The Insurance Act 2015 comes into force on 12th August 2016 and is arguably the single most important piece of insurance legislation in the past 100 years. Its intention is to create a fairer position for all parties involved in ‘commercial’ insurance transactions. If you buy insurance to protect your business, you need to understand the imminent changes in law. It will have a significant impact on the way you buy insurance and the payment of any claims you make.
The new Act applies to all commercial insurance that is itself subject to UK law (separate legislation covers consumer insurance). Despite the importance of this new legislation, there has been limited press coverage outside the insurance industry, but the key issues are not overly technical and I hope to summarise the most important changes here.
The legislation brings potential benefits to you as the insurance buyer but, as you might expect, potential problems too. To ensure you maximise the benefits and minimise the problems, you need to understand what your new obligations are.
What are your new duties?
You have a new duty of fair presentation (of your business risks) to an insurer. You will also be obliged to carry out a reasonable search within your business to identify material information that should be disclosed to your insurers.
Even in respect of information you do not disclose - you are also required to give insurers sufficient information to put a prudent insurer on notice to make further enquiries. So – as you can imagine - plenty of scope for dispute over the interpretation of what those terms and obligations mean!
What other key changes have been made?
The Act changes the impact of warranties.
To put this into context – a warranty in an insurance policy can be unpleasant, often overlooked and frequently misunderstood. Yet, its breach can have severe consequences in respect of claims you make under the policy.
To give an example, consider the use of an intruder alarm at a data centre. An Insurer may stipulate a warranty attached to the policy requiring that the alarm be inspected quarterly. Let’s assume this was not done. We’ll also assume that a fire later damages the property (regarding which the operation of the intruder alarm was irrelevant). Under the current law (before 12th August 2016) the fact that the alarm warranty had been breached would enable the Insurer to void the entire policy and avoid paying out in respect of the fire or any other claims (no claims paid, premium returned – nasty!).
Under the new law, the Insurer would not be able to do as this as the breach of warranty was not material to the loss. A warranty breach will only have the effect of suspending cover, rather than potentially voiding the entire policy. A position that will seem much fairer to the majority of commercial insurance buyers.
Additionally, the remedies available to an insurer should you breach certain terms of the insurance contract, have been modified (e.g. in the event you did not provide a ‘Fair Presentation’ of your risks). The Insurers’ remedies are proportional under the new Act. This is another improvement but there’s a sting in the tail as the Act also allows claim payments to be proportionately reduced in a number of circumstances.
What are the potential problems for Buyers?
I would suggest there are four key things to watch out for:
1. There are significantly increased obligations on YOU
Understanding and then satisfying your obligations will likely require a hefty increase in the time and resource you’ve previously allocated to management of your insurance programme. You’ll also need to evaluate the lead times necessary to ask the questions needed of (and gather the data from) your wider business. I would strongly recommend that these new processes be pre-agreed with your insurers to minimise the potential for later dispute.
What does this mean in real terms? In my view, for a mid-tier business, undertaken diligently, this is likely to add several months to the insurance renewal process to get it right – it really is that significant.
2. It is possible to contract out of the terms of the Act within certain parameters
You should be very careful with this. There will be many different approaches to this by insurers and brokers. You should carefully work through any modifications to the provisions of the Act very carefully and take legal advice where appropriate – remember you need to get your insurance contract right for your business.
3. This is new legislation and it inevitably comes with uncertainty
Even if you’re familiar with current case law specific to the IT sector – that may well be subject to different interpretation under the new Act. We can expect that the ‘legal’ position will evolve over the next 10-20 years as disputes pass through the courts.
My advice is to take ownership and control of the insurance ‘process’. Why? Because these new obligations rest on your shoulders as the buyer, rather than those of the insurer or broker. For many, this will require a significant shift in the dynamics of their relationships with the insurance markets. It will require far greater diligence and insurance ‘product and process’ understanding, if the benefits created by the new legislation are to be maximised.
4. Be aware that insurers may seek to redefine warranties as Conditions Precedent
These are potentially unpleasant clauses (I’ve never liked them) and they are not prohibited by the Act. Be very cautious about inclusion of the phrase ‘Condition Precedent’ anywhere in your insurance contract. The critical thing is to be aware of their presence, what they require you to do, (or avoid doing) and really understand the effect that a breach may have on any claim you might make.
In summary, the new Act brings welcome changes and updates to insurance law. But there are some major challenges for buyers too, particularly in meeting the new disclosure obligations. It certainly makes sense to take ownership of the insurance process and develop your understanding of these changes now, if you wish to maximise the benefits.
Andrew Ducat, CEO of Duke Risk Consulting
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