Our second blog in the Insurance Act 2015 series looks at the pre-contractual duty of disclosure- or “what you have to tell you insurer”. For an overview of the new Act, coming into effect on 12th August 2015, click here.
Commercial insurance is based on the principle of ‘utmost good faith’, whereby the insurer relies on the customer disclosing every material circumstance. In practice “every material circumstance” could be disclosing previous bankruptcies, previous convictions and potential claims. However, the problem is that many insurance customers are unaware of what is materially important. Once a claim is made, an insurer may discover circumstances and details which were not mentioned. They may then able to completely void the contract so that, in effect, the policyholder finds themselves in a position where no insurance had ever been put in place.
The solution to this problem is the new Act’s requirement for policyholders to make a “fair presentation of the risk”. This differs from the current legislation insofar as instead of anticipating or ‘guessing’ what the insurer needs to know, the new Act requires only that policy holders tells them what they think they should know. This applies only to commercial insurance contracts.
The way in which you present your information should be “reasonably clear and accessible to a prudent insurer”. But what does that mean?! As insurers and brokers get used to working under the new rules, how to put this into practice will become clearer and more defined. At this stage, however, we propose that clients keep a live document which they update with relevant information that they can provide to their insurer or broker when arranging a new contract of insurance. It should include any details that reflect who and what has to be insured.
The substance of what constitutes ‘fair presentation’ will also be determined by case law in the fullness of time. This means that policyholders cannot “data dump” information; they will need to pull all information together in a logical and clear presentation. Information should be presented in such a way that insurers can ask for further details as required. Eg a policy holder may disclose that they carry or store ‘hazardous substances’- an insurer will then be prompted to ask for the further details they require.
This brings up the issue of knowledge. The ‘knowledge’ of a limited company or charity includes not only the knowledge of the one person liasaing with the insurance broker or insurer, but the combined knowledge of all the organisation’s senior management, as well as those responsible for arranging insurance cover. It also any includes any information held by others such as external health & safety consultants, retained solicitors and so forth.
This means that senior management need to have a firm grasp of all an organisation’s activites. It needs to ensure that this is clearly communicated to and understood by the insurer.
The new Act gives the insurer a duty to carry out its own investigations. This means that insurers now have more responsibility in making sure that they have all the facts they need to make an offer. An insurer will be presumed to know things which are common knowledge, or which an insurer offering insurance to a specific sector or trade would be expected to know in the ordinary course of business. For example, a charity insurer should know to ask policy holders working with vulnerable adults if they have a safe guarding policy.
If a policyholder fails to disclose the necessary information, or if they misrepresent their organisation, an insurer may avoid the policy (cancel it, as though it had never existed). The insurer may only keep the premium where the misrepresentation or non-disclosure was deliberate or reckless.
Where the non-disclosure or misrepresentation is neither reckless nor deliberate (i.e an innocent mistake), the insurer may do the following:
- If the insurer would ghave declined the risk altogether, knowing the full facts, the policy can be avoided, with a return of premium.
- If the insurer would have accepted the risk, but included a contractual term, like an endorsement or warranty, the contract should be treated as if it included that term, regardless of whether the policy holder would have accepted that term
- If the insurer would have charged a greater premium, the claim should be scaled down proportionately (for example, if the insurer would have charged double the premium, it need only pay half the claim).
These changes will effect policies started or renewed on or after 12the August 2016. It will also apply to any policy which is adjusted on or after 12th August 2016.
In summary, you still have to disclose information to your insurer, and your insurance broker should help you to do that. Importantly, the way this is done changes slightly with a different emphasis on who does what. If information is not properly disclosed the insurers still have rights they can exercise to get out of the contract of insurance, but the options are set in stone, which should avoid most of the problems between policyholder and insurer.
There’s a lot to take in, and a lot of significant changes, so do keep checking back for the other blogs in the series.
2) What do I have to tell my insurer?
Give us a call or drop us an email at any stage with any questions about the Insurance Act 2015 and how it will impact your organisation. We’ll be happy to answer any questions and ensure that you are confident about the insurance you have in place.