The Insurance Act 2015 (“the Act”) came into force on 12 August 2016 and applies to all insurance policies governed by UK law which are entered into, or amended, on or after 12 August 2016. It is the most significant reform of insurance law in the UK in over a hundred years and is intended to bring clarity to the way in which the business of insurance is governed.
In this bulletin we address the way the Act reshapes the disclosure duty of policyholders, and introduces proportionate remedies for insurers in the event of a breach of that duty.
The duty of fair presentation
Under the previous law (The Marine Insurance Act 1906), a policyholder’s duty of disclosure required policyholders to act with “utmost good faith” and disclose to the insurer all circumstances material to the risk being underwritten. This has been replaced in the Act with a new overarching “duty of fair presentation”.
There are three key principles which policyholders must satisfy in order to make a fair presentation of a risk to insurers:
1. What must be disclosed?
Under the Act, policyholders must disclose to insurers all information material to the risk being underwritten that they have knowledge of, or ought to have knowledge of. This is similar to the duty under the old law (although see our comments on the meaning of “ought to know” below).
However, the Act also introduces a second limb which allows policyholders to satisfy the duty of fair presentation by doing something that actually falls short of disclosing all material information. Failing a disclosure of every material circumstance, policyholders can instead disclose sufficient information to “put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing material circumstances”.
Despite this second limb, the Act still maintains that any policyholder who deliberately refrains from disclosing information it knows is material will still be deemed to breach the duty of fair presentation. As such, this second limb should not be relied upon as a means of withholding or limiting disclosure, and policyholders should continue to make every effort to disclose all material information to their insurers.
In practice, our view is that the information passed over to insurers as part of the disclosure process is unlikely to significantly differ under the Act.
2. Disclosure must be "substantially correct"
Any material fact a policyholder discloses to its insurers must be “substantially correct”, and “every material representation as to a matter of expectation or belief must be madein good faith”.
This is a new standard introduced by the Act and policyholders should take care to read the fine print on any documentation signed in the course of providing disclosure. Proposal forms created under the old law often required a director (or other signatory) to declare that information contained in the proposal was “true and accurate”. The Act no longer requires this; the standard now simply requires that information be “substantially correct”. Policyholders should therefore take care that they do not inadvertently hold themselves to a higher standard of disclosure than the Act requires.
3. Disclosure must be reasonably clear and accessible
The Act requires that policyholders make their disclosure “in a manner which would be reasonably clear and accessible to a prudent insurer”. This is a new requirement created by the Act and has been implemented to overcome “data dumping” by policyholders such that all the material information may be disclosed but it may be disclosed in such a way that it is hard to find or identify.
Although “reasonably clear and accessible” is not a concept defined by the Act, we would suggest that the form of disclosure should be agreed with insurers in advance to ensure this requirement is complied with. This may for example, involve indexes, pinpointing key documents, or providing summaries of the information.
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For further information, please contact Carey Lynn, Senior Partner on +44 20 7558 3521 or email firstname.lastname@example.org