Fair Presentation of Risk: The Insurance Act 2015

The Duty of Fair Presentation

‍The Insurance Act 2015 and its ‘duty of fair presentation’ exists to enable insurers to provide a fair outcome in the event of a claim. Under its terms you have a statutory duty to disclose material information that a prudent insurer would consider relevant when deciding whether to insure the business and, if so, on what terms.

Fair Presentation of Risk is defined by the Act as an insured's duty to disclose every material circumstance which the insured knows or ought to know, or failing that, to disclose sufficient information that would put a prudent insurer on notice to ask further questions. 

Commercial insurance is only effective if insurers receive a fair, accurate, and accessible explanation of the risk they are being asked to underwrite. A fair presentation protects both the policyholder and the insurer, as it allows the risk to price accurately and preserves the value of the cover.

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Core Legal Features of 'Fair Presentstion'

A fair presentation of risk is built around three core duties: disclose material circumstances, carry out a reasonable search, and present information clearly. Upon receiving a fair presentation of risk, insurers are expected to undertake their due diligence. If the presentation raises questions or suggests that additional information is needed to assess the risk accurately, the insurer is obliged to make further inquiries. This collaborative approach encourages dialogue between the insured and insurer, facilitating a more accurate risk assessment and underwriting process.

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1. Disclosure of Material Circumstances

A material circumstance is any piece of information that would influence the judgment of a prudent insurer in determining whether to underwrite a particular risk and, if so, on what terms. This can include past claims history, known risks associated with the insured's activities, and any other factors relevant to the likelihood of a claim being made.

This means, before starting a new policy, changing a policy mid-term, or renewing a policy, you must make sure the information you provide is clear, accurate and complete. It is important you disclose all material circumstances that you’re aware of.

Examples of material circumstances may include:

• previous claims, notifications, or known circumstances
• regulatory investigations
• health and safety incidents
• cyber incidents
• fraud losses
• changes in business activities
• new professional services
• increased turnover or payroll
• overseas trading
• US or Canadian jurisdiction
• large contract values
• poor financial performance or insolvency concerns
• cladding, fire safety, asbestos, or pollution exposure
• acquisitions, mergers, or restructuring
• changes to premises, stock, machinery, or reinstatement values

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We recommend you carry out an appropriate review, which may include consulting with colleagues, directors and managers of your business. You should also consult with anyone who has particular knowledge about the risk to be insured. If you’re not sure what constitutes material circumstances, or you’ve not been able to gather the necessary information, please let us know.

Materiality is judged from the insurer’s perspective, not the policyholder’s. A director may believe an issue is minor, historic, commercially sensitive, or unlikely to lead to a claim. However, if a prudent insurer would want to know about it, the safer approach is to disclose it.

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2. The Reasonable Search

All statements and facts disclosed on application forms, statement of facts, claim forms and other documents, should be full, true and accurate and must be given after undertaking a reasonable search, including consulting with your senior management.

The Insurance Act specifies that the knowledge of the insured encompasses what is known to the individuals who are part of the insured's organisation and responsible for its insurance, as well as what should reasonably have been discovered by them through a reasonable search. This includes information held within different sections of a large organisation or by external consultants engaged in the insurance procurement process. The scope of what constitutes a reasonable search can vary depending on the size and complexity of the insured's operations.

A business cannot rely on ignorance if the relevant information should reasonably have been discovered.

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3. Clear and Accessible Manner

The Act also emphasises the manner of disclosure. Information must be presented in a clear and accessible way, avoiding the submission of vast amounts of data without context or direction. This requirement aims to prevent "data dumping," where an insured provides excessive documentation to the insurer without highlighting the relevant information, making it difficult for the insurer to assess the risk accurately.

For example, handing an insurer a raw, unindexed 300 page PDF folder containing contracts, spreadsheets and technical reports may not be enough. If the material facts are hidden within the documents and not signposted, the presentation may fail to meet the required standard.

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Consequences of Failing to Make a Fair Presentation

If the insured fails to make a fair presentation of risk, the Act provides insurers with a range of proportionate remedies based on the nature of the failure.

Deliberate or reckless failures to present the risk fairly could mean part or all of your claim is declined. In these circumstances, the insurer is entitled to treat the insurance as if it had never existed, and to keep any premium you have paid. If you fail to present the risk fairly, but your failure was neither deliberate nor reckless, insurer’s response will depend upon what would have happened if you had complied with your obligations:

• If insurers would not have provided the policy, they may treat the policy as if it never existed, refuse to make any claims compensation from the scheme if we cannot meet our obligations, payments and demand the return of any claims payments already made. However, insurers would have to return any premium payments already made;

• If insurers would have provided the policy but on different terms, the policy will remain in force but will be treated as if those different terms would have applied from the start of the policy. This could result in a claim not being met in part or in full.

• If insurers would have provided the policy but charged a higher premium, insurers may reduce any payment in proportion to the difference between the premium charged and the premium that would have been charged if you had fairly presented the risk. This could result in a significant reduction to the amount of any payment under the policy.

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Impact of the Fair Presentation of Risk

This provision has significantly impacted insurance practices, encouraging greater transparency and communication between insureds and insurers. It has shifted the focus from punitive measures for non-disclosure to fostering a more understanding and equitable approach to information sharing and risk assessment.

The fair presentation of risk under the Insurance Act represents a balanced approach to disclosure in insurance contracts, aiming to eliminate the harsh outcomes that previously resulted from technical breaches of disclosure duties. 

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Practical Application and Case Law

While specific case law evolving from the Insurance Act continues to develop, the Act's provisions on fair presentation of risk have already influenced how disputes between insurers and policyholders are approached. Courts are likely to consider the nature of the information withheld or misrepresented, the conduct of the insured in making the disclosure, and whether the insurer would have accepted the risk on different terms had a fair presentation been made.

The requirement for a reasonable search imposes a proactive duty on businesses and organisations to gather relevant information before seeking insurance. This might involve reviewing internal records, consulting with different departments, and considering any external factors that could affect the risk profile.

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Reference:

UK Governmenmt Legislation: THE INSURANCE ACT 2015