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The Insurance Act 2015 - beware the trip wires

The Glorious Twelfth this year will see the introduction of the greatest change to insurance contract law in this country in over 100 years. 12th August 2016 is the date when the Insurance Act 2015 amends the Marine Insurance Act 1906 and imposes significant new obligations on buyers of business insurance.

Written by Paul Brown on 20th June 2016

The Insurance Act 2015 - beware the trip wires

The Glorious Twelfth this year will see the introduction of the greatest change to insurance contract law in this country in over 100 years.  12th August 2016 is the date when the Insurance Act 2015 amends the Marine Insurance Act 1906 and imposes significant new obligations on buyers of business insurance.

The new Act introduces a number of changes but the duty of fair presentation, which replaces the old duty of Utmost Good Faith, in particular introduces a number of potential trip wires for the unwary.  After 12th August every insurance buyer will now have to conduct a ‘reasonable search’ before presenting its information to its insurer and it will not be enough to seek to pass the burden of fair representation to your Insurance Broker.

Unsurprisingly the Act gives little or no guidance on what constitutes a ‘reasonable search’, but this will include the knowledge of senior management, not only the board of directors but also those who play significant roles in the making of decisions about how the insured’s activities are to be managed, or organised.

Information must be presented "in a manner which would be reasonably clear and accessible to a prudent underwriter" and simply presenting the underwriter with company documents and vague references to the companies’ practices and activities will be considered "data dumping", which is unacceptable.

Managing Directors and Finance Directors are likely to carry the burden of the need to satisfy themselves and their management group that a reasonable search has been carried out and that the organisation’s insurance submission represents a fair presentation of its risk.

The remedies for material non-disclosure, or misrepresentation will also change.  Deliberate or reckless failure to make a fair representation will entitle an insurer to avoid the policy and return the premiums paid.  Where the failure is not deliberate, or reckless, an insurer will be able to ask a court to impose new policy terms, or conditions, or a retrospective higher premium, which an insurer will be able to offset against a claims settlement.  These remedies represent a serious threat to balance sheet exposure and business continuity, so the whole process of arranging cover under the new Act should not be taken lightly.

The new law is aimed at reducing the likelihood of policy disputes.  Time will tell, but what is certain is that it will require more input from and present more work for insurance buyers and insurance brokers as insurance placement becomes a more technical and contractual process.

Now is the time to ready your business for your next insurance renewal and the onerous duty of fair presentation:

  • Be prepared to invest time and money in your insurance placement. Given the balance sheet protection they provide and the increasing risk of policy avoidance and reduced claims by your insurer as a consequence of the new Act, your insurance policies represent important contacts.
  • Identify your senior management team, ie those who play significant roles in the making of decisions about how the insured activities are to be managed, or organised.
  • Put insurance renewal on your board agenda and make sure that the individual liaising with your broker has sufficient internal authority and skills to conduct an effective ‘reasonable search’ for information.
  • Work with an insurance broker that genuinely understands your sector and the challenges presented by the new placement regime.
  • Agree with your broker that you should restrict your insurance placement to quality, rated insurers who demonstrate a genuine commitment to the new placement regime.
  • Ensure that you have internal systems and controls in place to capture and collate all risk information about your business on an on-going basis and make sure your business management systems enable you to produce reliable and meaningful management information in a timely fashion, when requested by your broker and insurer.
  • Read and understand your insurance policies – you would be surprised how many insurance buyers and their insurance brokers fail to undertake this most basic risk management!

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