The Insurance Act 2015: What you need to know
This summer saw the single biggest reform in commercial insurance laws for more than 100 years. We look at what it means for businesses.
Designed to modernise Britain’s insurance industry, the Act should provide transparency, lower the number of legal disputes and bring Britain’s insurance industry in line with global competitors.
Why has it changed?
The previous legislation is based on the Marine Insurance Act 1906, however insurance has undergone many changes in the past century, which the law has failed to keep pace with.
It didn’t take into consideration the changes in the way companies operate, store and analyse information. It was inflexible, poorly understood and often seemed to favour the insurer.
The new Act looks to address the shortcomings of the previous legislation and rebalance the relationship between policy owners and insurers.
Who does it affect?
The Insurance Act 2015 as a whole applies to non-consumer contracts1 and impacts any new business policies or renewals entered into on or after 12 August 2016. It will also affect any variations made to existing policies on or after the 12 August 2016.
The act contains three main areas of reform; disclosure and misrepresentation, warranties and remedies for fraudulent claims.
But what does this really mean for businesses?
Duty of Disclosure will become Duty of Fair Presentation.
Business owners will be obligated to disclose honest assessments of potential risks associated with their businesses, including knowledge of the senior management team and those responsible for arranging the insurance.
They are no longer allowed “data dumps” – i.e. providing huge amounts of information with the expectation that the insurer will pick out what they need. All areas of potential risk should be highlighted and information should be disclosed in a straightforward and concise manner.
Under the previous legislation, should there have been a breach of Duty of Disclosure, the policy was treated as it never existed, all claims were refused and the policy premium repaid (unless fraud is involved).
However, under the new Act, a set of proportionate remedies come into force. Should it be discovered that the breach was deliberate or reckless (something the insurer would need to prove) then the policy would be voided and no premiums returned. However, if it was an innocent mistake then the remedy available depends on what the insurer would have done had the full information been available to them when the policy was taken out.
If they would have not taken the risk, they can refuse the claim but return the premium. If they would have entered into the agreement but under different terms, the policy would need to be treated as if those terms were in place from inception. If the insurer would have entered into contract, but at a higher premium, the insurer can reduce proportionately the amount on the claim – or request the additional premium to cover the additional costs.
Warranties are very strict conditions applied to a policy, which must be fulfilled or complied with in order to keep the contract in force. With the previous legislation, should these conditions not be met, an insurer can refuse to pay a claim, even if the requirements of the warranty were not relevant to the loss.
The new Act brings in two major changes to warranties, it abolishes the Basis of Contract clause i.e. the insurer is no longer able to convert statements made by the policy holder (on proposal etc.) into warranties.
Most importantly, an insurer is no longer entitled to refuse a claim on the basis that conditions of a warranty were not met, if the claim is not relevant to the warranty. Breaches of warranties will be less severe with policies only being suspended until breaches are rectified and claims before or after the suspension was in place are still valid.
Claims will only be refused if the warranty is directly linked to the type of loss2. For example, a breach of warranty requiring the customer to install a burglar alarm can only suspend the insurer’s liability for loss caused by intruder or theft not in the event of flood or fire loss.
3. Fraudulent claims
Line-by-line budget analysis might reveal specific areas where greater efficiencies might be possible within an organisation. Especially in areas such as saving fuel and running more environmentally friendly offices, those efficiencies might tie in neatly with a wider commitment to sustainability. In areas such as life cycle costing of proposed new capital assets, accountants can also help businesses integrate sustainability into the decision-making process.
So in light of these changes, what can businesses do?
It would be advisable for businesses to allow extra time when it comes to taking out or renewing their policies, and they should be prepared to answer more questions.
No longer will they be able to provide large quantities of information and presume that the insurer will find the answers they are looking for.
By establishing who in their business is classed as a senior manager, and thinking about any material circumstances which could impact their policy and consulting with third parties where necessary, businesses should be in good stead to not only adapt to the changes, but benefit from them.
1 Changes have already been made to personal lines insurance by way of the Consumer Insurance (Disclosures and Representations) Act 2012 (CIDRA).
2 this change is applicable to all policy terms not just warranties, with the exception of a term that defines the risk as a whole.
Bluefin Professions is the specialist professional indemnity division of Bluefin, one of the UK’s largest, but more importantly market leading insurance brokers.
About the author
Lorraine heads up the Edinburgh branch of Bluefin’s specialists professional indemnity insurance (PII) division, Bluefin Professions. She has more than 20 years experience and is an expert in the placement of accountants’ PII.
About the company
Bluefin Professions is a specialist team at Bluefin Insurance Services offering insurance solutions and risk management advice to businesses of all sizes offering professional services throughout the UK.
ICAS have worked with Bluefin Professions for over three years to provide members with professional indemnity insurance. More than 12,500 professional firms and 5,500 accountancy practices ranging from sole practitioners through to 'Top 10' organisation place their trust in Bluefin Professions to manage their insurance programme.
This blog is one of a series of articles from our commercial partners.
The views expressed are those of the author and not necessarily those of ICAS.