The law of 'fair presentations'
David Hertzell examines the intricacies of the new Insurance Act 2015 and what it means for law firms' professional indemnity policies
The Insurance Act 2015, set to come
into force on 12 August 2016, is the
third to come from the Law Commissions' insurance law project. It follows the Third
Parties (Rights against Insurers) Act 2010
and the Consumer Insurance (Disclosures
and Representation) Act 2012.
Collectively this legislation represents the
most significant change to insurance law in the last 100 years, with the last two Acts replacing large parts of the Marine Insurance Act 1906.
All three Acts followed extensive market consultation and represent a consensual view
of best practice. The 2015 Act deals with four
Disclosure and representations when purchasing insurance;
Warranties and similar risk-mitigation terms;
Insurers' remedies for fraud; and
Requirements to contract on different
While the second and third points apply to all types of policyholder, the first and fourth only apply to 'non-consumers'. That definition
includes law firms, whether partnerships, ABSs,
or sole practitioners. It is worth noting, however, that smaller firms may fall within the jurisdiction
of the Financial Ombudsman Service, which
has the power to decide cases on the basis of what is 'fair and reasonable' rather than in strict compliance with the law.
The non-consumer policyholder must now make
a 'fair presentation' of the risk when it purchases insurance. That is a question of both substance and form. Essentially the policyholder must disclose
all material information that it knows or ought to know - except information that the insurer knows, ought to know, or can be presumed to know - or, failing that, enough to put the underwriter on notice to ask further questions.
The Act gives some guidance on whose knowledge can be attributed to the policyholder and how 'ought to know' should be decided.
In particular the Act introduces the concept of a reasonable search by the policyholder for relevant information. The insured firm knows information that is known by its 'senior management' and known by the persons arranging the insurance.
The firm ought to know information that would reasonably have been revealed through a reasonable search.
'Senior management' is defined as the persons who 'play significant roles in the making of decisions about how the insured's activities are to be managed or organised'. Senior management
in practice may differ from job titles. It will often
be the board of a company. However, the definition is wider as some insureds will not be companies.
In a small firm the partners are likely to count as senior management; in a larger firm that may
be the management board with information
within the wider partnership being obtained through a reasonable search.
The individuals arranging the insurance can include, for example, the insured's risk manager or broker (although a broker is not obliged to disclose confidential information obtained through a business relationship unconnected to the relevant contract of insurance). Who is included will be fact specific to each insured.
The nature of the reasonable search will depend upon the type of insurance being purchased. The appropriate search for a professional indemnity policy would be different to the search for a property policy.
The Marine Insurance Act 1906 included some limitations to the insured's duty of disclosure which have been maintained by the Insurance Act 2015. An insured does not have to disclose information
if the insurer knows it, ought to know it, or is presumed to know it. The insurer knows what is actually known to its underwriter or their agent. The insurer ought to know both:
Information that should have been passed on to the underwriter (for example, by a surveyor or the claims department); and
Information the insurer holds in its systems provided that it is 'readily available' to the underwriter.
The insurer is presumed to know information that underwriters writing the relevant class of business should know and matters of common knowledge.
If the policyholder breaches its obligation to make a fair presentation then the outcome depends on what the insurer would have done.
If the insurer can show that it would not have written the policy if a fair presentation had been provided, then it may avoid the policy but must return the premium. If the insurer would have written the policy but on different terms, then those terms may be imposed, limits altered, and/or the claim reduced pro rata to the underpayment if additional premium would have been charged. The insurer may avoid the policy if the failure to provide a fair presentation was deliberate or reckless.
Warranties and fraud
The provisions on warranties and fraud in
the Insurance Act 2015 apply to all types of policyholder. However, the new Act does not define 'warranty' and existing definitions will continue to apply. Under the original law, if the insured breached a warranty in its policy then
the policy was discharged from the date of
breach, whether or not the breach had anything
to do with the loss that occurred.
In addition, the so-called basis of the contract clauses allowed insurers to convert all information provided when insurance was bought into insurance warranties. Any inaccuracy therefore discharged the policy even if it was to the insurer's advantage. Although rarely relied, upon the most recent case dates from 2013 and was decided in the insurer's favour.
The new Act abolishes the basis of contract >> >> clauses. Any term that seeks to turn information provided when the policy was purchased into an insurance warranty will have no effect. It will not
be possible for insurers to contract out of this provision.
If the policyholder breaches a warranty after the new law comes into force, cover will be suspended while the breach continues but will be restored once the breach is remedied. For example, if an insured is obliged to inspect an alarm system
but fails to do so, cover is suspended until the inspection is carried out.
Warranties and other terms that seek to mitigate risk will not be effective if the insured can show that non-compliance 'would not have increased the risk of the loss which actually occurred in the circumstance in which it occurred'. A risk-mitigation term is one that 'tends to reduce the risk of' loss
of a particular kind, at a particular location, or at a particular time. For example, a sprinkler warranty will apply if there is a fire, but not if the property suffers a loss by flood. However, a risk-mitigation term is not one that defines the risk as a whole.
A provision against insuring drivers under 25, for example, will continue to be effective.
If the insured makes a fraudulent claim then the entire claim is forfeit, including any genuine part. The insurer may terminate the policy from the date of the fraudulent act. Genuine claims before the fraudulent act will remain payable.
Like its predecessor, the 1906 Act, the 2015 Act is
a default scheme. Insurers can contract on different terms if they wish, provided the policyholder is not a consumer. However, if the term is disadvantageous to the policyholder the insurer must sufficiently draw it to the attention of the policyholder or their broker. The term must also be clear as to its effect.
Although not part of the original Insurance Act 2015, the Enterprise Act 2016 introduces the first amendment. This allows policyholders to recover consequential loss caused by an unreasonable failure to pay a valid insurance claim. Previously, the law provided insurers an immunity against such loss. The new provision will come into force in April 2017.
The Law Commissions sought to preserve existing language and concepts where these remain valid. The Act is concerned with systems and processes and recognises the impact of IT, as well as the emergence of new insurance structures, such as group insurance. Outcomes are neutral rather than protective and professionalism from
all parties is encouraged. The new law provides
a fairer system of remedies from a policyholder perspective but those benefits have to be earned. The Act's intention is for insurers to be provided with sufficient information to write a risk on the right terms and for the right price, and for the insured to have a policy that responds when a claim arises.
Although the Law Society's minimum terms have sheltered solicitors from the extremes of the Marine Insurance Act for professional indemnity insurance, and will provide more generous cover than the new law, it is nevertheless prudent to comply with the new provisions. Firms that fail to do so will inevitably face higher premiums and reluctance by insurers to provide cover. Of course, the new law will apply in full to general insurance outside the scope of the minimum terms such as property, motor, and employers' liability insurance.
Preparing a fair presentation will and should take a reasonable amount of time, possibly longer than is currently the case. The firm will need to decide who senior management is for these purposes and how a reasonable search will be organised. Careful records will need to be kept to ensure that there is not a dispute following a claim about who knew what. The firm should take professional guidance from its insurance broker.
However, it would be prudent to ensure that the broker is familiar with the Insurance Act 2015 and has read the guides produced by the British Insurance Brokers' Association over the last two years. A professional indemnity claim against the broker following insurance coverage issues may be cold comfort, especially if the broker has sensibly limited its liability. It would be wise to check what information is provided to insurers in the broker's submission. Be wary of advisers who promise that nothing much has altered. The new law has substantially changed the basis of UK insurance law.
Firms need to be wary of terms in their policies which seek to contract out of the new law. Those may be rare but may provide worse cover. It is also worth noting that if the insurer has advised the broker that it is contracting out of the new law, then under normal agency principles it has
advised the policyholder.
It might be sensible to avoid any failure of communication on this important topic to ensure that terms which seek to contract out of the new
Act are additionally notified direct to the firm.
Also bear in mind that the exemption provided
in the Marine Insurance Act regarding circumstances subject to insurance warranties is not included in the new law. In future it will be necessary to describe such information, including details of any breaches, when giving a fair presentation.
Perhaps the best advice is to seek
a dialogue with the broker and the insurer. Issues of concern are better dealt with as the insurance contract
is agreed rather than thrashed
out following a claim while on
the back foot.