The Insurance Act 2015 comes in to force in August 2016 and will have significant implications for anyone arranging insurance policies as a consequence of an insolvency appointment.
The Act is the most significant reform of UK insurance contract law since the Marine Insurance Act 1906 and will provide a new framework for insurance placements. It has been brought in to modernise the law in relation to how policyholders and insurers approach insurance placements and will change the role a broker plays as a conduit between an insurer and insolvency practitioner. All commercial contracts of insurance, reinsurance and retrocession governed by the law of England and Wales, Scotland or Northern Ireland, as well as variations to existing contracts made after that date, will be governed by the Act.
Definitions and duties
The Act makes important changes to the law regarding the insured’s pre-contractual duty to the insurer (duty of fair presentation), introduces proportionate remedies for a breach of that duty, makes adjustments as to how non-compliance with policy terms will operate and provides remedies for fraudulent claims.
The principal changes are as follows:
- A new pre-contractual duty to provide a ‘fair presentation’ of the risk by an insured to an insurer of material circumstances that the insured ‘ought to know’
- Defining what constitutes ‘knowledge’, and what constitutes the requirements of a ‘reasonable search’ for the purposes of disclosure by an insured
- Any breach of the duty of fair presentation will give an insurer a remedy if they would not have entered into the insurance, or would have done so on different terms
- Provides a range of new proportionate remedies for a qualifying breach
- Diluting the effect of warranties so that breach of warranty will no longer permanently discharge the insurer’s liability if the breach of warranty is remedied prior to the relevant loss
- Clarifying the effect of fraudulent claims abolishing ‘basis clauses’, which turn the insured's pre-contractual statements into warranties; and
- Affording the right to insurers, subject to certain requirements, to contract out of parts of the Act.
The effects of the Act are wide reaching. However, perhaps one of the most significant changes in relation to insolvency insurance placements comes with the introduction of the duty of ‘fair presentation’. The insured has a statutory duty placed upon them to disclose to an insurer important and/or relevant information known to them (or which they ought to know) that would affect the judgement of a prudent underwriter on deciding whether to accept a risk and on what terms (including premium charged). Failing that, as a fallback, the insured is required to put a prudent insurer on notice that they need to ask more questions to uncover material facts.
- The Act does provide some detail on what constitutes information that should be provided within ‘fair presentation’:
- The information provided must be presented in a way that would be reasonably clear and accessible to a prudent insurer
- The insured must disclose knowledge of the senior management
- The insured must disclose knowledge of the insurance team, including brokers
- Information which would be revealed by a reasonable search.
These requirements will of course prove a challenge for insolvency placements where little information about the risk being insured, its insurance history, its previous claims experience and access to ‘senior management’ and/or the previous insurance team may well not be possible. There is no definition as to what constitutes a reasonable search and no ‘one size fits all’ answer. However, the insured must take reasonable steps to ensure that enquiry is made to any other person who may hold material information. The insured is not required to declare information that the insurer is expected to already know.
If the insured fails to make a fair presentation, the insurer can reduce claims proportionately and/or impose terms to a policy that they would have imposed had they been aware of the information at the time the insurance contract was entered into. For insolvency placements where information about any risk at the time of placement of insurance is, by the nature of the immediate cover, requirement limited, the Act brings some significant challenges. The Act potentially creates a situation of post-loss underwriting when a claim occurs, where a claim could be proportionately reduced or terms and conditions applied to the policy (and cover provided in respect of a claim) from the time of placement, renewal or variation of the policy (provided this takes place after 12 August 2016).
Exceptions and opting out
The Act allows the ability to opt out of certain clauses, but it is not possible to opt out of the Act entirely. However, this ability is limited at the option of insurers, and any disadvantageous conditions to the policyholder must be agreed prior to inception of cover. This creates a specific issue for insolvency appointments where cover is required immediately on appointment and prior to the insurer being provided the information they need to underwrite the risk and being able to identify specific issues whereby they would wish to apply terms or conditions to a specific placement.
Opting out should only be undertaken after consideration of the beneficial and/or disadvantageous terms, and the effect that opting out has on the contractual basis of the policy to the policyholder. The Act also puts in place restrictions on insurers’ ability to void contracts – a significant benefit to a policyholder. In general terms, if you are opting out of the Act, what are you opting in to?
The continued reliance on an insurance policy placed prior to the appointment should be undertaken with a full understanding of the contractual basis of the policy. That policy will also be subject to the same requirements of the Act and be based on the fair presentation that was provided and, in practice, the insolvency appointment itself may be seen by an insurer as a material circumstance, and perhaps as the individual strategy for that appointment (there is some relief provided in relation to confidential information).
Transparency and cost
Cost will remain a significant consideration in placing insurance within an insolvency placement. With most insurance placements the more information collected will usually mean more options for placement, fewer unknowns for insurers to apply a premium for uncertainty to, and potentially lower premiums. More information can only assist with the duty of fair presentation subject to the information not constituting a data dump, as specified under the Act.
The Act also will allow the Third Parties (Rights Against Insurers) Act 2010 (TPRAI 2010) to be bought into force. The TPRAI 2010 simplifies existing compensation procedures when an insured becomes insolvent, introduces some increased duties to provide information to claimants and also allows for future amendments when new insolvency regimes are introduced. The TPRAI 2010 is expected to be come into force at the end of summer 2016.
Risk management advice
An insolvency practitioner, receiver or trustee should pay particular attention to their choice of insurance broker, taking into consideration risk management advice in addition to an insurance placement service. There is no exemption in relation to the Act for insolvency hold cover (commonly known as ‘open cover’) schemes.
Assessment should be made of the broker’s ability, not only to place insurance, but also of their knowledge of insolvency procedures and practice, their ability to assist and represent the insured as an agent of the insolvency practitioner or receiver in complying with the requirements to undertake reasonable search, and of their ability to mitigate the risk of post-claim underwriting and proportionate reduction of claims by the insurer.
The Insurance Act 2015 does bring some significant benefits to insureds, and while it brings some challenges to insolvency insurance placements, the Act also brings some restrictions to insurers’ ability to avoid policies.
All insureds should engage with their broker to understand the implications of the Act and what is required to comply with it in relation to a hold covered facility used (if one is used), the subsequent effects on the requirement for transparency in relation to cost, the placement post-appointment policies not on a hold cover facility and the review and potential use of pre- appointment policies. Most importantly in relation to insolvency insurance placements, obtain an understanding of what the insurer considers a fair presentation and the implications of failing to provide material circumstances.
For further information, please contact Ed Brittain, Head of Restructuring and Recovery Risk Practice on +44 (0)12 1626 7821