The Insurance Act 2015 will come into effect on 12 August 2016 and will represent the most significant changes to insurance contract law. The new changes will introduce a new and fairer balance between the policyholder and insurer.
The key provisions of the Act are as follows:
- Disclosure and Misrepresentation
- Insurers remedies for fraudulent claims
- Contracting Out
Disclosure and Misrepresentation
The policyholder will be under a new duty of “fair presentation”, replacing the previous duty to disclose all material facts. The policyholder will have to undertake a reasonable search of the information available to them and disclose every material circumstance that he or she knows or ought to know, or on failing to accomplish that, providing sufficient information to the careful insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances. The onus will then be on the insurer to ask additional questions following presentation of the risk. This represents a significant change from the existing law and is intended to ensure that the insurer takes a more pro-active approach to the disclosure process.
There are new proportionate remedies available to insurers for breach of the duty of fair presentation. Except where the breach was deliberate or reckless, insurer’s rights to avoid the policy will be limited and the onus will be on the insurer to demonstrate what it would have done had it received a fair presentation of the risk.
This will apply only in relation to contracts of insurance entered into on or after 12 August 2016 and to variations agreed on or after 12 August 2016 in respect of contracts agreed at any time.
Under the existing law, a breach of warranty automatically discharges the insurer from all liability under the insurance contract, even if the breach is trivial and has no connection with the policyholder’s loss or has been remedied. Under the new Act, a breach of warranty will not automatically discharge the insurer from all liability. The warranties will have a suspensive effect that will allow an insurer to only rely on a warranty whilst the policyholder is in breach. Therefore the cover will be suspended for the period during which the warranty is not complied with. In the event that a breach can be rectified, the insurer will be liable for losses that take place after a breach of warranty has been remedied.
In the event that fraud is committed, the insurer will not be under an obligation to pay any part of the claim, regardless of whether only part of the claim is fraudulent. In accordance with the Act the insurer can also elect to terminate the contract and discharge its obligation to pay claims relating to losses suffered after the fraud has occurred. The insurer will not be able to discharge its obligation to pay the policyholder for any losses legitimately incurred before the fraudulent claim was made.
The Act will also enable any fraudulent member of a group policy to be separated from the other members, ensuring that the innocent members of the group are not unfairly prejudiced.
With the exception of the basis of contract clause prohibition, the Act allows parties to any commercial contract to contract out of the legislative changes provided that any disadvantageous amendments are highlighted to the policyholder and are clear and unambiguous in their effect.
Policyholders may choose to undertake a review of their processes for collating disclosure information to ensure that they are compliant and can provide a fair presentation of the risk. This may include updating and documenting processes for identifying and recording the relevant disclosure information.
There are likely to be changes ahead of the introduction of the Act and the emergence of new policy wording from the insurance market. This may provide policyholders with the opportunity to negotiate better contracts and agree in advance with insurers clear policy wording that clarifies what constitutes a reasonable search and the scope of the search to be undertaken. In addition, policyholders may decide to provide a list of the individuals that are responsible for the company’s insurance and who are deemed to have the adequate knowledge for the purpose of the Act.