Herbert Smith Freehills partner Paul Lewis explains the main changes introduced by the new Act
How does the Insurance Act 2015 affect pre-contractual disclosures?
The Act requires the insured to make a “fair presentation of the risk” to the insurer. The insured must either disclose every material circumstance that it knows or ought to know (as is the current position) or, failing that, give the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances. Importantly, policyholders should note that they are required to make the disclosure in a manner that would be reasonably clear and accessible to a prudent underwriter. It is hoped that this will discourage “data dumping” (bombarding the insurer with vast swathes of material whether relevant or not).
What happens if an insured fails to make a fair presentation?
Currently, the only remedy available to insurers for a breach of the duty of good faith is avoidance of the policy, which means the policy is treated as though it had never existed. It was recognised that, in most instances, this was a draconian remedy that did not adequately distinguish between innocent and deliberate or reckless mistakes. The new Act provides for a range of proportionate remedies where the insured is in breach of its duty of disclosure.
What are the main changes in respect of warranties?
There are three significant changes in this area that policyholders will welcome:
- 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 the contract” clauses, which turn the insured’s pre-contractual representations (including answers to questions on a proposal form) into warranties.
- The Act also provides that where there is a warranty (or other term) that 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 should policyholders do between now and the autumn of 2016, when the Act will come into force?
Policyholders should make sure that their risk managers, the board and anyone else involved in arranging the insurance is familiar with the new law and how it will affect the disclosure and renewal process. Consideration should be given now as to whether any changes need to be made to internal procedures.
Policyholders might also think about liaising with their brokers and lawyers to consider whether it may be in their interest to try and take advantage of the Act’s benefits sooner than August 2016 by seeking amendments to their existing policies. For example, policyholders may wish to seek the removal of basis clauses from their policies or include the Act’s range of proportionate remedies in their policies for any innocent non-disclosure on the part of the policyholder.
Paul Lewis is a partner in the dispute resolution department of Herbert Smith Freehills