Be prepared for the biggest changes to business insurance law in generations
When the Insurance Act 2015 (the Act) comes into force on 12th August 2016, the much anticipated reforms to business insurance law in the UK will be upon us. The changes will impact policyholders, brokers and insurers alike, in the most significant shake-up of insurance law in over 100 years.
In this article, we discuss changes of relevance to those responsible for their own, or their firm’s, Professional Indemnity – and the steps we recommend you take in preparation for the Act coming into force.
Under the Act, a policyholder looking to obtain or renew their PI cover will be required to make a ‘fair presentation’ of the risk to insurers.
Many aspects of this new duty will sound familiar: the policyholder must not make any material misrepresentations (i.e. false statements) and must disclose every material circumstance that they know or ought to know. So, what’s new?
It’s actually largely good news:
- The Act provides an additional way for policyholders to satisfy the disclosure requirements: by disclosing sufficient information to put a prudent insurer on notice that it needs to make further enquiries. For example, say you disclose in a reasonably clear manner that a complaint has been submitted to your firm’s regulator, but you only provide limited details and the insurer fails to ask any questions regarding this complaint. If it subsequently becomes the basis of an insurance claim, you will not have breached the duty of fair presentation.
- A new system of proportionate remedies for breach of the duty of fair presentation is being introduced. This will replace the existing sole remedy of avoidance for those breaches which are neither deliberate nor reckless. For example, if the insurer would have written the risk but for a higher premium had a matter been correctly disclosed, the insurer’s remedy will be to reduce proportionately the amount of a claim payment (as opposed to avoidance of the policy in its entirety).
Need to know:
- The duty of fair presentation introduces a new requirement: policyholders must present the risk in a “reasonably clear and accessible” manner. This is designed to prevent ’data dumping’, where policyholders provide insurers with a large amount of information without highlighting the key points. Using the above example, if you were to only refer to a complaint against your firm on page 100 of a 200 page presentation, you may well breach the duty. We recommend that you start considering with your broker how best to present the risk fairly, in order to avoid inadvertently breaching this new requirement.
- The Act alters the law relating to what policyholders “ought to know” for the purposes of the material circumstances required to be disclosed. Policyholders will be required to perform a reasonable search of available information, including information held by their organisation or by any other person. This change is significant and potentially increases the burden on policyholders. We recommend that, in conjunction with your brokers, you agree guidelines on what constitutes a reasonable search with insurers.
Warranties and other terms
In insurance law, warranties are terms in a policy that must be complied with exactly. They are often described as promises on the part of the policyholder that a certain state of affairs exists or that certain things shall be done or not done – for example, that certain personnel will not be allowed to undertake work without supervision of a qualified person.
The changes relating to warranties are good news for policyholders:
- Breach of warranty will no longer automatically release the insurer from liability. If the policyholder remedies the breach, the insurer will be back on risk.
- “Basis of the contract” clauses will be prohibited. These clauses are often contained in proposal forms and convert all the answers into warranties; currently, if the policyholder inserts the wrong address details in the proposal form, the insurer is technically discharged from liability. This will no longer be the case.
- The Act will restrict an insurer’s ability, in certain circumstances, to deny liability for breach of a term (not just warranties) that did not increase the risk of the loss that actually occurred.
It remains important to be aware of any warranties contained in your policy and to seek clarification from your broker if unsure. This is because any breach, even if minor, will still release the insurer from liability if not remedied and not all warranties are capable of being remedied.
Insurers will be able to contract out of the new provisions contained in the Act (except for the prohibition on basis of the contract clauses). We therefore recommend seeking confirmation from your insurance broker and/or insurer that the new law will apply to your policy.
Written by: Liam O’Connell, Partner at Norton Rose Fulbright LLP (020 7444 2115 / liam.o’[email protected])
Produced for Pi, the magazine for Professional Services firms operating in high risk world, produce by Howden Professional Indemnity.
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.