Three experts examine the practical implications of the Insurance Act 2015, highlighting issues such as fair presentation, claims handling and reasonable search
Much of the focus on the Insurance Act 2015 has been on the new duty of fair presentation. Less time has been devoted to claims handling under the Act (and the new Enterprise Act).
The key to claims handling will be in proper claim presentation and active claim management, responding to insurers’ enquiries in a timely manner. It will be critically important during a period of uncertainty as insurers grapple with the new law.
The Enterprise Act 2016 applies to policies entered into from 4 May 2017 and gives policyholders a right to claim damages if the insurer does not pay a valid claim within a reasonable time. There can be little prospect of a policyholder succeeding if it has not advanced its claim properly and responded to insurers’ requests for information.
The new regime of proportionate remedies raises challenges in a subscription market where different insurers have divergent views on remedies if the presentation is shown not to be fair. Policyholders should look at clauses to limit the remedies open to insurers in their policy.
Insurers’ ability to reduce claims payments proportionately also raises issues. There are unanswered questions on how a proportionate reduction in claim payments would affect the claims handling of liability claims. Who will control the claim where an insured is partially uninsured?
Policyholders and insurers may consider contracting out of the provisions for proportionate reduction of claims in favour of the policyholder paying additional premium that would have been charged on a fair presentation of the risk. This may lead to a more advantageous result for the policyholder. Herbert Smith Freehills has assisted Airmic in preparing a sample clause to achieve this.
Warranties and risk mitigation terms
Where policies still contain warranties, these terms will operate as ‘suspensive conditions’ with insurers off risk while the policyholder is in breach. While record keeping should focus on ensuring compliance, it will be important to prove when any breaches are remedied so cover re-attaches at the earliest opportunity.
If a policyholder is in breach of a risk mitigation term, the insurer will not have a remedy if the policyholder can show its breach could not have increased the risk of loss that occurred. There will be debate around which clauses constitute risk mitigation terms and challenges in proving any breach could not have increased the risk of loss that occurred.
Alexander Oddy, partner and Sarah Irons, professional support lawyer, Herbert Smith Freehills
The Insurance Act 2015 is a fascinating development on two counts. First, it aims to create a fairer legal framework for resolving claims that addresses some anachronisms of British insurance law. Second, it also aims to encourage professional conduct across all parties in the insurance transaction: policyholders, brokers and insurers. In short, the Act aims to make insurance reliable not only by making sure the rules are fair but also by encouraging proper understanding of risk.
The Act also sets out how information must be presented to insurers. There is a requirement for it to be “clear and accessible”: this is not just a presentational standard but also means that policyholders must flag unusual risks or concerns.
If there is a breach of the duty that is deliberate or reckless, the insurer can avoid the contract and can keep the premium. However, the insurer must prove that the breach was deliberate or reckless.
In most cases, where breach is not deliberate or reckless, there are more measured options available to the insurer. More than one remedy can be applied; however, it is down to the insurer to show that they would have acted in that way had the information concerned been available:
- If the insurer would not have written the risk at all, then it can avoid the contract but 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 or different terms such as conditions / warranties, exclusions, extensions, sublimits, etc., the contract is to be treated as if it had been entered into on those terms.
Bruce Hepburn, chief executive, Mactavish
The Insurance Act 2015 incorporates a new obligation, a duty of fair presentation, which will replace the old duty to disclose material facts. It is intended to provide clear standards for gathering, reviewing and presenting risk information.
The Act requires insurance buyers to disclose information that should reasonably have been revealed by a reasonable search. Insurance buyers will need to look closely at both who to approach within their organisation, and what to ask, as part of the reasonable search.
As a starting point, they should prepare a list of who, internally and externally, needs to be involved in the disclosure process.
The process must include senior management, as input will be required at a very senior level, although exactly who is included will vary by client business and by insurance class.
Reasonable search will also need to extend beyond senior management and include key providers of underwriting, senior operational management, owners of key risk management policies, and third parties or outsourced service providers.
The final category should include professionals ‘on the ground’, who will typically have initial involvement with material risk developments, such as an IT data centre, quality control consultants and those responsible for risk control measures.
Insurance buyers should provide clear guidance to all those involved on what their roles and responsibilities are. There should be an internal review with sufficient time to resolve queries prior to final issuance. The guidance notes should also outline the information required from the relevant parts of the business. These should be signed off by a senior manager of that department. Clear documentation of the steps taken in the collation process is crucial, including tracking the involvement of key personnel.
Insurance buyers are not alone in achieving fair presentation. Insurers need to engage with buyers and, with brokers, help to guide them through this process. Insurers should be ready to explain areas of underwriting interest and seek to agree risk enquiries with clients.
Insurers may be unlikely to want to give formal ‘sign off’ that their client’s disclosure meets the standards prescribed by the Act, and this may provide false comfort in any event. However, working collaboratively with their client, insurers may be able to provide reassurance that their fair representation process contains the significant level of information required.
Joanne Howie, deputy general counsel (Global) and head of UK legal and compliance, and Rachel Coppenhall, legal counsel AXA Corporate Solutions, UK Branch