What’s it all about?
The Insurance Act 2015 will provide businesses with more clarity and the same sense of fairer play that Consumers benefited from after the introduction of the Consumer Insurance Act (April 2013) in relation to Personal insurance (houses, cars, jewellery etc.).
1. Duty of Disclosure and Fair Representation
Basically, not too much has changed here, you still need to provide all Material Facts to an insurer that ought to be known by Senior Management and those responsible for arranging the company’s insurance following a reasonable search. This is now known as the Duty of Fair Presentation.
A presentation to an Insurer can be fair even if all Material Facts are not disclosed provided that you submit sufficient information to put an Insurer on notice that it needs to make further enquiries for the purpose of providing this information.
2. Remedies for Non-Disclosure or Misrepresentation
An Insurer now has less artillery available to reject your claim if there has been non-disclosure or misrepresentation. Please see below the options which are available to the Insurer if the breach is not reckless or deliberate:
- If the Insurer would still not have written the policy on any basis, the Insurer may avoid the contract but must return the premium
- If the Insurer would have written the policy on different terms, the policy is treated as if containing those terms
- If the Insurer would have written the policy but charged an increased premium, the Insurer may proportionately reduce the claim amount
A working example
Florence Ltd places their Public Liability insurance through its broker, Nightingale Ltd, at an annual premium of £3,000. Prior to policy inception, Florence Ltd unknowingly makes an honest mistake and confirms that they have 10 full time members of staff.
A few months on and a £250,000 Public Liability claim is made by a member of the public against the company for personal injury. During investigations, it is discovered that Nightingale Ltd actually employs 11 permanent staff.
Thanks to the Insurance Act 2015, the Insurer is no longer able to cancel the policy due to non-disclosure of a Material Fact. Instead, they have to consider how they would have underwritten the risk if they had known about the additional employee.
The Insurer considers that if there been fair representation by the Policyholder, the premium charged would have been £4,500. The policyholder only therefore paid 2/3 of the premium and, under the new Act, the Insurer is only obliged to pay the proportional 2/3 of the claim. In this instance, it leaves the Client £83,333 out of pocket.
3. (a) Warranties and other policy terms
A warranty is essentially a promise that certain facts and conditions are true or will happen. An Insurer can no longer just simply terminate a policy because of a breach of Warranty. Instead a policy can be suspended until the breach has been remedied and then full policy cover must be reinstated
A working example
Lennon Ltd have an office policy placed via their broker McCartney Ltd which requires them to activate their office burglar alarm whenever the property is unattended.
Due to human error, one evening the alarm is not activated and £20,000 of computers are stolen overnight. The following night, the owner, John Lennon, personally makes sure the alarm has been activated.
As soon as the alarm is not activated, the insurance in relation to Theft and attempted Theft is suspended. Therefore, there is no insurance cover in place when the burglary takes place. As soon as the alarm is activated the following night, insurance cover for these perils is now active and Lennon Ltd would be covered if the burglar returns.
(b) An Insurer can no longer outright reject an otherwise valid insurance claim due to a breach in warranty which has no connection to the actual loss.
A working example
Freddie Ltd has an office policy placed via its broker Mercury Ltd. The policy has a warranty that the burglar alarm must be activated when the office is unattended. One evening, the alarm is not activated and a few hours later, there is a serious flood in the area which causes substantial damage to the premises.
Freddie Ltd makes a claim under their policy and, thanks to the new Insurance Act, they should be able to prove that neglecting to set the alarm would not have increased the risk of the office from flooding. As such, the insurer should provide cover.
This should all seem like common sense and fair play but sadly until the introduction of this Act, Insurers have not been obliged to honour these claims.
(c) “Basis of Contract”
This clause has been abolished in its entirety. It used to allow the Insurer to avoid any policies where there had been a factually incorrect presentation/proposal made by the Policyholder prior to policy inception. Whether the information was Material or not was of no consequence, the policy could be voided. This is no longer the case thankfully!