Insurance Act 2015 – Implications for lawyers engaging with ATE Insurance on behalf of their clients
The Insurance Act 2015 (“the Act”) comes into force on 12th August 2016 and fundamentally alters the duty of a proposed insured in presenting a risk to a prospective insurer and the remedies available to a prospective insurer for material misrepresentation and non-disclosure. This is important for all lawyers engaging in ATE insurance applications on behalf of their clients.
Under existing legislation – the Marine Insurance Act 1906 – an applicant had a duty, when applying for insurance, to disclose “every material circumstance which is known to the assured, and the assured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him”. The test for whether or not a fact or matter was “material” was set out in paragraph 18(2) of the Marine Insurance Act 1906; “every circumstance is material which would influence the judgment of a prudent insurer in fixing the premium, or determining whether he will take the risk”.
In essence, the applicant had a considerable, and some would consider draconian, duty to disclose everything that was either known, or ought to have been known, that would influence an insurer’s decision in accepting or pricing a risk. The extremely wide scope of this duty meant that insurers were often able to avoid a contract of insurance on the basis of a minor, or perhaps irrelevant, breach of the insured’s duty.
What are the changes introduced by the Insurance Act 2015?
There are numerous important changes introduced by the Act, but, for the purposes of this article, the focus will be on; the duty of fair presentation and the new remedies for material misrepresentation and/or non-disclosure.
The Duty of Fair Presentation
The Act operates on the basis of a “duty of fair presentation”. A fair presentation of a risk is one:
a) “which makes the disclosure required by subsection 4 (see below)”;
b) “which makes that disclosure in a manner which would be reasonably clear and accessible to a prudent insurer”;
c) “in which every material representation as to a matter of fact is substantially correct, and every material representation as to a matter of expectation or belief is made in good faith”.
Importantly, the disclosure required is:
a) “disclosure of every material circumstance which the insured knows or ought to know”, or;
b) “failing that, disclosure which gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances.”
This is an important move away from the duty to disclose everything a proposer knew or ought to have known and means that, once a proposer has disclosed sufficient information to notify an insurer of the need to make further enquiries, the onus is then on the insurer to do so and a failure to do so will be sufficient for an insured to argue that the insurer has waived their rights of further enquiry.
New Remedies for Non-Disclosure
The Act also fundamentally alters the remedies available for a breach of the duty of fair presentation. The general purpose of the Act is to make the remedies available for an insurer proportionate to the breach. Those remedies available will be determined by whether any such breach is “deliberate or reckless”.
An insurer is only entitled to avoid a policy entirely where the breach of the duty of fair presentation is “deliberate or reckless” and where the insurer can demonstrate that they would not have entered into the contract had they known the information or that they would have done so on different terms. In practice, this is likely to be difficult for insurers to prove.
If an insurer is unable to establish a deliberate or reckless breach, they can only refuse the claim in its entirety if they can show that they would not have accepted the risk at all. However, if they can establish that they would have written the policy on different terms and/or charged a higher premium then the contract will be treated to as having been entered on those terms or the claim would be reduced proportionately in line with the higher premium.
What are the Solicitors duties?
As well as ensuring that their clients comply with all pre-contractual duties and representations when making applications for insurances, solicitors are deemed to be insurance intermediaries for their clients and are under the SRA Financial Services (Conduct of Business) Rules 2001 and are therefore under an obligation to inform their clients whether advice has been given on a fair analysis of a sufficient number of available insurance products, for a recommendation to be made as to which policy is adequate to meet the client’s needs.
This effectively means that a solicitor has to have a detailed understanding and knowledge of the insurance market in which the recommendation is being made and have to be able to demonstrate that any advice being given is based on a fair analysis of that market.
This often leads to the thorny issue of who pays the solicitors costs incurred in carrying out this market search and providing this advice.
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Robert Warner, Head of Broking | email@example.com | Tel: (0)207 337 6035