What are the practical considerations of the Insurance Act 2015?

When the Insurance Act 2015 comes into force in August 2016, it will introduce fundamental changes to UK insurance contract law. Risk managers will welcome the reforms and are being encouraged to prepare for the changes well in advance of next year. Airmic has urged the insurance market to implement the reforms as soon as possible and some insurers may be willing to apply the new rules to policies incepting or being renewed before August 2016.

The key changes for risk managers concern the duty to make a fair presentation about the risk before the insurance cover incepts. The duty applies not only when the cover is first placed with an insurer but each time the insurance contract is varied or renewed.

Under the Act, the duty of disclosure will be satisfied if either all material circumstances that the insured knows or ought to know are disclosed to the insurer or sufficient information is given to put a prudent insurer on notice that it needs to make further enquiries. If the duty is breached, the Act introduces a scheme of proportionate remedies, depending on what the insurer would have done had a fair presentation been made. Commercial policyholders will benefit from the reforms, but there are nevertheless important issues that risk managers will need to consider carefully.

Searches for information

A commercial policyholder’s knowledge will be what is known to its senior management team and the individuals responsible for its insurance. In addition, what it “ought to know” is what should reasonably be revealed by a reasonable search of information available to the policyholder.

Risk managers will have to satisfy themselves that a reasonable search for information has been made both within the organisation and of any other party that has information about the risk. This will include, for example, making enquiries of agents (including the insurance broker) or individuals covered by the insurance (such as individual directors and officers covered by a D&O policy). If they do not already, risk managers should put in place guidelines and procedures for conducting searches and making enquiries for information about the risks they are insuring. They will want to talk to their insurance brokers about the extent of such searches and may be able to agree the parameters of what is a “reasonable search” with the insurer.

Making the presentation in a reasonably clear and accessible way

The Act says that the presentation must be made in a manner that would be reasonably clear and accessible to a prudent underwriter. The intention is to avoid “data dumping”, whereby large amounts of information, often in electronic format, have sometimes been presented to an underwriter in an unstructured form. In future, it is unlikely that a court will find that such an approach satisfies the duty to make a fair presentation.

Risk managers, with their insurance broker, will need to give careful consideration to how to structure the presentation of information, which could include indexing and the signposting of important information to the underwriter.

Contracting out

A key issue for risk managers, and one that they are unlikely to favour, is that the Act allows the parties to non-consumer insurance policies to contract out of the majority of the new rules. This can be done only if the term in the policy is clear and unambiguous and has been sufficiently drawn to the policyholder’s attention before the insurance incepts.

The Act does not set out what would be sufficient steps for an insurer to take to draw the term to the policyholder’s attention but does say that the characteristics of the policyholder and circumstances of the transaction will be taken into account in deciding whether it has been done. It follows that the more sophisticated the policyholder, the less the insurer will have to do to bring a term to its attention.

Risk managers, with their insurance brokers, will – as always – need to scrutinise the terms of policy wordings and documents cautiously to ensure that they reflect their understanding of the cover being offered.

 Ed Foss is the head of the insurance and reinsurance group and Simon Garrett is a partner at CMS