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Insurance: Taking The Safe Option

by Brian Sims
Tina Chittenden

Tina Chittenden

It may well have passed you by if insurance isn’t high on your list of priorities (…but surely it is?), but over the summer one of the most substantial changes to the UK’s insurance contract law for over 100 years came into effect. Tina Chittenden highlights recent changes to insurance requirements that could put your business at risk, unless you take the appropriate action.

The new law may not have affected you yet as the new legislation only applies to all policies placed, renewed or varied on or after 12 August 2016. However, in the upcoming months when it comes around to renewal time, or if you’re planning on investing in a new policy pretty soon, you’ll need to be prepared for developments.

The Insurance Act 2015 creates new duties for business policy holders (and insurers), and considerably affects the way in which insurance policies are handled. A ‘fair presentation’ duty was introduced in the Act. This means that it’s now up to the business being insured to disclose every ‘material circumstance’ which might impact on the risk involved that it knows (or it is deemed it should know) to the insurer.

In English law, every circumstance is material if it would influence how a prudent insurer sets the premium and/or the terms of the insurance and, indeed, whether they would accept the risk in the first place. This doesn’t just mean the insurer who has been offered the risk. It also includes the opinion of any insurer which is considered ‘prudent’.

It’s important to note that there doesn’t need to be an increased premium, or indeed a reduction of risk, for the information to be considered material.

The new framework aims to redress the imbalance, present under previous law, between the interests of the company being insured and the insurer.

Flexible approach

The Insurance Act 2015 is designed to bring clarity for all businesses about the information that they need to provide to an insurer. It also sets out who’s responsible for providing it and who the recipient of the information should be.

It’s not overly prescriptive, though, and sets out principles to be followed rather than a strict code. This means it can be applied appropriately for both small businesses and major corporations.

To be considered a fair presentation of the risk, the following criteria must be met:

(1) Disclosure of every material circumstance which the insured party knows or ought to know or, failing that, disclosure which gives 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

(2) Disclosure in a manner which would be reasonably clear and accessible to a prudent insurer

(3) Every material representation regarding factual information is substantially correct, while every material representation regarding expectations or beliefs is made in good faith

There was already a duty on those taking out business insurance to offer information and this has been maintained.

What are the risks?

If you don’t disclose the relevant information, your insurer may reduce any claim payment, apply new terms or even avoid the policy. If you’re not sure whether any specific information needs to be disclosed, or when it should be disclosed, my advice would be to share it with your insurer just to be on the safe side.

Having said that, the law is rarely straightforward and disclosure must be made: ‘…in a manner which would be reasonably clear and accessible to a prudent underwriter’ (Section 3(3)(b) of the Insurance Act 2015). This means that policy holders must not overload their insurers with information in the hope of hiding important issues somewhere in the middle of the data.

If the duty to make fair representation is breached, the new Act has introduced a new system of proportionate remedies.

If you’re in any way unsure of your responsibilities under the new Act, I recommend you contact your insurer or insurance broker.

Tina Chittenden is Head of the Security Sector at Darwin Clayton

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