Navigating the Insurance Act

Major changes to UK Insurance LawInsurance Act 2015

16 February 2017Simon BrooksCo-Head of International InsuranceEversheds Sutherland

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Welcome, your presenter today is:

Simon [email protected]+44 20 7919 4583 linkedin.com/in/simonbrooks

Simon is Joint Global Head of Insurance and specialises in high value insurance and reinsurance disputes and complex professional indemnity claims. His cases have included major insurance market disputes such as the long running and high profile film finance and leading cases involving claims against insurance brokers.

Simon has a great deal of experience in defending insurance brokers, solicitors, accountants and construction professionals, as well as advising on property damage and product liability claims. He has acted in high value and complex energy related claims in the UK and abroad, and also advises in relation to Directors and Officers insurance claims and coverage issues.


https://www.linkedin.com/in/simon-brooks-42277a7/

Eversheds Sutherland | 20 February 2017 |

─ The new Act and why it’s important─ The old regime─ New “Duty of Fair Presentation of the Risk”─ New remedies for breach of the new duty─ Abolition of “Basis Clauses”─ New rules on warranties─ New concept of “Risk Mitigation Terms”─ Contracting out─ How is the market responding

Introduction


─ Why change?• Unfair rules on disclosure/representations• Unfair remedies for unrelated breach of warranty• basis clauses

─ Affects all policies worldwide that are subject to UK law incepting after 12 August 2016

─ Affects all contracts of insurance, reinsurance, retrocession and variations to existing contracts

Insurance Act 2015


Section 17 – Utmost good faith• “An insurance contract is a contract of utmost good faith, and if utmost

good faith is not observed … the contract may be avoided”.• Avoided = treat the contract as if it never existed, return premium.Section 18 - Disclosure• The Insured must disclose every material circumstance the insured

knows or ought to know.• What is a material circumstance? A circumstance is material if it would

influence the judgment of a prudent insurer in deciding whether to write the risk or in fixing the premium.

• if an Insured fails to disclose a material circumstance the insurer can avoid the policy if the actual underwriter would not have written the risk, or would have written it on different terms, had he known the undisclosed fact.

Marine Insurance Act 1906

The Old Regime


Section 20 - Representations

• Every material representation made by an Insured must be true.

• What is a material representation? A a representation is material if it would influence the judgment of a prudent insurer in deciding whether to write the risk or in fixing the premium.

• If the material misrepresentation induced the underwriter to write the risk (i.e. it was a “real and substantial cause” of him entering the contract of its terms), the insurer can avoid.

Marine Insurance Act 1906

The Old Regime


An Insured must satisfy your duty in one of two ways. Either:

• [Limb 1] The Insured discloses every material circumstance it knows or it ought to know; or

• [Limb 2] In its risk presentation, the Insured provides “sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances”. [The Fall Back Position]

What is the Insured's duty?

Duty to make a Fair Presentation of the Risk The New Regime


─ Information is material if it "would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms".

─ The Act also provides some examples:

• Special or unusual facts relating to the risk

• Particular concerns that led the Insured to seek cover

• Anything that those concerned with the class of insurance “would generally understand as being something that should be dealt with in a fair presentation of the risks of the type in question”.

Satisfying Limb 1 – What is “material”?Duty to make a Fair Presentation of the Risk


─ What does a corporate Insured know?

• What the Insured’s “senior management” knows

“those individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised”

• What the “people who are responsible for the Insured’s insurance” know (brokers, insurance department, risk managers)

Satisfying Limb 1 – the Insured’s knowledgeDuty to make a Fair Presentation of the Risk


─ What ought a corporate Insured know?

• “… an Insured ought to know what should reasonably have been revealed by a reasonable search of information available to the Insured”.

• … including information which is “held within the insured’s organisation orby any other person (such as the insured’s agent..)”

─ Broader than the current test of what the insured ought to know “in the ordinary course of business” as it is assumed all businesses are run efficiently.

Satisfying Limb 1 –the Insured’s knowledgeDuty to make a Fair Presentation of the Risk


─ What is a “reasonable search”?

• Legal definition of “reasonable”

“fair, proper or moderate having regard to the circumstances”

• Test includes information held by “any other person” – very broad e.g. an outsourced service provider? IT consultant?

Satisfying Limb 1 - The Insured’s knowledgeDuty to make a Fair Presentation of the Risk


In its risk presentation, the Insured must provide “sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances”. • If insurers are put on enquiry, and they don’t ask questions to reveal further

information, they cannot argue that that information was not disclosed.• Disclosure must be clear and accessible to a prudent insurer - no data

dumping.• An Insured cannot deliberately conceal material information through

intentionally cryptic or elusive references in the risk presentation.• Underwriters will be more engaged in the process as will be on enquiry.• Insurers may ask for information to be re-presented where it is initially

incomprehensible.

The Fall Back Position

Satisfying Limb 2 – the Fall Back PositionDuty to make a Fair Presentation of the Risk


The Insured need not disclose information which the Insurer knows, or ought to know, or is presumed to know.

─ includes what the actual underwriter actually knows

─ includes information held by the insurer that is readily available to the actual underwriter

─ includes information known to employees of the Insurer who ought to have passed it to the underwriter

─ includes things which are common knowledge and “"things which an insurer offering insurance of the class in question …would reasonably be expected to know in the ordinary course of [its] business."

You don’t need to disclose what the insurer already knows

Duty to make a Fair Presentation of the Risk


─ The main, technical change is the removal of avoidance as the automatic remedy for breach of Utmost Good Faith.

─ Replacement with a range of remedies:

• If the breach of duty to make a fair presentation of the risk is deliberate or reckless, the insurer may avoid the policy and keep the premium.

• A breach of the duty to make a fair presentation of the risk is “deliberate” if insured knows he is in breach of the duty (i.e. intentional breach).

• A breach of the duty to make a fair presentation of the risk is “reckless” if the insured does not care whether he is in breach of the duty or not.

Insurer’s Remedies

Remedies for Breach of the DutyDuty to make a Fair Presentation of the Risk


─ 3 remedies under the Act• Avoidance• Varying the terms of the contract• proportionate reduction of the claim payment

─ Avoidance

• Only available if the insurer proves that, had there been a fair presentation of the risk, the underwriter would not have written the risk at all

Insurer’s Remedies where breach is not deliberate or reckless



─ Varying the terms of the policy

• If, on a fair presentation of the risk, the underwriter would have written the risk but on different terms, the policy is treated as if it was written on those terms (i.e. the Court re-writes the contract).

• But what terms? Extra warranties? How would they effect the loss? Or the future viability of the policy?

• Has retrospective effect, so what effect on claims already paid?




─ Proportionate reduction in the claim

• If, on a fair presentation of the risk the insurer would have written the risk, but for a higher premium, then the insurer may proportionately reduce the claim.

• The reduction will be in the same proportion that the actual premium bears to the premium that would have been charged if a fair presentation had been made.

• Claim is £1000; actual premium was £100; would have charged £150; 100/150= 0.67; 0.67 x £1000 = £670


Remedies for breach of the dutyDuty to make a Fair Presentation of the Risk


In summary:

Duty to make a Fair Presentation of the Risk

• Meaning of “material information” hasn’t changed• You must disclose material information you know or ought to know• “What you know” includes the actual knowledge of “Senior

Management” and those individuals who are responsible for insurance is relevant

• You need to make a “reasonable search” for information you ought to know

• That search is of your organisation but also includes information held by any other person (e.g. you broker)

• There is a fall back position where you can put insurers on notice to ask question, but full disclosure is preferable

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─ Example of a basis clause “The proposal or application and declaration you have completed, and any other information supplied, form the basis of this contract”.

─ Held to mean that the insured warrants the truth of the answers given in the proposal form.

─ IA15: Insurers may not use such a clause to “convert” representations made in connection with a policy into such a warranty.

Abolition of Basis Clauses

Warranties and Other Terms


─ Old law: breach of warranty discharges insurer’s liability under the policy from moment of breach onwards. Remedy of the breach does not reinstate cover.

─ IA15 transforms warranties into ‘suspensory conditions’, i.e. the insurer will not be liable for losses while insured is in breach of warranty.

─ The insurer remains liable for:• any loss occurring before the breach of warranty occurred;• any loss “attributable to something happening” before the breach of warranty

occurred;• any loss occurring after the breach of warranty is remedied.

─ The insurer is not liable for:• any loss occurring whilst the warranty is being breached;• any loss “attributable to something happening” before the breach was

remedied.

Converting Warranties into Suspensory Conditions



─ Breach of a “Time warranty” (requiring something to be done by a particular time) could be remedied if the “risk to which the warranty relates later becomes essentially the same as that originally contemplated by the parties”. E.g. late installation of a fire alarm.

─ Breach of any other warranty can be remedied “if the insured ceases to be in breach of warranty”.

─ Some breaches of warranty cannot be remedied (e.g. warranties to protect the condition of goods).

Remedying a Breach of Warranty



• Old law – breach of warranty/CP, even if not connected to the loss in question, means the insurer can deny liability for loss.

• The Act identifies “Risk Mitigation Terms” which are terms/warranties in the policy that “tend to reduce the risk” of a loss of a particular kind or a loss at particular location or a loss at a particular time.

• If breach of a “Risk Mitigation Term” could not have “increased the risk of the loss which actually occurred” then the insurer cannot rely on that breach to deny liability for the claim in respect of that loss.

Terms not Relevant to the Actual Loss



Parties can contract out of all provisions (save for the ban on Basis Clauses) and subject to “transparency requirements”• “Sufficient steps” must be taken to draw it to the attention of the

insured• The contracting out clause must be “clear and unambiguous as to

its effect”. i.e. state its effect• Example “Section 10 of the Insurance Act 2015 is excluded in its entirety.

As a result, if the insured fails exactly to comply with any warranty in the policy, the insurer is irrevocably discharged from liability from the date of the breach of warranty. Accordingly, the insured cannot avail itself of the defence that it has remedied the breach of warranty before any loss has occurred.”

Parties can contract out of the new Act

Contracting Out


6 months on – what’s happening?

Insurance Act 2015

• Was the market ready on 12 August 2016?

• Contracting out for harsher remedies?

• Contracting out for simpler remedies?

• Agreement on “Senior Management”, “Reasonable Search”?



Checklist

Insurance Act

• Did your current insurance programme incept post 12 August 2016?

• Are your processes for identifying and disclosing material information fit for purpose:• Who are your senior management?• Who is “responsible” for your insurance?• How have you defined your “reasonable search”?

• Have your insurers contracted out of the benefits of the act?


Eversheds Sutherland | 20 February 2017 | 26Use Insert tab, Header & Footer to change this text, then Apply to All to change on all slides

Thank you for joining us, for more information please contact:

Simon [email protected]+44 20 7919 4583 linkedin.com/in/simonbrooks


https://www.linkedin.com/in/simon-brooks-42277a7/


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Navigating the Insurance Act

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Transcript of Navigating the Insurance Act