Written by Adrian Bingham
On 12 August 2016, the Insurance Act 2015 was brought into force. This represents the greatest statutory change to commercial insurance law since the previous legislation was enacted in 1906.
The majority of underwriters, brokers and intermediaries in the insurance industry will already be well aware of the changes in the law, and will have made provision for it in their business operations. However, the changes are likely to be less well known to policyholders. This briefing note seeks to set out in summary format the key factors which purchasers of commercial insurance need to be aware of going forward.
1.What has to be disclosed when taking out insurance cover?
Under the former law, the burden was on the insured to inform the insurer, before taking out the policy, of “every material circumstance” known to the insured, and the insured was deemed to know every material circumstance which ought to be known in the ordinary course of business. A breach of this duty could enable the insurer to void the contract and treat it as if it had never existed. This could place the insured at a considerable disadvantage, because (a) the insurer was not bound to ask any specific questions about the risk, (b) the insured was not necessarily in a position to know what the insurer might retrospectively consider relevant, and (c) if the insurer invoked the right, it had to be on an all-or-nothing basis. As a result, injustices regularly occurred.
The stringency of this regime has been considerably moderated by the Insurance Act 2015. Now, the insured’s duties are framed on the basis of a “duty of fair presentation”. The insured is still supposed to inform the insurer of all material circumstances, but the Act recognises that this may not always happen, and also provides for a less onerous duty for the insured to “give sufficient information to put a prudent insurer on notice that it needs to make further enquiries” as being acceptable. There are also detailed and entirely new provisions defining how the senior management and other employees of a commercial organisation are deemed to obtain their knowledge, and whether it is known by its external representatives (such as its brokers). What constitutes “material circumstances” is now defined by statute in more detail, as well as what underwriters are deemed to know without being specifically told by the insured.
2. What happens if the insured breaches its duty?
Under the former law, the position was very black and white. If the insurer exercised its statutory or common law right to void the cover, no part of the policy could be retained in existence, even if the breach only related to a limited (or even peripheral) issue. This gave rise to much case law, as well as insurance industry agreements and contractual alternatives to mitigate the severity of the law.
Now, the position is much more flexible. As with the former law, if the insured deliberately (i.e. fraudulently) or recklessly misrepresents or fails to disclose facts relating to a risk, or makes a fraudulent claim under the policy, the insurer can still void the policy and refuse to pay any claims. The insurer can also keep any premium that has been paid.
However, if the breach was innocent or negligent, there is a range of possibilities, unlike the position under the former law. These will depend upon what the insurer would have done, if it had known about the true position when being invited to cover the risk. In summary:
- If the insurer would not have offered cover at all, it can void the contract and refuse any claims, but must return the premium;
- If the insurer would have offered cover, but on different (i.e. less favourable) terms, those terms will be deemed to apply. It is for the insurer to put forward what those terms would have been. Also, if the insurer would have charged a higher premium for the cover, the indemnity limit can be proportionately reduced.
Whilst some may consider that this gives the insurer a great deal of freedom to decide on a retrospective basis what it might have done in a different situation, the end result should still be better for the insured, in the light of the regulatory duties of insurers to “Treat Customers Fairly” under the FCA Rules – certainly in comparison with the risk of an all-or-nothing voidance of cover.
3. Other ways in which the 2015 Act is better for the insured
These include the following:
- It is no longer permissible for an insurer to include a clause in the policy which turns all pre-contract representations by the insured into warranties that must be strictly complied with as a condition precedent to coverage.
- If the insured warrants something to be the case, the insurer can now only rely upon a breach of warranty if it relates to the incident for which a claim has been made by the insured. Previously, there did not have to be any connection between the facts of the breach and the circumstances of the claim.
- Insofar as an insurer can contract out of certain parts of the Act, this must be clearly explained to the insured, in order to be valid.
As with all new legislation which implements major changes, there will be uncertainties of interpretation and application that will inevitably give rise to new court decisions. However, most commercial users of insurance cover, as well as the insurance market itself, will regard the 2015 Act as a substantial improvement on what has been in force before.
Adrian Bingham is a partner of Gordon Dadds, practising in insurance and construction law.
 There have also been relatively recent legal changes affecting personal insurance contracts, under the Consumer Insurance (Disclosure and Representations) Act 2012: these are outside the scope of this briefing note.
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I graduated from Cambridge University in 1984 with a degree in English literature, and qualified as a solicitor in 1988. Prior to joining Gordon Dadds in April 2014, I was a partner at Hextalls and Davenport Lyons. I focus on insurance and construction. My insurance experience includes advising on coverage and professional indemnity disputes, as well as insurance documentation and regulatory matters. In the construction arena, I represent developers and contractors in claims involving delay and disruption and disputes, and advise on contracts, terms of retainer, warranties, bonds, and other industry documents. I also deal with construction-related property claims, and am accredited as a construction adjudicator and as a mediator. Outside of work, I enjoy cricket, racket sports, chess, fly-fishing and wine.