Reform in commercial insurance laws
9th September 2016
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This summer will see the single biggest reform in commercial insurance laws for over 100 years, with the introduction of the Insurance Act 2015. Designed to modernise Britain’s insurance industry, the Act is hoped to provide transparency, lower the number of legal disputes and bring Britain’s insurance industry in line with global competitors.

Why is it changing?

The current legislation is based on the Marine Insurance Act 1906, however insurance has undergone many changes in the past 100 years, which the law has failed to keep pace with. The current legislation doesn’t take into consideration the changes in the way companies operate, store & analyse information.  It is inflexible, poorly understood and often seems to favour the insurer.

The new Act looks to address the shortcomings of the existing legislation and rebalance the relationship between policy owners and insurers.

Who does it affect?

The Insurance Act 2015 as a whole applies to non consumer contracts[1] and will impact any new business policies or renewals entered into on or after 12th August 2016. It will also affect any variations made to existing policies on or after the 12th August 2016. 

The act contains three main areas of reform; disclosure & misrepresentation, warranties and remedies for fraudulent claims.

But what does this really mean for businesses?

Duty of Disclosure will become Duty of Fair Presentation:

Business owners will be obligated to disclose honest assessments of potential risks associated with their businesses, including knowledge of the senior management team and those responsible for arranging the insurance.  They will no longer be allowed ‘data dumps’ – i.e. providing huge amounts of information with the expectation that the insurer will pick out what they need. All areas of potential risk will need to be highlighted & information should be disclosed in a straightforward and concise manner.

Under the current legislation, should there be a breach of Duty of Disclosure, the policy is treated as it never existed, all claims are refused and the policy premium repaid (unless fraud is involved). However, under the new Act, a set of proportionate remedies will come into force.  Should it be discovered that the breach was deliberate or reckless (something the insurer would need to prove) then the policy would be voided and no premiums returned. However if it was an innocent mistake then the remedy available depends on what the insurer would have done had the full information been available to them when the policy was taken out.

– if they would have not taken the risk, they can refuse the claim but return the premium. If they would have entered into the agreement but under different terms, the policy would need to be treated as if those terms were in place from inception.  If the insurer would have entered into contract, but at a higher premium, the insurer can reduce proportionately the amount on the claim – or request the additional premium to cover the additional costs.

Warranties

Warranties are very strict conditions applied to a policy, which must be fulfilled or complied with in order to keep the contract in force. With the current legislation, should these conditions not be met, an insurer can refuse to pay a claim, even if the requirements of the warranty were not relevant to the loss.

The new Act brings in two major changes to warranties, it abolishes the Basis of Contract clause i.e. the insurer is no longer able to convert statements made by the policy holder (on proposal etc.) into warranties.  Most importantly, an insurer is no longer entitled to refuse a claim on the basis that conditions of a warranty were not met, if the claim is not relevant to the warranty.  Breaches of warranties will be less severe with policies only being suspended until breaches are rectified and claims before or after the suspension was in place are still valid.  Claims will only be refused if the warranty is directly linked to the type of loss[2]. For example a breach of warranty requiring the customer to install a burglar alarm can only suspend the insurer’s liability for loss caused by intruder or theft not in the event of flood or fire loss.

Fraudulent claims

Under the existing legislation, if a business is found to have made a fraudulent claim, the insurer is able to avoid the policy from inception, refuse to pay the fraudulent claim, but also reclaim costs on any previously submitted genuine claims. Under the new Act, if a fraudulent claim is submitted the insurer is within its right to terminate the policy from the date of the claim & keep the premium. The insurer is not liable to pay the claim or any subsequent claims – however the insurer is still liable for any genuine claims previously made & cannot reclaim these costs.

So in light of these changes what can businesses do?.

It would be advisable for businesses to allow extra time when it comes to taking out or renewing their policies, and they should be prepared to answer more questions.  No longer will they be able to provide large quantities of information and presume that the insurer will find the answers they are looking for.  By establishing who in their business is classed as a senior manager, and thinking about any material circumstances which could impact their policy and consulting with third parties where necessary, businesses should be in good stead to not only adapt to the changes, but benefit from them.

Article provided by Bluefin Insurance Services.
bluefingroup.co.uk

 



[1] Changes have already been made to personal lines insurance by way of the Consumer Insurance (Disclosures and Representations) Act 2012 (CIDRA).

[2] this change is applicable to all policy terms not just warranties, with the exception of a term that defines the risk as a whole.

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