The Insurance Act 2015 will introduce the most significant changes to business insurance in over 100 years when it comes into effect on 16 August 2016.
Primarily, it will clarify what has previously been the highly contentious issue of when an insurer is entitled to refuse to honour a claim on the basis that the insured was guilty of non-disclosure or mis-representation when the policy was taken out.
Insurance contracts always have been, and will remain, contracts of the utmost good faith. The insured, under the new act, will be required to provide proper details of the risk the insurer is being asked to accept and to do so “ ... in a manner which would be reasonably clear and accessible to a prudent underwriter”.
The often thorny issue of what the insured should have known, and disclosed, when applying for cover has been clarified to the extent that it includes information which “should reasonably have been revealed by a reasonable search”. In other words, what should be known by the directors, senior management or those playing significant roles in the way that the insured business is managed.
The insurer’s ability to avoid a policy entirely for material non-disclosure or mis-representation will change when the act comes into force and will only apply where the mis-representation or non-disclosure was deliberate or reckless. In other cases a number of “proportionate” remedies will apply:
i) Where the insurer can show that it would have declined cover the policy can be avoided and the premium returned;
ii) Where the insurer would have agreed cover but imposed special conditions the policy will be deemed to have included any such conditions;
iii) Where the insurer would have charged a higher premium the sum covered will be reduced on a pro-rata basis (interestingly, in other jurisdictions, the insured is simply required to pay the additional premium to benefit from full cover).
“Basis of the contract” clauses will be prohibited by the new act and, unlike the other provisions of the act, this provision cannot be contracted out of. This means that the current, common, practice of treating the insured’s information supplied in the insured’s proposal as a warranty (breach of which will enable the insurer to decline cover completely) will be no longer be possible.
Furthermore, breach of warranty by the insured will not invalidate the policy if the breach has been remedied by the time a claim is submitted.
Where an insurer has failed to comply with conditions of the policy but that failure has not increased the risk of loss of the kind actually incurred the breach will not invalidate the policy (for example failure to maintain a security alarm will not invalidate a claim for flood damage).
Hopefully, the terms of the new act will avoid the uncertainty, and injustice, of insurers disclaiming liability on the basis of apparently irrelevant breaches – and that will be of benefit to every insured business. From the insurers’ perspective, the fact that there are now a range of proportionate remedies should also mean that the courts will be more willing to find breach by the insured given that, in most cases, the consequence will not be complete loss of cover.