Insurance Act 2015 - What do I have to tell my insurer?
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 previous bankruptcies, convictions, or potential claims. The problem is that many insurance customers are unaware of what is materially important. Once a claim is made, an insurer may discover details that were not mentioned and may then be able to completely void the contract, leaving the policyholder in a position where no insurance had ever been 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 in that, instead of anticipating or ‘guessing’ what the insurer needs to know, the policyholder must provide the information they think is relevant. 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”. As insurers and brokers get used to the new rules, how to put this into practice will become clearer. For now, clients are advised to keep a live document updated with relevant information, which can be provided to their insurer or broker when arranging a new contract. It should include any details reflecting who and what needs to be insured.
Organising and Presenting Information
The substance of ‘fair presentation’ will also be determined by case law over time. Policyholders cannot “data dump” information; it must be gathered logically and clearly. Information should be presented so insurers can request further details as needed. For example, if a policyholder discloses that they carry or store ‘hazardous substances’, the insurer can then ask for further specifics.
Knowledge of the Organisation
The ‘knowledge’ of a limited company or charity includes not only the knowledge of the person liaising with the broker or insurer, but also the combined knowledge of senior management and those responsible for arranging insurance. It also includes information held by external consultants, solicitors, and others. Senior management must therefore have a firm grasp of all the organisation’s activities and ensure these are clearly communicated to the insurer.
Insurer Responsibilities and Remedies
The new Act also imposes a duty on insurers to carry out their own investigations. Insurers are presumed to know things that are common knowledge or expected within a specific sector. For example, a charity insurer should know to ask policyholders working with vulnerable adults if they have a safeguarding policy.
If a policyholder fails to disclose the necessary information or misrepresents their organisation, the insurer may avoid the policy (cancel it as though it never existed). The insurer may only retain the premium where the misrepresentation or non-disclosure was deliberate or reckless.
Where the non-disclosure or misrepresentation is neither deliberate nor reckless (i.e., an innocent mistake), the insurer may:
Avoid the policy with a return of premium if they would have declined the risk.
Treat the contract as including terms they would have added if they would have accepted the risk with a contractual term (like an endorsement or warranty).
Scale down claims proportionately if a higher premium would have been charged (e.g., if the insurer would have charged double, it need only pay half the claim).
Effective Date
These changes affect policies started or renewed on or after 12th August 2016 and also apply to any policy adjusted on or after that date.
In summary, policyholders still need to disclose information to insurers, with their broker’s assistance. The process now has a clearer emphasis on roles and responsibilities. If information is not properly disclosed, insurers retain rights to exercise remedies, but the Act sets these out clearly, helping to avoid disputes between policyholders and insurers.
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.
What are my responsibilities once my insurance cover starts?
What is Contracting Out?
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.
