Paul Lewis, partner at Herbert Smith Freehills, explains what policyholders should know about the changes and how to prepare for the Act coming into force next year
What can risk managers expect from the Airmic/Herbert Smith Freehills’ briefing on the Insurance Act 2015?
Herbert Smith Freehills and Airmic have worked to produce a briefing on the new Act that aims to assist policyholders wishing to amend their current policies to take advantage of some of the benefits of the Insurance Act 2015 before it comes into force in August 2016. The briefing includes an endorsement that might helpfully form the basis of discussions with insurers.
It is important for policyholders to be aware that not all sections of the endorsement in the briefing will be appropriate for everyone and this is not a ‘one-size-fits-all’ approach. I would urge policyholders to discuss the options with their insurance broker in the first instance and consider seeking independent legal advice.
Partners from Herbert Smith Freehills, including me, are offering Airmic members the chance to discuss the Insurance Act and its impact in free one-to-one sessions at the conference. This is a great opportunity to speak personally to specialist insurance lawyers about the Act, the implications it may have for your business and what preparations need to be made now. Herbert Smith Freehills will be in meeting room 3. Places are limited so book your free personal discussion with one of Herbert Smith Freehills’ insurance partners now by emailing Amanda.Syme@hsf.com.
Why was new legislation deemed necessary?
The current law is based on the Marine Insurance Act 1906 whose provisions, unsurprisingly, were considered outdated for the modern insurance market. It was also felt that the current law was imbalanced in favour of insurers and this was putting the English insurance market at a competitive disadvantage in the global arena.
The new Act provides for a new duty of fair representation, so how can policyholders prepare for a reasonable search?
Under the new Act, an insured is required to disclose every material circumstance that they know or ought to know. The Act states that the insured ‘ought to know’ what is revealed by a ‘reasonable search’. Policyholders will need to consider what information should be collected from whom within their organisation bearing in mind the nature of their business, its geographic scope and the type of policy being placed, in order to comply with this duty. Thought will need to be given as to how best to conduct such a search and collate the information provided. It will be crucial for policyholders to keep an audit trail of the searches carried out so that they can, if required, demonstrate to insurers that they carried out a reasonable search and seek to avoid any suggestion by insurers that the policyholder is in breach of its duty of fair presentation.
It is important to remember that in addition to the reasonable search, the insured is also required to disclose material circumstances that it ‘knows’ and the Act is prescriptive as to whose knowledge s relevant for these purposes – it is the knowledge of senior management and those individuals involved in the process of procuring the insurance.
Policyholders should act now to educate these individuals on the requirements of the Act and what information they will need to provide so that they are ready when the Act comes into force.
What are the main changes in respect of warranties and basis clauses?
Policyholders will welcome three significant changes in this area:
- under the Act, a breach of warranty will no longer automatically take the insurer off risk. The Act makes warranties ‘suspensive conditions’, which means that the insurer’s liability will be suspended while the insured is in breach of a warranty but can be restored if the breach is subsequently remedied;
- the Act abolishes ‘basis of contract’ clauses, which turn the insured’s precontractual representations (including answers to questions on a proposal form) into warranties; and
- the Act also provides that a warranty or other term would tend to reduce the risk of loss of a particular kind or loss at a particular location or time, an insurer cannot rely on the insured’s breach of such a term to avoid paying that claim if the breach could not have increased the risk of the loss.
What are the main elements to watch out for when contracting out?
If parties want to contract out of the default regime under the Act, any term that puts a policyholder in a worse position than it would be under the Act must meet certain ‘transparency requirements’:
(i) the insurer must take sufficient steps to draw the disadvantageous term to the insured’s attention before the contract is entered into or the variation agreed; and
(ii) the disadvantageous term must be clear and ambiguous as to its effect.
Policyholders should note that it will be sufficient for (i) above for an insurer to draw the disadvantageous term to the attention of the broker. It should also be noted that parties cannot contract out of the prohibition on ‘basis of contract’ clauses.
What practical steps should policyholders take before the Act comes into force in 2016?
Policyholders should think about two things.
First, policyholders should consider with their broker whether they want to amend their current policies to take advantage of some of the benefits that the new Act offers now. As mentioned above, the Airmic/Herbert Smith Freehills briefing on the Act contains a sample endorsement that could form the basis of any discussions with insurers on this.
Second, policyholders should take steps now to educate those involved in their organisation with the placement process to ensure that those involved in gathering and providing information for the underwriting presentation are aware of the new duty of fair presentation and what it involves. This should ensure compliance with the new duty of fair presentation when the Act comes into force in August 2016.