Insurance law is an area which has remained unchanged for over 100 years. The Insurance Act 2015 (the Act) will have a significant impact on non-consumer insurance contracts post 12 August 2016.
The old law
- The insured is under the duty of utmost good faith to disclose all facts material to the risk insured.
- Every material circumstance would influence the insurer in deciding to take the risk and when quantifying the premium.
- The smallest adjustment to the premium constituted materiality.
- A material non-disclosure (even if innocent) which increased the risk gave the insurer the remedy to avoid the policy.
The new law under the Insurance Act 2015
The duty of “fair presentation” – 2 part test
First limb – duty to disclose information which the insured knows or ought to know having conducted a reasonable search
- Whilst the duty to disclose remains, the Act requires the insured to make a fair presentation of risk by disclosing all relevant circumstances which the insured knows or ought to know.
- In determining what the insured knows, it will be key to assess the knowledge of senior management and/or decision-makers as well as the individuals putting the insurance in place (excluding brokers).
- The insurer is deemed to know what “should reasonably have been revealed by a reasonable search”. The extent of what is deemed “reasonable” is objective and depends on the nature, size and complexity of the business.
- It is worth noting that, if as a consequence of a reasonable search made in the context of the ordinary course of business, a non-managerial/decision-maker is found to hold information, this too should be revealed.
If the first limb is not satisfied, the insured’s duty to disclose may be fulfilled by satisfying the second limb:
Second limb – duty to put the insurer on notice to make further enquiries
- The insured may satisfy its duty if it discloses sufficient information to put a prudent underwriter on notice that it needs to make further enquiries for the purpose of revealing those material circumstances.
- The duty requires the disclosure to be reasonably clear and accessible.
Knowledge of insured and insurer
An insurer’s knowledge is now presumed if information is:
- held by the insurer or an agent/employee who ought reasonably to have passed on the information (i.e. constructive knowledge); or
- readily available – for example, common knowledge or information which the insurer would be expected to know in the ordinary course of business.
- The insurer’s remedy of avoidance of the policy for a breach of the duty of good faith is now abolished unless there has been a breach of the duty of fair presentation and the insurer can show the breach was deliberate or reckless, in which case it may avoid the contract and need not return the premium.
- Otherwise, if there has been a breach of the duty of fair presentation that is not deliberate or reckless, the remedy will depend upon what the insurer would have done had the risk been fairly presented.
- Using a subjective standard, the insurer may prove that:
- it would not have insured at all, in which case it may then avoid the contract (however it must return the premium); or
- it would have insured on different terms, then the insurance is treated as being on those terms; and if a different premium would have been payable, the amount paid out is reduced proportionally.
- Despite there no longer being a remedy for the breach of the duty of utmost good faith, insurance contracts will still be founded on utmost good faith.
- Owing to the insurer’s positive duty of inquiry, the insured’s burden of disclosure will increase, particularly in circumstances where a reasonable search leads to information being disclosed by third parties (i.e. who are not employees or agents of the insured).
- Insurers are likely to store more data on the insured from the outset.
- Companies may form their own protocols in response to the revised disclosure duties.
For further information please contact Scarlett Wheeler.