On 12 August 2016, the most fundamental reforms of UK insurance
contract law for over 100 years will come into force. The reforms are being
introduced to redress the imbalance between insurers and policyholders –
insurers being perceived as having too much leverage in coverage disputes
because the existing law was overly protective of the insurers' position.
For buyers of insurance, the changes are undoubtedly a very positive
development. They do, however, significantly change the way UK insurance
business will be conducted. Policyholders who want to take advantage of the
benefits of the reforms need to understand the changes and adapt their
practices accordingly. This article provides a summary of the areas policy
holders need to address.
Why is insurance important?
The UK insurance market (which
is the third largest in the world and the largest in Europe), plays a
significant role in underpinning global trade by insuring trade related risks.
Physical assets are almost
always covered for loss or damage. In trade finance transactions banks may want
to be co-assured on the policies that cover the goods, to take an assignment of
the proceeds or at the very least be named as loss payees. They may also
require cover to be taken out for the premises where goods are produced.
The obligor’s non-payment risk
can be insured, as can the borrower's credit risk on financed deals, and the
country or political risks that may adversely affect the borrower's ability to
service the loan. Over the last ten years these types of credit policies have become
increasingly popular, particularly so where the financer can obtain risk
capital relief for the insurance. To qualify for the relief, the robustness of
risk transfer needs to very clear and confirmation of eligibility supported by
legal opinions.
What has changed?
The
Insurance Act 2015 (the ''Act''):
- radically changes the pre-contractual disclosure process and policyholders' duty;
- introduces a wider range of remedies, which are designed to be more proportionate, in the event of policyholder breach;
- reforms the law relating to insurance warranties;
- codifies the rules that apply if a policyholder makes a fraudulent claim; and
- provides for damages in the event of late payment of claims.
When
the Act comes into force on 12 August 2016, it will apply to all contracts of
insurance and reinsurance, and to any variations to existing contracts made on
or after that date.
This
article focuses on the aspects of those changes that require a change of
practice by policyholders.
New duty to make
fair presentation
Policyholders
will be under a duty to disclose material information known to senior
management and any individuals responsible for arranging the insurance. Those responsible for the insurance are responsible
not only to the internal insurance or risk management team, but also the
external insurance broker.
As
under the current law, any information is material if it would influence the
judgement of a prudent insurer in determining whether or not to take the risk
or fix the terms in so doing. Materiality will therefore depend upon the field
of activity (e.g. shipping, banking, commodity trading); the nature of the
risk; and the relevant class of insurance (e.g. property insurance, credit
risk, marine cargo).
Policyholders
will also be under a duty to conduct a reasonable search for information that
"ought to be known". This includes not only information within the
organisation, or its possession and control, but also relevant information held
by third parties outside the organisation.
Presentation
needs to be clear and accessible
There
is a new standalone duty to present information to insurers in a manner that is ''reasonably clear and accessible". The Law Commissions (which had
spent many years working on the reform proposals that culminated in the Act) were
critical of the practice of proposed insurers providing large quantities of
un-signposted documentation without any indication as its potential relevance.
As a result, the last minute "data dumping" of unstructured
information will no longer be permitted.
Practical
Impact of Fair Presentation Duty
Start
Early
Policyholders
need to start considering their renewal process and opening the dialogue with
placing brokers about what needs to be achieved much earlier. The presentation
is now supposed to be an interactive process with insurers asking questions
regarding the information provided. The timetable needs to build in this
flexibility.
Get advice
Brokers
should be able to provide guidance on what information should be considered
‘material’ for any particular type of risk. Part of the long lead-in time
permitted between when the Act received Royal Ascent and came into force (18
months), was to enable insurers, brokers and policyholder bodies to work
together to develop guidance and protocols setting out what a standard
presentation of risk should include for different types of risks.
Organisations,
in particular, need to take advice on what should be the ambit of their
"reasonable search” and agree that with insurers. The Act provides for a
default regime only. Accordingly, if the parties want to agree that the ambit
of the relevant search will be narrower than the terms of the Act, they are
free to do so.
Who has relevant ''knowledge''?
It
will be essential to identify those within the organisation who fall within the
definition of "senior management". The Act defines senior management
as those individuals who play a significant role in making decisions about how
the policyholders' activities are managed/organised. In a corporate context
this is likely to extend beyond simply the main Board, and could be a
substantial group of people depending on the structure and management
arrangements of the organisation.
Policyholders
should consider whether the knowledge of such a large group of individuals is
really relevant for the purpose of any particular insurance policy. For
example, if a commercial bank regularly takes out individual policies covering
their clients’ credit risk, is it practical for every individual falling within
the definition of senior management to be consulted about whether they have
that relevant "knowledge"? It
is much more likely that the transaction team, who have put the deal together, will
have the pertinent information and therefore it would be sensible to amend the
policy to reflect that fact.
Knowledge
also extends to those individuals who are responsible for the policyholders’
insurance. This includes any corporate risk management function but also the
placing broker. Policyholders therefore need to liaise closely with their
broker and agree what knowledge is relevant and who is responsible for
searching for - and in due course storing - the various categories of
historical information that might be needed to fulfil the duty.
More onerous
obligations
The
duty to undertake a reasonable search for information substantially increases
the policyholders' obligations. Remember, a reasonable search will now include
relevant information in the hands of third parties – e.g. agents, subcontractors,
consultants, professional advisers and those to whom relevant business
functions have been outsourced. Policyholders need to make sure they have
considered which individuals or organisations are likely to have relevant
information and allow enough time to collate it.
Explaining
the crucial importance of responding to the information requests in a rigorous
manner will also be key.
Explain the
risks
Any
individual whose knowledge is considered relevant needs to understand the
importance of the information gathering exercise, and the likely impact of
getting it wrong. A bland enquiry "do
you know anything about X" may not result in the appropriate degree of
scrutiny, unless it is put in context.
Make
it clear, for example, that the organisation is about to insure a physical
asset of considerable worth and that the insurance may turn out to be a wasted expense,
if relevant information is not disclosed.
Blind Eye
Knowledge
When
requesting information, whether from senior management or as part of the
"reasonable search" obligations, individuals need to be reminded that
knowledge under the terms of the Act is not limited to that which an individual
actually knows. Knowledge extends to matters which an individual
suspected, and of which he or she would have had knowledge, had they not
deliberately refrained from confirming or enquiring about them. This is concept
is often expressed by the shorthand term of "blind eye" knowledge. Once
again, however, parties are free to agree that knowledge, for the purpose of
any particular policy, should be limited to actual knowledge.
Keep records
updated
Policyholders
need to make and retain detailed records as to the searches they have
undertaken and received. Do not assume that the list of individuals relevant
for the purpose of the "reasonable search" enquiry will stay static. The
commercial activities of an organisation can change radically during the course
of a year and the question of what constitutes a reasonable search needs to be
revisited at every renewal, and every time a request is made to insurers to
amend the policy.
Reforms of the
law on Warranties
Under
the current law it is open to
insurers to add a declaration to insurance proposal forms or policies stating
that the policyholder is warranting the accuracy of all the answers given, or
their answers form the "basis of the contract". This has the legal
effect of warranting the truth of every piece of information given in the
proposal. Any inaccuracy, however immaterial, can entitle insurers to treat
themselves as discharged from liability automatically.
The
Act abolishes clauses of this type and, if included, they will no longer be
given effect to.
The
Act also replaces the existing remedy for breach of any warranty and provides
instead for more proportional remedies. The policy might provide, for example,
that the insured warrants that a particular physical commodity will be stored
in a secure warehouse protected with 24-hour security personnel. If the
relevant storage warehouse is left unattended, the warranty will be breached. The
Act provides that for any loss occurring during the period of the breach,
insurers will have no liability. If, however, the breach is remedied, and the
security arrangements become fully effective, again insurers will become liable
for any loss arising after the breach has been remedied.
Practical
Implications
Going
forward, any ‘basis of contract’ clauses in policies or proposal forms should
be struck out. They will no longer be effective in any event, so why keep them?
Policyholders
should continue to take insurance warranties extremely seriously. Even though
the new remedies will now be proportionate, insurers will still be able to
escape liability for any loss that happens during the period of breach.
Make
a careful note of any warranties that have been given, consider how compliance
is monitored and put in place reporting procedures to keep tracking compliance.
Any inadvertent breach must be quickly remedied if remedy is possible. Evidence
as to the date and times that breaches are remedied must be retained so that
this can be provided to insurers in the event of a loss. If the breach cannot
be remedied, get advice promptly on what options might be available e.g.
getting insurers to waive breach.
Fraudulent
Claims
Under
the new Act, if the policyholder makes a fraudulent claim, the insurer is not
liable to pay that claim, even it would seem (although this is not beyond
doubt) those parts of the claim that are entirely honest. The insurer may also
give notice to the policyholder to terminate the contract and may retain the
premium.
The
Act does not define what is fraud or what amounts to a fraudulent claim. That
is left for the courts to interpret that as a matter of common law.
Practical
Implications
Everyone
involved in an insurance claim needs to be clear that absolute and scrupulous
honesty is required. Exaggerating any aspect of a claim, or providing insurers
with any documents in support of a claim where there are suspicions as to their
authenticity, can lead to serious problems.
The
second practical step is to consider whether the fraud clause in your policy
appears more onerous than the Act. If so, the justification for including it
should be discussed.
Damages
for Late Payment of Claim
A late amendment inserted into the Act
by the Enterprise Act 2015 introduces an implied term into insurance contracts
that the insurer will pay claims within a ‘reasonable period of time’. Breach
of that implied term entitles the insured to a claim in damages. This new provision
comes into force on 4 May 2017. Under the old rule, even if an insured had
suffered significant losses as a result of insurers delaying a claim payment,
the insured had no remedy.
Insurers will have a defence under the Act
if they had reasonable grounds for disputing the validity or quantum of the
claim. It remains to be seen how the Courts will interpret the test of
reasonableness, but the introduction of an implied term will undoubtedly give
policyholders more leverage if insurers are obviously dragging their feet
without any apparent justification.
Practical
Implications
The
time limit for bringing a claim for damages for late payment of claim is
extremely tight. The insured will only have one year from the date insurers
paid the claim and this deadline need to be carefully noted.
Conclusion
Changes introduced by the Act undoubtedly
place policyholders in a significantly better position.
This is good news for trade
finance parties where there has been some scepticism about the value of
insurance owing to concerns that insurers would find reasons not to pay. Achieving
more certainty about the effectiveness of insurance as a risk transfer or
mitigation tool, in a trade finance context, will increase its attractiveness.
However, if policyholders want
to take advantage of the benefits that the Act was designed to confer, they need
to understand the changes and adapt their practices accordingly. The manner in which insurance risks need to be
presented going forward has changed radically. Carrying on with "business as usual"
could result in claims being denied or policy proceeds being significantly
reduced.
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