When was the law effective from?
The Insurance Act 2015 came into force, in the UK on 12th August 2016.
This was a substantial change in legislation affecting the insurance industry. It was the most significant reform of insurance contract law for over 100 years.
Did we need the Insurance Act 2015?
Many UK laws can become outdated and required updating. Most remain in force, but have amendments or changes applied. Sometimes though, it is better to re-write certain legislation and introduce a new act. These acts can be brand new or they can be amalgamations and re-writes of older legislation.
What legislation was replaced?
The Insurance Act 2015 replaced the Marine Insurance Act 1906.
What were the main changes from the Act?
An insurance policy is between an underwriter, or insurer, and a client (the insured). There was a duty of disclosure, which applied before the contract (policy) was effected. This has been replaced by a new duty, that of fair presentation.
Previously, a policy could be avoided, more easily, by an insurer. They could cancel a policy, from its inception, and return all money to the insured. They could take this step if they were able to prove non-disclosure or misrepresentation. It didn’t happen often, but legislation supported this step.
The Act now requires the insured to disclose material circumstances which they know, or ought to know. They are also required to take reasonable steps to fulfil this obligation.
If an insurer can prove that an insured deliberately or recklessly breached this obligation, they can still avoid the policy.
If an insured can prove their breach was not deliberate or reckless, insurers cannot just cancel the policy, in all cases. There are three different options:-
If insurers would have not underwritten the policy, if they knew the full facts
In this scenario, if the insurer would not have insured the risk, had it known the full facts. Where this is the case, they can cancel (avoid) from inception. They will return all premiums paid.
If insurers would have underwritten the policy, but not on the same terms
Had the insurers known the full facts, they may have accepted the risk, but applied different terms. If this is the case, then the policy is considered to contain these terms, from its inception.
If insurers would have underwritten the policy, but applied a different premium
This is very similar to applying different terms. The insurers may have underwritten the risk, but they would have charged more. If this was the case, they could charge an increased premium, going back to the contract inception.
The Act allows for the last two of these scenarios to be merged, if needed. For example, if an insurer would have accreted a risk at increased premium with different terms. The insurer can apply both of these from inception.
When would these apply?
These parts of the Act will tend to apply, after a loss. If an insured suffers a loss, this is when the insurers may be aware of a breach of fair presentation.
A property owning example
Let’s consider a large, multi-location, commercial property owners insurance policy. A building has been purchased after the policy has started.
The insured lets their business insurance broker know of this additional risk. This is then added to the policy.
A claim occurs
A few months later, this property suffers a storm damage claim to the roof. It transpires that part of the roof, that suffered damage, was felt on timber. This was a small part of the overall roof.
Did the insured comply with fair presentation?
The insured was not fully aware of the roof construction as they purchased a number of properties, at auction. They did have an annual maintenance policy in force, when they inspected each of their properties. However, they did not disclose the flat roof to their broker, and insurer. They genuinely were not aware of this.
Although the insured did breach the fair presentation, this is likely to be non-deliberate/reckless.
What does the insurer do?
The insurers standard storm excess is £250. Flat (felt on timber) roofs are more susceptible to storm damage. The insurer will cover flat roofs, but the excess is £500. In this example, the insurer will not avoid the policy. What they will do is meet the claim, but apply the correct excess of £500.
A more complex example
The above example is a very simple explanatory case. Most real life cases that refer to the Act, will be more complex. They’ll usually involve considerable discussion between insurer and broker.
Many business insurance policies contained clauses which formed part of the contract. These meant that insurers could rely on avoiding policies more easily. A small or immaterial incorrect statement on a proposal, could lead to avoidance of a policy.
What changes have been made to warranties?
The Act changed this to say warranty breaches don’t lead to automatic cancellation.
What else was included in the Act?
There were other legislative changes included. The above two affect brokers more than others.
What if I buy business insurance online?
Ultimately, insurance cover is not provided by brokers. It’s important that brokers take care to ensure that full risk information’s declared to insurers. Buying insurance online places 100% responsibility on you, the insured. The best option is to work with a broker. It is their role to obtain the correct risk information on your behalf. This doesn’t remove you responsibility of fair presentation. However, a broker will help you to understand what insurers need to know.
Please note this is only intended to be a brief summary of a very important piece of legislation. If you’re needing clarification on any points, an insurance broker will be able to help.