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Managing your risk landscape
Fri 20 May 2016 @ 16:07
British insurance law was largely developed in the 18th and 19th centuries with major legislation now more than 100 years old. The Insurance Act 2015 (the ‘Act’) will introduce the most significant changes to UK insurance contract laws in over 100 years. The Act comes into force on 12 August 2016 and will apply to all insurance policies in England and Wales, Scotland and Northern Ireland.
The new legislation which received Royal Assent on 12 February, 2015 is seeking to create a new and fairer balance between policyholder and insurer. It aims to ensure better exchange of information between insurers, brokers and customers, which should reduce the number of disputes, avoid disruption for both insurers and customers and increase confidence in the UK insurance sector.
As a trusted promotional risk insurer the Act will bring significant changes for PIMS and our clients. We have therefore summarised the key elements of the Act below, and you can also read full details of the new legislation.
Duty of fair presentation
When the Act comes into force, before entering into a contract of insurance, insured parties will be required to disclose either:
- every matter which they know, or ought to know, that would influence the judgement of an insurer in deciding whether to insure the risk and on what terms (very similar to the current position); or
- sufficient information to put an insurer on notice that it needs to make further enquiries about potentially material circumstances.
Insured parties will be considered to have known, or ought to have known:
- matters that could be expected to be revealed by a reasonable search of information available to the insured party – for example, information held within an organisation or by a broker;
- anything known by a person responsible for their insurance – for example, a broker;
- insured organisations will also be deemed to have the knowledge of anyone who is a part of the organisation’s senior management, or who is responsible for their insurance.
Insurers will be considered to have known, or ought to have known:
- • matters known to individuals who participate on behalf of the insurer in deciding whether to take the risk and on what terms – for example, underwriting teams;
- • knowledge held by the insurer and readily available to the person deciding whether to take the risk;
- • matters known by an employee or agent of the insurer and which should reasonably have been passed on to the person deciding whether to take the risk.
Remedies for breach of duty of fair presentation
Previously, an insurer was able to refuse all claims under an insurance contract if the pre-contractual disclosure duty was breached, even if the breach was committed by the broker. The 2015 Act has now introduced a range of proportionate remedies, valid depending on the scale of the breach and the state of mind of the insurer. These are:
- • deliberate or reckless breach: the insurer will be able to avoid the contract and keep any premiums;
- • breach is neither deliberate nor reckless and the insurer would not have entered into the contract: the insurer will be able to avoid the contract but must return any premiums;
- • breach is neither deliberate nor reckless and the insurer would have entered into the contract on different terms, other than terms relating to premium: the insurer will be able to treat the contract as if those different terms apply – for example, any additional exclusions that would have been imposed;
- • breach is neither deliberate nor reckless and the insurer would have entered into the contract for a higher premium: the insurer will be able to reduce the cover to which the insured is entitled on a proportionate basis.
Warranties and terms not relevant to the loss
Warranties are to be treated as suspensive conditions, meaning that an insurer’s liability will only be suspended during a period of breach and a breach of warranty will no longer automatically terminate the policy. The breach of the warranty must have some bearing on the actual loss by increasing the risk of the loss occurring.
- In Business Contracts, the parties may contract out of any provisions in the Act, save for the abolition of basis clauses.
- Contracting out is subject to requirements that (i) the contracting-out clause is brought to the attention of the insured, or its agent; and (ii) that the clause is clear and unambiguous as to its effect.
- In Consumer Contracts, any attempt to contract out of the Act would be of no effect, if it would put the consumer in a worse position than under the Act.
Previously, in the event of fraud, an insured party would forfeit the whole claim and insurers could also avoid the whole contract. The 2015 Act now sets out a clear statement of insurers’ remedies in the event of fraudulent claims brought by policyholders. Insurers:
- will not be liable to pay the fraudulent claim;
- may recover any sums paid to the insured in respect of the fraudulent claim; and
- may, by notice, treat the policy as terminated with effect from the fraudulent act and retain all premiums paid. Previous valid claims are unaffected.
Amendment to the Third Parties (Rights against Insurers) Act 2010
The 2015 Act contains new provisions amending the Third Parties (Rights against Insurers) Act 2010 so that it can be brought into force. An omission in the Third Parties (Rights against Insurers) Act 2010 regarding the definition of insolvency events had previously prevented this.
It appears that the Act goes some way to redressing the imbalance under the current law between the interests of the insured and insurers. PIMS are well underway to ensuring we are able to satisfy the new law and that adequate and effective internal governance is in place so that relevant employees are fully up-to-date with the changes.
If you want to discuss the new legislation with PIMS to see how it will affect your future promotional risk insurance, call Mark on 020 7255 7900 or email email@example.com.