Insurance - the law improves

On 1 August 2016 the Insurance Act 2015 (the “Act”) came into force.  The Act introduces welcome changes in a crucially important area of business and risk management particularly for the construction and engineering sectors.

In last month’s issue Neil Mason outlined the changes to the law on claims where the insured has become insolvent introduced by the Third Parties (Rights Against Insurers) Act 2010 which also came into force on 1 August 2016. 

In this month’s article we will concentrate on the issue of disclosure, which is a key aspect of the duty of good faith owed by an insured to the insurer.

Disclosure
The law as previously stated in the Marine Insurance Act 1906 required the insured to ..”disclose to the insurer, before the contract is concluded, every material circumstance which is known to the [insured], and the [insured] is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him”..

The justification for this approach was that the insurer is unaware of the risks faced by the insured but the insured knows all.  The Act readdresses the obligations around disclosure and the knowledge assumed of the insurer has changed.

The new duty of disclosure  applicable from 12 August 2016 is that of fair presentation and is contained in Section 3 of the Act.  This introduces a second limb where the insured should either:

“(a) disclose every material circumstance which the [insured] knows or ought to know; or

(b), failing that disclose sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those circumstances”

This second limb represents a significant shift in emphasis on assessing risk in obliging insurers to be proactive in making their own enquiries.  The insured should be aware, however, that there is a duty on it to volunteer material information, an obligation which may go beyond the expectations of some insurance policies available in the commercial market.

Additionally, the fair presentation should be made in a manner which is reasonably clear and accessible to a prudent insurer.  This new requirement would preclude the unstructured dumping of vast amounts of information on the insurer.

In a further improvement the exceptions to information required to be presented on fair disclosure are those circumstances where (a) it diminishes the risk (b) is known or ought to be known by the insurer (c) the insurer is presumed to know it or (d) it is something as to which the insurer waives information.

Knowledge on Disclosure
The Act helpfully gives guidance on what an insurer and an insured knows or is assumed to know. 

Insurers are now taken to know what should reasonably have been revealed by a reasonable search of information available to them.  Insurers are also presumed to know what an insurer offering the class of insurance in that field of activity would reasonably be expected to know in the ordinary course of business.

Non individual insureds are deemed to know what is known by individuals who are part of the senior management or otherwise responsible for the insured’s insurance.

Remedies for breach of duty of fair presentation (“Qualifying breaches”)
Previous insurance law offered an often onerous, one size fits all remedy of avoidance of the insurance contract by the insurer for breaches of the duty of disclosure whereby  the two parties are placed in the same position they would have been in had the contract not been made.  The Act introduces a tiered remedies.  An insurer has a remedy if it can show that, but for the breach, the insurer:

•would not have entered into the insurance contract; or

•would have done so only on different terms.

The insurer’s remedies depend on whether or not the breach was deliberate or reckless.

Deliberate or reckless breach
A qualifying breach is deliberate or reckless if the insured (a) knew that it was in breach of the duty of fair presentation or (b) did not care whether or not it was in breach of that duty.  For such a breach an insurer can avoid the policy and keep the premiums.

Breach not deliberate or reckless
If the insurer can demonstrate that it would not have entered the contract, it can avoid the policy but must return the premiums paid.  Where the insurer would have accepted the risk but on different terms, the contract is to be treated as if it included those terms.  If the insurer would have entered into the contract but on a higher premium, the insurer may reduce the amount to be paid on a claim proportionately.

Practical Steps
• The insured should work with its broker in good time to present the information on risk appropriately and to categorise the information in order for material information to be accessible.
• The insured (particularly larger multi site corporations) should establish protocols with the insurer to identify who is considered part of the senior management and who is responsible for insurance and appropriate disclosure mechanisms.

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.