and consistent approach to achieving a ‘fair presentation of the risk’, and the development of systems to centralise knowledge held on clients. The Airmic report shows that there’s an emerging trend of brokers and insureds seeking written agreement from insurers that a fair presentation has been provided.
Airmic advises that members should not place total reliance on such clauses. One of the main purposes of the act was to encourage a more comprehensive dialogue between the insured and the insurer, and a transparent understanding of the risk by both sides. Seeking sign-off without extensive discussion in their view circumvents the positive aspects of the legislation.
Importantly, the Act introduced a new system of proportionate remedies where the duty to make a fair presentation had been breached. The Airmic report indicated that some insurers have been willing to alter these remedies. However, Airmic notes that some standard clauses available in the market are less advantageous to the insured than those enshrined in the act itself.
A condition precedent is a contractual term which, if breached, can entitle the insurer in certain circumstances to remove cover and reject a claim. These clauses can place onerous obligations on the insured. Although their use can be legitimate in some circumstances, Airmic urges members to keep them to a minimum and ensure they are expressly stated.
Focus has embraced the Insurance Act 2015 and adopted compliant wordings on all our products.
One of the principal areas of the Act is fair presentation of the risk, which requires clear and accessible disclosure, without material misrepresentation, of every material fact which the Insured knows, or ought to know, or at the very least, sufficient information to put a prudent underwriter on notice that further enquiries are needed.
Focus will rely on our brokers to explain to their clients the need for them to make a reasonable search within their own organisation in providing the information needed for preparing a suitable presentation. Focus, as a MGA, also has a responsibility to use their knowledge of the trades being quoted on and the information available in the public domain to complete the fair presentation.
By working together with our brokers, we are sure that we can provide cover that meets the demands and needs of their clients at competitive terms and premiums.