When the new Insurance Act came into force in August 2016, it brought with it significant changes to the obligations on businesses to provide their insurer with relevant information when applying for insurance. Michael Axe in RB’s Commercial Disputes team looks at the practical effects of these changes one year on from implementation.
The Insurance Act 2015 was unquestionably the biggest overhaul of insurance legislation in a generation, and one of the biggest changes was in relation to the disclosure obligations owed by businesses to their insurers. Businesses have seen a relaxation of the disclosure obligations, as for the first time, insurers now share the responsibility for ensuring that all relevant information is available when the policy is taken out.
The Act only applies to “non-consumer” insurance contracts (the law relating to “consumer” insurance having been reformed separately in 2013), which covers everything except insurance taken out by an individual not acting in relation to his trade or profession. In essence, this means that all business-related insurance policies will be “non-consumer” insurance contracts, and will come within the scope of the Act.
The Duty of “Fair Presentation”
The Act replaced the customers’ traditional “duty to disclose” all relevant information to the insurer when applying for insurance with a new “duty of fair presentation”. This new duty is less onerous on the customer, and requires the insurer to take a more proactive role in assessing whether it has been provided with sufficient information. The consequences for breaching the new duty of fair presentation are also different from the consequences of breaching the duty to disclose.
In broad terms, the new duty of fair presentation means that the customer needs to disclose to the insurer either all “material circumstances” which are known to the customer, or sufficient information to put a “prudent insurer” on notice that it needs to make further enquiries in order to elicit all “material circumstances”. It is this second alternative limb to the duty which is the significant departure from the previous “duty to disclose”, which was an absolute duty that the customer owed to the insurer.
The second limb of the duty of fair presentation means, for the first time, that the insurer has to take a degree of responsibility in relation to the disclosure of information when the policy is taken out. If the disclosure made by the customer is not enough to satisfy the first limb (ie it does not disclose all material circumstances), but it is enough to put a “prudent insurer” on notice of the need to make further enquiries, then the burden transfers from the customer to the insurer, which must then make the necessary further enquiries.
The hope is that this will prevent insurers from simply taking a passive role in relation to the information provided at the time that the insurance policy is taken out, and then subsequently purporting to deny cover to the customer on the grounds of non-disclosure once a claim is made.
Consequences of breach
Provided that the breach of the duty of fair presentation was not deliberate or reckless, the consequences of the breach will depend on what the insurer would have done if fair presentation had been made:
If the insurer would not have provided cover at all, then the insurer can “avoid” (ie terminate) the insurance contract and can decline cover for all claims, although it does have to refund the insurance premium to the customer.
If the insurer would have only provided cover on different terms, then the insurance contract can be treated as if it was subject to those additional/alternative terms.
If the insurer would have only provided cover in return for a higher insurance premium, then the insurer can reduce the amount paid out on a claim by a proportionate amount to reflect the higher premium.
If, however, the breach of the duty of fair presentation was deliberate or reckless, then the insurer can “avoid” the insurance contract and decline cover for all claims, and it doesn’t have to refund the insurance premium to the customer.
Other amendments to be implemented by the Insurance Act 2015
This article focuses on what, for businesses, is arguably the biggest practical change to insurance law under the Act - the replacement of the “duty to disclose” with the “duty of fair presentation”. There are, however, a host of other reforms to insurance law that were implemented by the Act when it came into force, including in relation to insurance warranties, fraudulent claims, and third parties’ rights against insurers.
The Act also allows the parties to “contract out” of certain provisions of the Act in individual insurance contracts, but only if the Act’s transparency requirements have been met. These transparency requirements are designed to protect businesses when insurers attempt to contract out of certain protective provisions under the Act to the business’ detriment. Full transparency requires:
The insurer to take sufficient steps to draw any terms which are more disadvantageous to the customer, as a result of contracting out of the Act, to the customer’s attention before the insurance contract is entered into.
The disadvantageous term is clear and unambiguous as to its effect.
In assessing whether the insurer has provided full transparency in relation to any contracted out provisions, the Courts will take into account the specific circumstances of the individual customer and transaction.
A new legal landscape
The Act was intended to acknowledge that, where “non-consumer” insurance contracts are concerned, there is unlikely to be a ‘one size fits all’ solution, and so there needs to be a degree of flexibility built into the legislation.
Although the Act came into force a year ago, we are still waiting for a clear indication from the Courts as to how they will apply and interpret these new statutory provisions in specific cases. However, there is little question that the Act (including a recent amendment that came into force in May 2017 which requires insurers to make prompt payments when claims are made), has shifted the balance of power between insurers and businesses in an attempt to redress the earlier imbalances.
For more information on these or any other issues relating to insurance disputes, please contact Michael Axe in the Commercial Disputes team on 01293 527744.