Important Changes for Policyholders and how these will impact on you
As a result of a recent act of parliament, the Insurance Act 2015, major changes have been made law in relation to Non-consumer Insurance Contracts. For the purposes of the Insurance Act 2015, non-consumers are defined as follows:-
- Where the policyholder is a corporate entity
- Where the policyholder is an individual and the contract of insurance is entered into wholly or mainly for purposes related to the individual’s trade, business or profession
This has a significant impact on the operation of your insurance policy, including your disclosure obligations towards insurers, warranties and fraud.
Duty Of Disclosure & Representation
The Insurance Act imposes an obligation on all policyholders to make a “fair presentation of the risk” prior to your Policy commencing.
What is a fair presentation of the risk?
This is one that discloses, in a manner that is reasonably clear and accessible, every material circumstance which is known or ought to be known by the Policyholder’s senior management, or those responsible for arranging insurance, following a reasonable search.
Material Circumstance – this is anything which would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms. There is no specific limitation on what constitutes a material circumstance but examples include prior claims, your financial history, convictions of key personnel and your business activities.
Known or ought to be known – to disclose material circumstances that you actually know but also those you ought to know. If the information is readily available to you but you do not disclose it due to a lack of enquiry or “turning a blind eye” you will have breached your duty to fairly present the risk. Any knowledge we have as your broker must also be presented to Insurers.
Senior Management – for the purposes of the Act (but is not limited to) – Senior Management includes anyone who has a key role in making decisions on behalf of the business, even if they do not sit on the board or if they do not officially have a management role. You should take the time to carefully identify who within your business is best placed to identify any information that may be relevant to insurers when considering the particular risk and type of policy.
Reasonable Search – you are obliged to undertake a reasonable search. When considering the extent of your search you should take into account the nature of the insurance you wish to purchase and consider who within your organisation is best placed to provide relevant information.
Reasonably clear and accessible – all information must be provided to insurers in a clear and accessible manner. This means that information must not be provided in an ambiguous way. The new rules prevent Policyholders from concealing key facts amongst large volumes of less relevant or immaterial information.
What happens if you do not fairly present the risk?
Insurers do have differing remedies depending upon the nature of the breach and what would have happened had you fairly presented the risk:-
- Deliberate or reckless presentation of the risk – insurers are entitled to avoid the policy and retain all premiums. Insurers can treat the policy as if it never existed and would result in no claims being paid. You could also be required to repay any claims payments that have already been made.
- Failure to present the risk fairly however this was not deliberate or reckless – insurers may still avoid the policy if they can demonstrate that the policy would not have been provided if you had represented the risk fairly. Insurers could be required to repay the policy premium to you, although they would be required to make no payment in respect of claims and you would be required to repay any claims payments already made.
- If Insurers can demonstrate that they would have provided a policy however on different terms, the policy would be treated as if those terms applied from the commencement of the policy. These additional terms could be increased excess or additional exclusions. The additional terms may result in no payment being made in respect of any particular claim.
- If Insurers would have provided the policy and charged an increased premium – the amount insurers will pay will reduce by proportion to the difference between the premium actually paid and the premium that would have been charged had the risk been fairly presented. EG if a fair presentation would have resulted in the premium doubling, any claims payment under the policy will be halved.
What Does This Mean For You?
Overall the impact will be beneficial to policyholders, as they will benefit from greater clarity in understanding the laws that govern insurance contracts. Furthermore the sanctions available to insurers will be more proportionate.
- Insurers will no longer be able to rely on “Basis of Contract” clauses to convert all representations into warranties./
- In the event of a “breach of Warranty”, Insurers will only be allowed to refuse to pay a claim where the loss arose during a period of non-compliance. eg – if you breach a warranty (fail to set a fire alarm), cover will be re-instated as soon as you re-establish compliance. Cover is simply suspended during periods of non-compliance.
- If the warranty is designed to reduce the risk of a certain type of loss or a loss at a certain place or time and the policyholder can demonstrate that the breach could not have increased the risk of that loss occurring, insurers must still pay the claim.
Historically in the event of a fraudulent claim being made against the policy, all cover under the policy ceased and insurers were entitled to retain the premium. The policyholder would also have to repay any claims payments already made. However, under the new regime, insurers will be entitled to terminate the policy from the date of the fraudulent claim or act, but must still cover claims arising from incidents occurring before the fraudulent act.
Please do not hesitate to contact your Account Executive or usual Northern Alliance contact should you wish to discuss the implications of The Insurance Act further. Alternatively, further discussions will form part of the annual review process at the next renewal of your current insurance arrangements.