It has been said that insurance is the only product that both the buyer and the seller hope is never actually used. There are, however, new UK rules that will govern how it is used. These changes are among the most significant in the history of UK insurance law. The earliest recorded insurance in history dates back to the marine insurance of 12th century London when insurers would provide cover for merchant explorers who were going to the New World to seek precious metals and exotic spices. The insurance would cover the loss of their ships on potentially dangerous expeditions.
Although history has moved on, insurance law been resistant to change over the last century. The Marine Insurance Act 1906 remains one of the most important pieces of insurance legislation in the UK.
However, the Insurance Act 2015 (‘the IA 2015’) is a radical new law that aims to make the UK business insurance market more modern and competitive. The IA 2015 will not come into force in August 2016. I explain below what some of the major changes under the IA 2015 are.
Fronting up: the insurer’s duty to be honest about all material facts.
Under the new law, a lot hinges on the insured’s duty to be up front with the insurer about risk.
Under section 3 of the IA 2015 the insured must make to the insurer a fair presentation of the risk. This is called the “duty of fair presentation.” Under section 3(3) the disclosure must be made “in a manner which would be reasonably clear and accessible to a prudent insurer.” This rule prevents data dumping. The insured cannot send tetrabytes of data to the insurer and then later say “we told you so” when trying to rely on some obscure piece of raw data that is hidden within electronic files. The key words here are “clear and accessible.” The insured should be advised to present the insurer with a clear analysis of all of the material facts by investigating its own circumstances and documents and then providing a report to the insurer.
There is a further duty on the insurer to either:
- Disclose “every material circumstance which the insured knows or ought to know” OR
- Disclose sufficient information to put the insurer on notice that it needs to make further enquiries.
Brokers are going to want to make sure that the insured knows about this provision.
The IA 2015 goes on to say that “an insured ought to know what should reasonably have been revealed by a reasonable search of information available to the insured”. The insured cannot put its head in the sand and hope that it does not learn of any disadvantageous facts in order that it can avoid having to tell an insurer about them. The tenor of the IA 2015 is that the insured has to take responsibility and make proper enquiries about its circumstances. The insured that does not make a proper investigation of its circumstances before it takes out a policy may mean that its cover is voided and that the insurer is able to refuse to pay out on claims.
The insured should keep an audit trail of the search it conducted on the information that it had before it took out the policy of insurance.
Stonewalling: What happens if the insured fails to comply with the duty to tell the full story
Under the old regime, the law was cruder. Often, if an insured did not disclose a material fact, the cover was voided. We live in a new world where balance and proportionality are an essential part of commercial law.
Where the non-disclosure is deliberate or reckless
Under the IA 2015, the insurer can void the contract, refuse all claims and need not return the premiums paid if the insured was “deliberate or reckless” when they failed to make proper disclosure to the insurer before the cover started. It is, however, difficult to see how an insurer could prove that a non-disclosure was deliberate or reckless.
Where the non-disclosure by the insured is not deliberate or reckless
Where the non-disclosure by the insured is not deliberate or reckless then there are two provisions under the IA 2015.
- If, in the absence of the insured’s non-disclosure, the insurer would not have entered into the contract on any terms, the insurer may avoid the contract and refuse all claims, but must in that event return the premiums paid.
- If in the absence of the insured’s non-disclosure the insurer would have entered into the contract, but on different terms the contract is to be treated as if it had been entered into on those different terms if the insurer so requires.
The new law puts standards of fairness in place. The IA 2015 recognizes that there are degrees of non-disclosure. The days when an insurer can cry foul and rely on a trifling failure to disclose in order to void a policy over. The law is also balanced; it prevents the insured from playing games with the insurer by trying to dump data on an insurer in the hope that the insurer will not find any negative information before settling on terms. It prevents the insured from having “plausible deniability”- i.e. by claiming that something was fairly disclosed when in fact it was hidden under a vast amount of other material.
This bold new piece of legislation brings new burdens and new responsibilities for businesses, brokers and insurers.
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