Insurance affects almost everyone, whether you are an individual insuring your car or a corporation insuring huge office premises. The Insurance Act 2015 was probably the most significant shift in Insurance Law since the beginning of the last century, developing the insurer and insured responsibilities.
What is the Insurance Act 2015?
The Insurance Act 2015 applies to every commercial insurance contract and variation from 12th August 2016. It redefines many crucial elements of the insurer/insured relationship, and it places considerable responsibility on insurers to ensure that the insured entered into the contract with in-depth information – the insurer having to, for example, list the benefits and potential shortfalls of the policy.
Key Clauses
The Act updates many legal standards surrounding insurance. However, it also presents a new risk of under-insurance; you should always refer to your policy’s specific wording.
Warranties and Conditions Precedent
When you take out an insurance policy, you make pre-contractual promises called warranties to ensure it is valid. The Insurance Act rules that if your breach these warranties, your insurer can only suspend your policy for the breach’s duration. Then, once compliant, the insurer cannot refuse claims based on it.
If you breach another policy term but prove it did not boost the risk of a loss, the insurer cannot use this breach to deny a claim.
Fraudulent Claims
If you make a fraudulent claim, the insurer:
- Is not liable for the claim
- Does not have to pay the claim
- Can claim back any prior money given for a fraudulent claim
- Terminate the policy upon the date of the fraudulent claim, holding any premium
However, they cannot simply avoid your policy and are still liable to pay any valid claims made before the date of the fraudulent claim.
Utmost Good Faith
Both parties in an insurance contract have a duty of utmost good faith that obligates them to act honestly. It prevents one party from misleading or withholding information from another.
Previously, a breach of this duty has been grounds for a party to avoid the contract. The Act removes this remedy.
Fair Presentation of Risk
You have a duty of fair presentation of risk, detailing the information to provide when taking out, changing or renewing an insurance policy. You should include any detail that could influence the insurer’s decision and the terms they offer.
You must honestly explain ‘material circumstances’ relevant to the policy that you know or should have known about. The law defines this information as:
- Information that a reasonable search would have uncovered
- Information known by someone responsible for the insurance policy, like a broker
- Information known by the insured organisation’s senior management
You must disclose this information clearly, accessibly and in good faith. To deliver these requirements, you should regularly review your disclosure processes, record details of those responsible for the policy, involve senior management, and evaluate and document the steps taken to retrieve information from internal and external sources.
If you fail to reveal these ‘material circumstances’, your insurer can act in many ways, depending on the situation.
- An insurer can void your policy and keep your premium if you fail to present risk recklessly or deliberately
- An insurer can void your policy but must refund your premium if your failure to present risk was not reckless or deliberate but would have prevented the insurer from offering a policy
- An insurer can reduce your claims payments and treat your policy under different terms if your failure to prevent risk would have led them to insure you under these terms
What the ‘Duty of Fair Presentation of Risk’ Means for You
Say your company owns a factory and has insurance cover for physical damage and business interruption. You insure this factory for £1.5 million and estimate the annual business interruption component at £100,000.
The worst happens; a fire destroys the factory. You then discover the true rebuild cost is £3 million, and the lost business value is £500,000.
If the rebuild is £3 million, the insurer is entitled to discount payment on your claim to half of the insured amount; your company receives only £750,000 and will have to find the other £2.25 million, plus any excess.
They will apply the same reduction to your business interruption claim, and you suffer under-insurance at 80%.
You should instruct an appropriately qualified and experienced commercial insurance broker to avoid under-insurance.
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If you have an insurance dispute or are waiting for a decision on a recent claim, contact our friendly team to arrange a no-obligation consultation.
This article is only intended as general information and does not constitute legal, financial, or professional advice. The law may have changed since publication.
