The Insurance Act came into effect on 12th August 2016 and affects all commercial and charity insurance policies governed by UK law.

The Act is designed to shift the power imbalance from insurers to organisations making recovery from insurers simpler and fairer in the event of claim.

The Act introduces a new ‘duty of fair presentation’, requiring insureds to capture more knowledge from more people in their organisations.

The Insurance Act 2015 (the Act), a piece of legislation designed to modernise and support Britain’s insurance sector, became law on 12th February 2015, and applies to all commercial and charity policies governed by UK law beginning or renewed from 12th August 2016. The Act ushers in a more modern regime for the industry by replacing the 110-year-old Marine Insurance Act which governs contracts between organisations and insurers.

The Act introduces these four broad changes:

1. The Duty of Fair Presentation:

The duty of fair presentation replaces the previous duty of disclosure and further specifies whose knowledge needs to be captured for the insurer when applying for cover. The actual Act states, ‘Before a contract of insurance is entered into, the insured must make to the insurer a fair presentation of the risk.’ It then specifies that the ‘fair presentation of risk’ must:

• Be ‘clear and accessible to a prudent insurer’, meaning that sending overly brief or huge ‘dumps’ of data to an insurer when applying for cover is unacceptable;
• Be ‘substantially correct, and[…]made in good faith’; and
• Include ‘every material circumstance which the insured knows or ought to know’, or failing that, include ‘sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purposing of revealing those material circumstances’.
• The Act defines information that the insured ‘ought to know’ as anything which would be revealed by a reasonable search of available information. This means that the Act will require insureds to make adequate enquiries within their organisation to identify and verify information relevant to the risks they are trying to insure. These enquiries should capture all relevant knowledge of the organisation’s senior management (those who ‘play significant roles’ in making management or organisational decisions) and those involved in buying the insurance (including the broker).
• Depending on your organisation, these relevant enquiries could also extend to third parties involved with the business, such as external consultants, contractors and other people insured by the policy.
• Should an insured fail the duty of fair presentation, insurers have a new system of proportionate remedies that replaces the previous avoidance-only regime. These ‘remedies for breach’ depend on whether the breach was deliberate or reckless, or not.
• If the breach was deliberate or reckless, the insurer ‘may avoid the contract and refuse all claims’ as well as keep the premium. However, it falls on the insurer to prove that the breach was deliberate or reckless.
• If the breach was not deliberate or reckless, the insurer has several options:
  • If the insurer would not have written the policy based on the uncovered information, it may avoid the policy but must return the premium.
  • If the insurer would have charged a higher premium based on the uncovered information, it may proportionately reduce claim payments.
  • If the insurer would have written the policy but on different terms based on the uncovered information, the contract is to be treated as if it had been entered into on those terms.

2. Warranties and Conditions:

The Act abolishes ‘basis of the contract’ clauses, which automatically transform pre-contractual information supplied to insurers into a warranty. Under the Marine Insurance Act, any change in the information supplied to insurers (even if trivial or immaterial) would lead to termination of the policy. Abolishing these clauses helps shift more power back to the insured.

In the event that the insured does breach a warranty, the cover is merely suspended rather than automatically terminated under the Marine Insurance Act. The Insurance Act allows the insured to remedy the breach, and then cover will be automatically reinstated. However, not all breaches can be remedied, so policyholders should still make every effort to comply. The British Insurance Brokers’ Association uses the example that, if there is a warranty that a building is made of bricks and mortar when it is actually built of wood, then that breach can never be remedied and the policy would be effectively suspended for the rest of the policy term (i.e. terminated).

Lastly, the Insurance Act eliminates insurers’ ability to avoid a policy for any breach of warranty even when that breach was not relevant to the actual loss. For example, if an insured breached a warranty in their policy that they must have working fire alarms but suffered a flood, the insurer would not be able to avoid paying the flood claim just because the insured did not install fire alarms. This is referred to as ‘terms not relevant to the actual loss’.

3. Fraudulent Claims:

The Act clarifies and harmonises insurers’ remedies in the event of fraudulent claims. Under the Act, insurers do not need to pay fraudulent claims (even if there are honest elements to it) but are still liable for losses occurring before the fraudulent act. Insurers have the option of terminating the policy at the time when the fraudulent act was committed, and may recoup anything paid out after the fraudulent act.

4. Contracting Out:

Think of the Insurance Act as a ‘default regime’—insurers must follow it, but they are allowed to contract out of requirements (except for the abolition of the basis of contract clauses) provided that any alternative terms (or, as the Act classifies them, ‘disadvantageous terms’) meet certain transparency requirements:

• Insurers must take sufficient steps to draw the disadvantageous terms to the insured’s attention before the contract is entered into or the variation agreed.
• Disadvantageous terms must be clear and unambiguous.

You may only need to make small changes to your insurance buying process to comply with The Act. This does place more responsibility on your shoulders, but in return, the Act protects your organisation and ensures your cover is as effective as possible.

The Act can be easily applied provided you take certain measures, which you are probably already doing. These include:

1. Identify who is responsible and who is involved in arranging your insurance

• Determine: 
  a) who counts as ‘senior management’
  b) those involved in buying insurance in your organisation and
  c) the sign-off requirements.  
  
  This is likely to include your Treasurer, Executive Committee or Chief Executive.

• Decide who needs to be involved in getting the information related to your insurance.  
  
  This may be people in your charity and third parties. For example if your equipment is stored in a church hall you may need to check with the church about their security.

2. Have a clear understanding, of the risks being insured and the cover that is required, identifying any special or unique risks

• Research your risks so you have a comprehensive understanding of what data insurers may need.
• Investigate whether there is anything special or unique about the risk your organisation faces that should be clearly indicated to insurers.  
  
  This could include security of your buildings, or where your equipment is stored and used, or travelling to areas of political instability.

3. Compile and checking risk information

• Ensure there is a process for gathering all the necessary information for your insurer.
• Document the process to show that you undertook a reasonable search for information, recording any concerns or shortcomings.

4. Remember to leave enough time 

• for renewing your insurance 
• for gathering the information for insurers.

You can find further information on these websites:

legislation.gov.uk - Insurance Act 2015

The Chartered Insurance Institute (CII) - Insurance Act 2015: bringing insurance law into the 21st century