The Insurance Act, which comes into force on 12 August 2016, represents the greatest change to insurance contract law in this country in over a century. The Act will sweep away certain provisions of the Marine Insurance Act 1906 in order to reflect the demands of today’s insurance market. It will mainly influence commercial insurances and will apply to contracts issued, renewed or amended after 12th August 2016 if governed by UK Law.
The Solicitors Regulation Authority (SRA) is currently undertaking a Consultation on The Insurance Act but this is still under discussion. Thus we cannot definitively state what the final impact will be on the Minimum Terms and Conditions (MTC) but, once the SRA concludes their Consultation, we will be ready to examine and keep you advised. The intention of the Act is to increase the standard of disclosure compared with the current position and also to achieve a fairer outcome between Insured and Insurer. The Act itself seeks to redress the balance in favour of the Policyholder so it will be interesting to see how this affects the solicitors’ professional indemnity market where the balance is already firmly in the Policyholder’s favour.
The key changes provided by the Act are as follows:
The Duty of Fair Presentation
The existing law requires Policyholders to disclose all material information relevant to the risk which would influence a ‘prudent insurer’ in assessing a risk. This existing practice is harsh on the Policyholder as it means that non-disclosure or misrepresentation of a “material fact” allows Insurers to treat the policy as void. The Insurance Act 2015 will require the Policyholder to make a “fair presentation” of the risk. He must disclose every piece of information he knows (or ought to know) about the risk and/or provide enough information so as to put an Insurer on notice to ask additional questions. The disclosure should be provided in a reasonably clear and accessible manner – avoiding convoluted presentations and “data dumping”. For the purposes of disclosure, the Insured will be taken to know what is known or should be known by the Insured’s senior management (which will include the board of directors and those who play key roles in the management and organisation of the Insured’s activities) and the individuals arranging the insurance. What an Insured “ought to know” is what would be revealed by a reasonable search of the information available to the Insured. Also what is reasonable depends on the size and complexity of the business.
Under the Insurance Act, where an Assured has deliberately or recklessly failed to make a fair presentation, the insurer will be entitled to avoid the policy and return the premiums paid. In all other circumstances, remedies proportionate to the effect of the failure to present the risk fairly will be applied. As stated, we are still awaiting the conclusion of the SRA Consultation but we would anticipate that these remedies will not apply directly to insurance contracts covered by the Minimum Terms and Conditions (MTC). However, they will be relevant to any decision about what is “just and equitable” if insurers seek reimbursement from firms under the MTC where they think an insured has not made a fair representation of the risk.
Under the Minimum Terms and Conditions, insurers are currently prohibited from avoiding or repudiating the insurance on any grounds whatsoever, including non-disclosure, misrepresentation and failure to pay premium. However, Insurers may have rights of reimbursement against firms on any of those grounds. The reason insurers of law firms are prohibited from avoiding the contract is to ensure clients of law firms remain protected where firms have breached a term or condition of the policy. Our understanding is that, at this stage, the SRA intend to maintain the current position that insurers cannot avoid or repudiate cover for non-disclosure or misrepresentation – they can seek only reimbursement.
Basis of Contract Clauses and Warranties
Under the current regime, the “Basis of Contract” clauses create express warranties and, under the existing law, a breach of warranty discharges the insurer from all liability, even if the breach is trivial and is not connected with the Insured’s loss. The use of “basis of contract” clauses has been much criticised because of their potentially severe consequences. Under the new Act, “basis of contract clauses “are abolished and where warranties are applied, these must be expressly stated in the Policy. Also, Warranties will become “suspensive” conditions. This means that the Insurer can only rely on a Warranty whilst the Assured is in breach of such Warranty and Insurers cannot rely on a breach which is not relevant to the actual loss.
After “The Insurance Act”, in non-consumer contracts, if a fraudulent claim is made, the Insurer is not liable to pay any claim and the Insurer can choose to terminate the contract from the date of the fraudulent act. However, for contracts governed by the MTC, if the Insured has committed or condoned dishonesty or any fraudulent act or omission, the Insured must reimburse the Insurer to the extent that is just and equitable having regard to the prejudice caused to the Insurer’s interests by such failure to make a fair representation of the risk. Under the current MTC, the Insurer cannot void or repudiate the insurance on any grounds whatsoever including any breach of the duty to make a fair representation of the risk or misrepresentation, whether fraudulent or not.
In respect of non-consumer contracts, it is possible for Insurers to contract out of any of the Act’s provisions except the “Basis of Contract Clauses”. However, the Insurer must take sufficient steps to draw the disadvantageous terms to the attention of the policyholder. All Insurers will need to identify each and every change which they do not intend to apply.
How to prepare for your renewal
The Solicitors’ Professional Indemnity market eagerly await the conclusions of the SRA. Regardless of what the SRA decide, The Act is significant and will fundamentally change the face of the insurance market as we know it. In the initial period after the Act comes into force, there are likely to be disputes and discussions over the application of its provisions. It will take many years for courts to test these, build case law and deliberate on what this really means in practice. The intention of the Act is to produce greater certainty and equality between Policyholders and Insurers in the long term. However, for Policyholders to earn these benefits the Act puts a raft of new responsibilities on the buyers of insurance and these should be borne in mind as firms prepare for renewal.
- One of the principles of “Fair Presentation” is that for the insurance to be valid, the Policyholder has to disclose risks they reasonably could be expected to know about or to have discovered after a search. For disclosure purposes, this includes what should be known by Senior Management (including the Board) with the expectation that these people know what is going on and understand all the risks in the business. We recommend therefore that you identify the people in your organisation whose knowledge is attributed to the Policyholder as required by the Act. The person in your firm who is entrusted with buying the Professional Indemnity must have sufficient influence and authority within your firm to conduct a “reasonable search” which will include him or her communicating with the Board in order to collate the necessary information.
- Ensure that your own internal operations and processes are updated so that you are able to capture relevant and clear management information when requested to do so by your broker and underwriter in order to provide a fair presentation of your firm’s risk.
- Be prepared to invest quality time in the renewal process and be proactive in discussions with brokers and insurers. As you will need to know what your insurer considers to be a “reasonable search”, it is more important than ever to meet your insurer face-to-face. We cannot sufficiently emphasise the importance of dealing directly with the broker who places your risk with the insurer rather than dealing with a broker further down the chain. Dealing directly with the placing broker means that you minimise any possibility of information being misinterpreted and you can arrange to meet your underwriter.
- Only use brokers with a demonstrable understanding of Solicitors’ Professional Indemnity who have made provisions for the implications of the new regime. Brokers who specialise in Solicitors’ Professional Indemnity will make it a fundamental priority to understand and apply the legal and regulatory changes which are a constant feature of this challenging environment. Their Compliance teams will have deployed considerable resources to ensure that their firm is ready for the Insurance Act. This might well not be the case if you approach brokers who dabble in a vast array of different sectors and who may not be equipped to handle the legal consequences of this Act specifically for Solicitors’ firms.
- As usual, avoid dealing with unrated insurers. It is crucial that you are confident that your insurer is genuinely geared up to the new regime.
- Aim to develop and manage a strong relationship with your broker and underwriter as this always provides better results. Do not try to cut corners when undertaking the insurance placement as the consequences of getting this wrong could be catastrophic for your firm’s future. Be confident that you have lined up the best people both internally and externally to be involved in your renewal negotiations. This will ensure that your firm is equipped to deal with any of the inevitable challenges of the 2016 Solicitors’ Season including The Insurance Act.
This article was submitted to be published by Howden UK Group Limited as part of their advertising agreement with Today’s Conveyancer. The views expressed in this article are those of the submitter and not those of Today’s Conveyancer.