The Insurance Act introduces some radical changes to commercial insurance. Policyholders must properly engage in the buying process.

The Act clearly sets out the parties’ responsibilities. If policyholders fail to measure up to the standards set they can expect little sympathy from the courts.

What are the key changes? 

Through work in the House of Lords, we were able to outlaw ‘terms not relevant to actual loss’ meaning that a warranty regarding a sprinkler system will have no effect if the loss results from flooding by a river.  The act sets out what the business policyholder must do when buying insurance. They must make a ‘Fair Presentation’ of the risk - a question of both substance and form. 

The policyholder (as now) must provide all material information to allow the insurer to rate the risk or at least sufficient information to put the insurer on enquiry to ask further questions.

If the presentation is complex the policyholder cannot ‘data dump’. They must give information in a clear and accessible manner. The policyholder is deemed to know what its senior management knows, what its broker knows, what the persons arranging its insurance know and what would have reasonably been revealed by a reasonable search.

Risk assessment

Policyholders need to give some thought to what their risks are and how they present those to insurers. The act should therefore mean customers working more closely with their insurance brokers. Who can provide advice on how the new process can be met.

If the policyholder breaches the duty of fair presentation, then the insurer always has a remedy. If the presentation was deliberately or recklessly incorrect then – as now – the insurer can avoid the policy and keep the premium. 

If the insurer would not have written the risk they can avoid the policy but returning the premium. Otherwise the outcome will depend on what the insurer would have done.  There could be an adjustment to the excess, the imposition of an exclusion, a reduction of limits or, if the premium is increased, the claim may be subject to average (a proportionately reduced payment).  All of this could mean that the policyholder may receive nothing at all or only a much reduced payment. It is important to get it right.

Outside of the placement process the act deals with warranties and similar terms.  Basis clauses that seek to turn everything said by a policyholder into a warranty are of no effect. It will not be possible for insurers to contract out of that. Otherwise breach of warranty will suspend cover.  If the breach is remedied cover will be restored.  In addition a warranty or other term designed to reduce risk will only be effective in the context of the type of risk it sought to limit.

Genuine claims

The act clarifies insurers’ right if there is a fraudulent claim. The insurer can reject that claim in its entirety including any honest parts.  Genuine claims prior to the fraud are payable but the insurer may terminate the policy from the date of the fraud should it wish to do so.

Like its predecessor the new act is a default scheme. Generally insurers will be able to contract on different terms if they wish to do so.  However if the term is disadvantageous for the policyholder the insurer must first sufficiently inform the policyholder of its intention and the term itself must be clear. 

Insurers are unlikely to contract on different terms for mainstream risks.  However they may well wish to do so for more specialist risks and here the broker’s input and advice will be vital.