It is a long established principal that policyholders have a duty to disclose material facts to their insurers. This has now been codified into a wider duty to make a fair presentation of the risk. The existing obligations of good faith and ensuring accuracy of material information both remain. The Act, however also specifies what a policyholder must do for a presentation to count as fair. There are two key elements:
‘Reasonable Search’ is a new obligation which will vary based on business circumstances:
- the policyholder must make adequate enquiries within their business to identify and verify information relevant to the risk(s) concerned.
- These must include all relevant knowledge of ‘senior management’ of the business and those involved in the insurance purchasing process (including us your broker).
- Reasonable enquiries must be made of any relevant third parties involved with the business including external consultants (accountants/solicitors etc) and anyone insured by the policy.
‘Clear and Accessible’ presentation of risk information
- This addresses the clarity of presentation and how able insurers are to assess the risk.
- An additional requirement to highlight any other facts or unusual activities and or/known areas of concern that could affect the risk.
- Sufficient information to put a prudent insurer on notice that it needs to make further enquiries to reveal those material circumstances
Whose and What Knowledge is relevant?
- Knowledge of senior management
- Knowledge of the insurance team (including brokers)
- Every material circumstance which the insured knows or ought to know
- Information reasonably revealed by a reasonable search
Insurer remedies for a breach of fair presentation
- If the breach was deliberate or reckless, the insurer can avoid the contract from inception and can keep the premium. The insurer must prove that the breach was deliberate or reckless.
- If the breach was not deliberate or reckless, then there are a number of options available to the insurer if they wish to impose a remedy. More than one remedy can be applied – the insurer must show that they would have acted in that way if the breach of duty had not occurred.
- If the insurer would not have written the risk if it had known the information which has come to light, then it can avoid the contract but it has to repay the premium.
- If the insurer would have charged a higher premium, then it can proportionately reduce any claims payments.
- If the insurer would have included new terms, or imposed different terms other than with respect to premium such as conditions / warranties, exclusions, different extensions, sub-limits etc., the contract is to be treated as if it had been entered into on those terms.
Example – Premium from the insurer based on the information given was £5000 but the insurer would have charged £10000 had a fair presentation been made then the claim would be reduced by 50%
As your Insurance Broker we will of course work with you to establish key facts in relation to your risk.
Warranties & Conditions
Currently a breach of a warranty in an insurance contract automatically discharges the insurer form liability from that point onwards, even if the breach is subsequently corrected. Under the Insurance Act (Section 10), the effect of a breach of warranty is now to suspend liability rather than to discharge the insurer from all liability under the policy.
Currently if you have a claim and you are found to be in breach of a warranty, insurers are entitled to deny the claim even where the breach is irrelevant to the loss incurred, for example there is a flood , insurers ask for a copy of the intruder alarm maintenance records, there are none, this breach of warranty enables the insurer to turn down the flood claim due to a breach completely unrelated. This is now helped in part (there are still some exceptions) by Section 11 of the Act which prevents risk mitigation terms being applied where they are irrelevant.
Abolition of basis of contract clauses
This is another positive outcome from the new act. Basis of contract clauses in essence turn any information you provide to insurers into warranties. This means that under current legislation insurers can avoid claims should any information at all be inaccurate. The new act prohibits these clauses.
If you have any further questions on the Insurance Act then please do not hesitate to contact your Account Executive or any other member of our team.