For brokers, adapting to the Insurance Act 2015 will involve more than just explaining a few changes to customers. When the new law comes into force on 12th August this year, brokers will have fresh responsibilities and their clients will face different consequences for misleading insurers. Are you prepared for all the changes?
In context: changing 100-year old principles
The new law replaces principles set out in the Marine Insurance Act 1906. To reflect the huge changes in business culture, the insurance industry and the world around us in that time, the Act introduces reforms which are aimed at bringing UK law into line with internationally-recognised best practice.
The changes include a different basis for disclosing material information, amended remedies for breach of contract and a new way to establish which pieces of information represent warranties. For non-consumer contracts, parties will be able to contract out of the provisions.
The Duty of Fair Presentation
The old Duty of Disclosure will be replaced by a Duty of Fair Presentation. For the policyholder, this means they must disclose information which they either know or ought to know. Alternatively, the insured should provide sufficient information to ‘put a reasonable insurer on notice that it needs to make further enquiries.’ Information which is disclosed should be ‘reasonably clear’ and ‘accessible to a prudent insurer.’
The scope of information which should be identified and potentially disclosed includes that held by senior management and what would be revealed by a reasonable search of the material available to the insured. Disclosure includes information held by third parties such as contractors and at any of the organisation’s operational sites.
The role of brokers in disclosure
Knowledge held by brokers is included within the scope of what an insured either knows or ought to know. This means that brokers must be careful to share appropriate information with clients, probably more information than is shared at present.
The requirement to provide information in a reasonably clear way puts an additional onus on the broker to ensure information is presented correctly. If an insured has hidden a crucial piece of information among a few thick files, the broker will still be expected to pick this out and flag it up to the insurer. A warning to the client about not hiding this information may help, but this could also alter relationship dynamics.
How brokers’ roles will change
The new law will result in significant changes to the procedures brokers follow. A more comprehensive search for disclosure material will take additional time, as will arranging this in a format that meets the requirement for reasonable clarity.
Brokers will face slightly higher risks under the new regime, as they are being given additional responsibilities which will increase liability. To protect themselves, brokerages will need to revisit their contractual terms and clarify the role of the broker and client and specify key responsibilities.
The opportunity to deliver better value
Inevitably, if brokers take on greater responsibility and their role in disclosure becomes more complex and time-consuming, prices will rise. On the other hand, the change in law offers an opportunity to demonstrate value to clients by ensuring that insurance is being entered into on the basis of reliable disclosure, and is not subject to subsequent challenge from the insurer.
It is important to note that available remedies for breach of contract are changing under the new Act. A reckless or deliberate breach of contract will still give the insurer the right to void the policy and claim back any payments made to the insured under the policy to date. However, a new spectrum of more proportionate remedies is being introduced for inadvertent breaches.
The new remedies include avoidance of the policy, variation of the terms of the policy and reduction of the claim. Avoidance will only be available to an insurer where they would have refused cover entirely had there been a fair presentation of risk.
By assisting clients with disclosure, insurers can help clients avoid this more stringent remedy. The new range of more proportionate remedies should help to avoid disputes with clients and fewer policyholders will find themselves facing very heavy losses due to avoidance of cover.
Warranties will become suspensory conditions
The Insurance Act 2015 removes the ability of an insurer to discharge their liability to the policyholder in response to the breach of any warranty. Previously, the insurer could do this even if the breach was unrelated to the loss giving rise to a claim.
The new law espouses a more flexible approach. Insurer liability is suspended as a result of a breach, but applies once more if the breach is remedied. This means brokers should be vigilant to identify where warranties may have been breached, so they can warn the insured that this should be remedied. If no warning is given, the client may seek to bring a claim on the basis that the broker should have provided this advice.
This need for ongoing monitoring is in contrast to the current system, where the broker only needs to ensure that information submitted is accurate at the start of a policy. The system should be more fluid but may be more onerous for brokers.
How will the Insurance Act 2015 impact you?
How do you envisage your practice being affected by the new law? While the changes have not been universally welcomed, many industry commentators see the new regime as offering an opportunity to improve professionalism within the sector, as well as fostering closer relationships between brokers and insurers.
Where insurers seek to contract out of the provisions of the Act, there could be a response from brokers to remove unscrupulous firms from their panels. If brokers think insurers are being less than transparent about the impact of their policy terms, those insurers could find themselves facing a reduction in trade.
Want to find out more about how the new changes will affect you? Talk to Stride Group today.
Call us: 023 9224 8790