Caught in the Act!
Nine months after it became law, Niall Hevey of specialist law firm Reynolds Colman Bradley gives his expert view on the impact of the Insurance Act...
The Insurance Act 2015: Redressing The Balance?
In order to achieve its objective of redressing the balance between Insurer and policyholder the Insurance Act 2015 (“the Act”), which came into force on 12 August 2016, implemented a number of key changes to insurance contract law. Nearly 9 months on, we can now take stock of where the parties to professional indemnity insurance contracts seem to stand.
The Duty of Fair Presentation
The threshold that a policyholder must now overcome in order to discharge its disclosure obligations has been lowered, with the implementation of the duty to make “fair presentation” of the risk. Such a duty requires the policyholder: a) to make disclosure of every material circumstance which it knows or ought to know; or failing that b) to provide sufficient information to put a prudent Insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances.
What the policyholder ‘ought to know’ is characterised as “what should reasonably have been revealed by a reasonable search of information available to the Insured” and how onerous this search will be is likely to depend on the nature and size of the policyholder’s business. In our experience, a smaller business is unlikely to have to carry out a particularly extensive search whereas larger businesses should seek to ensure that procedures are implemented and maintained in order to ensure that the duty is discharged. Construction-based policyholders should, for example, seek to ensure that any relevant information held by sub-contractors is passed up the chain so that it can be reported to Insurers when the risk is presented.
The principle of “fair presentation” applies at inception, at renewal, and also whenever the policy is amended; and in order to prevent the practice of “data dumping” (of which the Law Commission was critical) the presentation must be “in a manner which would be reasonably clear and accessible to a prudent underwriter”.
Remedies for Breaches
The old remedy of avoiding a professional indemnity insurance policy entirely for any non-disclosure or misrepresentation even when the offence in question was innocent has been replaced with a less draconian system of remedies for Insurers. The Insurer may still avoid the policy and retain all of the premium when it can demonstrate that the offending breach was deliberate or reckless. However when the Insurer is unable to discharge that particular burden, the key question will be what the Insurer would have done had the correct information been provided.
If the Insurer is able to demonstrate that it would not have entered into the contract at all then it can still avoid the policy but it would then need to return the premium to the Insured. Alternatively if the Insurer would have agreed to enter into the contract but on different terms, then it will effectively be entitled to treat the policy as having incorporated those alternative terms. In addition, if the premium would have been higher had the Insured properly complied with its disclosure obligations then the Insurer will be entitled to proportionally reduce the level of indemnity in relation to the claim in question accordingly.
Warranties and Breaches of Policy Terms
Where a breach of warranty occurs the Insurer will now only be entitled to suspend cover for the duration of the breach as opposed to being able to discharge itself of liability under the policy entirely. Under the Act the Insurer will remain liable for losses which occurred before the breach and after the breach, provided of course that the breach has been remedied.
In addition Insurers can no longer rely on the breach of one particular policy term in order to avoid cover in relation to another unconnected loss. An Insured can now also claim damages from its Insurer where the latter has unreasonably delayed payment of a claim.
The Impact of the Act
It is, to some degree, still a little too early to fully assess the impact of the changes that the Act shall bring. The option to contract-out certainly appears to have proved popular (the parties to a commercial insurance contract are entitled to contract out of all of the provisions of the Act save for paragraph 9, which has the effect of prohibiting the conversion of representations made in the course of a non-consumer contract into a collateral warranty) although the effectiveness and legitimacy of such agreements, particularly given that Insurers are required to satisfy transparency requirements where the absence of the term in question would put the policyholder in a worse position than it would have been had the term been included, is, as far as we are aware, still yet to be fully tested.
The new remedies available under the Act have proved attractive for a number of Insurers, particularly where previous policies included an innocent non-disclosure clause. Equally, a number of the provisions could (and will almost certainly) lead to uncertainty. The new statutory requirements are yet to be tested in the courts, and disputes are expected to arise in the coming years as insurers and the buyers of insurance seek clarity on, and confirmation of, certain provisions. It remains to be seen, for example, how the issue of reducing the indemnity on a proportionate basis, where the non-disclosure has impacted upon the level of premium, will most-often be determined. Will formal evidence from the actual underwriter be required? Will any “expert” underwriting evidence be necessary? Would/will an admission that the premium would have been higher constitute a waiver of the right to avoid the policy all together?
All prospective buyers of professional indemnity insurance now need to review their risks with fresh eyes at each renewal and they will need to ensure a more thorough, and a more properly conducted, search, by which to ensure that they inform their brokers of any changes that may be relevant to their prospective insurance, such as new products or processes and/or movement into new jurisdictions.
It appears clear than a party’s ability to have documented, and to then be able to evidence, its search for information and its attempts to determine a fair presentation will be central (and quite probably key) to successfully resolving disputes over claims.
Most insurers have already amended their wordings to ensure alignment with the Act; they tell us that they are, however, forestalling themselves for future changes as the law ultimately does get tested in the courts.
We have noticed differences in approaches from different insurers. Some insurers have offered their (current and prospective) customers little guidance. Others have been pro-actively using the introduction of the Act and its changes as an opportunity to improve their offerings and to really differentiate themselves.
RCB will be keeping a very-close eye on the manner in which the Act is implemented; and we shall be reporting further on our observations and conclusions periodically.
Niall Hevey, Reynolds Colman Bradley LLP, 6th Floor Bury House Bury Street London EC3A 5AR
This newsletter is an informal document. It is intended to provide commentary and general opinions on its subject matter. It is not to be regarded and/or relied upon as a substitute for professional advice which takes account of specific circumstances and/or any changes in the law and practice. Subjects covered change constantly and develop. No responsibility can be accepted by the firm or the author for any loss occasioned by any person acting or refraining from acting on the basis of this document.