The 12 August 2016 saw the coming into force of the Insurance Act 2015, which has been described by some commentators as the most significant revision of insurance law in over a century. However, other commentators are less convinced that the Act will truly create radical changes. Only time will tell whether the Act and the related Consumer Insurance Act 2012 have initiated a paradigm shift in fundamental insurance concepts.
The Act undeniably contains a number of positive measures for policyholders which amend the extent of the powers of insurers to deny claims for breach of policy conditions. This can only be a good thing for policyholders.
Further claims measures prevent the insurers from denying the entirety of a claim due to a non-critical misrepresentation or non-disclosure, but do allow the insurer to reduce the amount paid by the percentage difference between the premium which should have been paid, and the premium which was actually paid. The concern is that on the face of it, the insurer decides the premium which should have been paid. The effect of this change will cut both ways in practice. On the one hand, there will be fewer denials of claims in their entirety due to non-disclosure. However we suspect an increase will be seen in part payment of claims due to disclosure issues.
The insurers continue to have the power to avoid the policy and deny all claims if there has been a critical non-disclosure or misrepresentation.
So what are the rules on disclosure following the new Act?
The Act replaces the previous duty of “utmost good faith” with a new duty of “fair presentation” which seeks to be more proportionate between insurers and policyholders.
The duty arises at the inception of the policy ie when you take it out or renew it. It also arises in the event of any material change in the risk insured during the period of insurance. This is the same as before the Act.
It requires the disclosure of any information which would influence the judgement of a prudent insurer in deciding whether to accept your insurance, impose special terms, or charge an increased premium. Whilst now called a “material circumstance” this is essentially what was previously referred to as a “material fact”.
All representations made must be substantially correct if relating to matters of fact, or made in good faith if they are matters of expectation or belief. This is potentially more proportionate than the previous requirements.
Critically, firms are required to disclose what should “reasonably have been revealed by a reasonable search of information available to you”.
However the parameters of a reasonable search explicitly include (please take careful note!!):
- what is in the knowledge of all senior management within your organisation (senior officers not just directors)
- what is known to other organisations (this would therefore include your insurance brokers, solicitors, accountants, IT Consultants, Compliance Consultants and any other professional advisers)
Information must be disclosed in a way which is reasonably clear and accessible to a prudent insurer. Deluging an insurer with unstructured information (“data dumping”) is explicitly a breach of fair presentation. This is new and policyholders and their brokers must be much more careful to explain the information they are presenting (policyholder to broker, and broker to insurer).
The Act also establishes certain categories of knowledge which are assumed to be in the contemplation of the underwriter, regardless of whether they are contained in the actual presentation provided by the policyholder and their broker. It includes:
- information contained within the insurer organisation and which would have been available to the underwriter after a reasonable search within their organisation (so a claims report to the insurer’s own claims department for example)
- information which is common knowledge
- things which an insurer offering insurance of the class in question to insureds in the field of activity in question would reasonably be expected to know in the ordinary course of business
Whilst favourable we would strongly recommend that the “assumed insurer knowledge” provisions are not over relied on by policyholders. We see them as providing useful support in the event that disclosure problems arise, but the safest course is full disclosure at the outset. A policyholder cannot disclose too much (provided they appropriately explain or structure the information).
Regardless of the intent of the legislators, the revision to the duty of utmost good faith has introduced new unknowns. 110 years of insurance practice has been overturned, and even if the previous duty was strict, it was at least well known and understood. We are now entering a period of interpretation where the new Act will be applied, and new norms and precedents established.
If you have any doubt as to what constitutes a relevant fact or circumstance please do not hesitate to ask us for advice.