UK Insurance Act 2015: disclosure requirements and implications

12 August 2016 has come and gone and so the long anticipated changes to English insurance law are now in force and suddenly very relevant to our industry. The Insurance Act 2015 (the act), unless contracted out of by the parties, applies to all English law insurance contracts entered into from 12 August 2016.

The radical changes introduced by the act concern the new remedies for breach of warranties and particular terms and the introduction of proportionate remedies for the breach of the duty to give a fair presentation of the risk (the duty). From a practical perspective, however, the changes that have an impact on how business is placed in a post 12 August world are those that concern the duty. The act provides a default set of rules that apply to how an insured is expected to satisfy the duty and who needs to do it. This article considers the new guidance concerning the duty and its implications for the industry.

The duty applies before an insurance contract is entered into and contains three elements. First, the duty to disclose material circumstances to a risk. The test for what is material is unchanged – anything which would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms. This duty is the corner stone of insurance allowing insurance to be appropriately and effectively priced and has been retained as a key feature of a fair presentation. We come back to this. Second, as before, there is a duty not to make a material misrepresentation. Third there is a new duty concerning the form in which a presentation must be given. Information must be presented in a reasonably clear and accessible way. This is intended to target ‘data dumps’ where an insurer is presented with an overwhelming amount of undigested information. Information provided should be structured, indexed and signposted so that an underwriter is able to navigate to what is important.

Disclosure

The law commissions recognised that insurers should be engaged in the disclosure process and not ‘underwrite at the claims stage’ waiting to ask questions only when a claim was presented. The Act recognises this concept in that there are now two ways to satisfy this duty. The first and primary duty replicates the previous test – an insured must disclose all material circumstances that the insured “knows or ought to know”. The second way is new. It applies if the insured has failed to satisfy the primary duty but has disclosed enough information to put the insurer on notice that it needs to ask further questions for the purpose of revealing all material circumstances about the risk; then the disclosure duty will have been satisfied. This takes into account that there may be circumstances where an insured will need guidance from an insurer to satisfy the disclosure duty and greater participation from insurers seeking clarification of information is anticipated.

The act clarifies what an insured knows or ought to know, but this clarification has given insureds many factors to consider including whether any amendments to policy wordings are required to amend and/or clarify the default position.

In broad terms an insured is taken to know what is known to its senior management or to the individuals who participate in buying insurance. In a corporate context, this is likely to include members of the board of directors but may extend beyond this, depending on the structure and management arrangements of the insured. Insureds need to identify whose knowledge within the insured’s organisation will be relevant for the purpose of compliance with the duty of disclosure. Are there people whose knowledge is important to the risk who do not fall within those categories? Policy wordings may be amended by identifying those persons whose knowledge is relevant.

In addition an insured should carry out a reasonable search both within its own organisation and of third parties. Insureds need to consider what the parameters of a reasonable search will be and how this search will be conducted both within its organisation and of third parties. The knowledge of those individuals who do not fall within the category of senior management, yet who perform management roles or otherwise possess relevant information or knowledge about the risk to be insured, may be captured by the “reasonable search” criteria. Insureds need to consider how to document and keep records of a reasonable search. Insureds should also consider how best to disclose the search parameters and processes and procedures to insurers as part of the placement process.

The act also deals with the question of insurer knowledge in the context of the exceptions to this disclosure duty. The Insured has no duty to disclose circumstances known/ought to be known/presumed to be known by the insurer.

This captures those involved in making the particular underwriting decision and information held elsewhere in the insurer’s organisation if it should have reasonably been communicated to the underwriter or was readily available to the underwriter. Insurers are also expected to know matters of common knowledge, that is what an insurer writing the risk would reasonably be expected to know. An insurer ought to have some insight into the industry for which it is providing insurance, but this insight may reasonably be limited to matters relevant to the type of insurance provided.

The changes to an insured’s disclosure duty are evolutionary and not radical and many elements of the previous regime remain. Long-standing buyers of insurance in the credit political risk market have well established processes and procedures surrounding their purchase of insurance and policy wordings that have served them well. Many of these insureds have/are considering the act and how it reflects the way their insurance business has been conducted historically and the extent to which established practice and procedures can continue alongside the new regime. They are also considering whether their policy wordings require amendment to contract out of the default provisions of the act.

n particular bank insureds are ahead of the game as they have already grappled with their disclosure obligations for Basel compliant non payment policies to ensure that they fully understood their duties and who would discharge these. For many years now banks have had deal team/transaction team or an equivalent definition in their wordings to designate and define those persons whose knowledge is relevant for the purpose of their disclosure duties. Some corporates have also incorporated similar functioning definitions. We expect to see more definitions of this nature in policy wordings for insureds who haven’t yet negotiated this.

Both existing and new buyers of the products available in the credit political risk market are in the same situation when considering their duties on placement of a risk and negotiating a wording in this new landscape. Overall, due to the bespoke nature of the products and the sophistication of the insureds purchasing credit and political risk insurance, the impact of the changes is likely to be less arduous than may be encountered in other areas of insurance.

Carol Searle

General Counsel - Texel Finance Limited