The Insurance Act 2015 in the UK introduced sweeping reforms to clarify the principles governing insurance contracts. Below we take a look at what you need to know:
The Insurance Act 2015, which came into full force on 12th August 2016, introduced sweeping reforms designed to update and clarify the century-old principles governing insurance contracts. The landscape of insurance law before the enactment of the Insurance Act 2015 was largely dominated by the Marine Insurance Act 1906.
Fair Presentation of Risk
One of the cornerstone changes introduced by the Insurance Act 2015 is the reformulation of the insured's duty to make a fair presentation of the risk. This modification aims to provide a more balanced and realistic approach to the disclosure of risk information.
Changes from Previous Law: Previously, the duty of disclosure was heavily weighted against the insured, requiring them to disclose every material circumstance they knew or ought to have known, often leading to disputes over what ought to have been disclosed. The 2015 Act clarifies this duty, specifying that insureds must disclose every material circumstance which they know or ought to know, or give the insurer sufficient information to put a prudent insurer on notice that it needs to make further inquiries for the purpose of revealing those material circumstances.
Duties of the Insured and Insurer: The Act introduces a more equitable distribution of the burden of discovery. Insureds are expected to conduct a reasonable search of the information available to them, including information held within their organisation. Meanwhile, insurers are required to make further enquiries if the information presented to them suggests that additional details are necessary to accurately assess the risk.
Non-disclosure and Misrepresentation
The Act introduces a new regime of proportionate remedies for non-disclosure and misrepresentation, moving away from the previous "all or nothing" approach that often led to insureds being unfairly penalised for honest mistakes.
Proportionate Remedies:
Depending on whether the non-disclosure or misrepresentation was deliberate, reckless, or innocent, the Act allows for a range of proportionate remedies. For deliberate or reckless acts, insurers can void the contract, refuse all claims, and retain the premium. For non-deliberate or non-reckless misrepresentations, remedies are based on what the insurer would have done had it known the true facts, ranging from adjusting the premium to reducing the amount paid on a claim.
Types of Remedies Available:
This tiered approach gives insurers the ability to apply remedies more appropriately, reflecting the nature of the disclosure or misrepresentation and ensuring that penalties are not disproportionately severe.
Warranties and Terms
The Act also significantly overhauls the treatment of warranties and other terms within insurance contracts, aiming to prevent insurers from declining claims based on terms that bear no relevance to the loss incurred.
Basis of Contract Clauses:
The Act abolishes "basis of the contract" clauses, which previously allowed insurers to treat any statement made by the insured as a warranty, thereby voiding the policy if the statement was incorrect, regardless of its relevance to the claim.
Changes to Warranties and Conditions:
Warranties are now treated as suspensive conditions. This means if the insured breaches a warranty, the insurer's liability is suspended rather than completely voided. If the breach is rectified before a loss occurs, the insurer's liability is reinstated, promoting fairness, and allowing for minor breaches to be corrected.
Benefits of the Insurance Act 2015
Clearer understanding: The Act clarifies the expectations for risk disclosure, reducing the fear of inadvertently failing to disclose material information. Policyholders benefit from a more transparent and predictable framework. The fair presentation of risk, coupled with the abolition of basis of contract clauses, means policyholders can be more confident in their cover.
Improved policy wordings: Both insurers and policyholders have seen changes in policy documentation, with policies now being written in clearer language to comply with the Act's requirements. Insurers have also adjusted policy terms to align with the new legal framework, particularly in relation to warranties and conditions.
Less disputes and litigation: Insurers must now evaluate claims with consideration to the proportionate remedies available under the Act. This approach encourages a more judicious and fair handling of claims, potentially reducing the number of disputes and litigation cases.
Risk assessment: Insurers gain from the clearer guidelines on what constitutes a fair presentation of risk, allowing for more accurate risk assessment and pricing. The requirement for policyholders to conduct a reasonable search for information and present it in a clear and accessible manner helps insurers to understand the risks they are underwriting better.
Insurance Act 2015 Example Claim Scenarios
Misrepresentation
A consulting firm, when applying for professional indemnity insurance, inaccurately reported its annual turnover. The mistake was unintentional, arising from a misunderstanding between the firm's finance and management teams. A claim was later made against the policy for advice that led to a client's financial loss.
Under the Insurance Act 2015, the insurer, upon discovering the misrepresentation, would evaluate whether it was deliberate or reckless. Given the unintentional nature of the error, and assuming the insurer would have still provided coverage albeit at a higher premium, the insurer might adjust the terms of the claim pay-out rather than void the policy. This approach allows for a more equitable resolution that considers the intent and impact of the misrepresented information.
Breach of warranty
An software company that arranged PI insurance, had cover with a warranty that all client data would be backed up daily. The company inadvertently failed to back up data over a weekend, during which no client work was performed. A few months later, the company faced a claim for a different issue related to software failure that resulted in client losses. The insurer initially sought to decline the claim, citing the breach of the data backup warranty.
Under the Act, the breach of warranty was examined in relation to the claim. Since the breach was unrelated to the software failure and the data backup did not contribute to the loss, the insurer was required to pay the claim. This case illustrates the Act's adjustment of warranty conditions, ensuring that insurers can only refuse claims based on breaches directly relevant to the claim.
Full details of the Act:
Insurance Act 2015: The full text of the Act as published by the UK Government
About the author
Simon Taylor is a respected senior industry professional and a Chartered Insurance Broker with over 20 years’ of experience in the commercial insurance sector as an underwriter, broker and director.