Buying insurance – the insured’s new duty of fair presentation of the risk
The Act will replace the existing duty of disclosure in the Marine Insurance
Act 1906 with a duty to make a ‘fair presentation of the risk’ to the insurer
before the policy commences.
A fair presentation requires the insured to disclose every material
circumstance the insured knows or ought to know. An insured ought to know what
should have reasonably been revealed by a reasonable search.
The Law Commission and industry bodies such as Airmic have encouraged
insurers and insureds / their brokers to discuss and, if possible, agree what
the insured needs to do to meet this duty including what constitutes a
reasonable search.
While some insurers may be willing to engage in such discussions, they may
not be prepared to confirm that the insured has satisfied its duty of fair
presentation.
As such, insureds should start planning on:
- where relevant knowledge resides (i.e. identifying ‘senior management’
and those responsible for the insured’s insurance)
- what a reasonable search will require for their business
- how to present the risk in a clear and accessible manner.
Proportionate remedies
The Act entitles insurers to proportionate remedies when an insured breaches
their duty to make fair presentation of the risk.
For example, if an underwriter would have increased the premium by double had
the insured complied with their duty of fair presentation of the risk, the
insurer is entitled to reduce the amount to be paid on the claim
proportionately, i.e. by half.
However, if the insured breaches their duty of fair presentation of the risk,
some insurers and insureds may prefer for the insured to pay a higher premium
rather than have their claim payment reduced.
The International Underwriters’ Association has published an example clause
to this effect. Airmic intends to publish its own example clause also. Whilst
example clauses from industry are useful, it should be remembered that they may
not always be appropriate, so parties should consider their own individual
circumstances and risk profile, and seek advice where necessary.
Fewer opportunities to avoid liability
Under the previous law, if an insured breached a warranty under the insurance
policy this would automatically discharge the insurer from liability under the
policy from the date of breach.
Anecdotally we understand that draconian remedies were rarely used but were
actively discussed when parties discussed settlement of claims.
Under the Act, the insurer will only be alleviated of liability under a
policy if:
- an insured’s breach of warranty is ongoing at the time the loss occurs;
and
- the breach of warranty is relevant to the loss that has occurred. In the
latter case, for example, an insurer could not rely on a breach of a
warranty which requires 5 lever mortise locks on a property to escape a
claim for flood damage.
The changes to insurers’ remedies are welcome to policyholders. There is some
concern in the market that insurers may now apply the remedies under the Act
strictly. But it is hoped that the changes implemented by the Act will result in
better placement of insurance by underwriters and policyholders.
Contracting out of the Act
It is possible to contract out of individual or multiple provisions in the
Act (apart from those relating to basis of contract clauses) by including terms
in the policy which are more onerous to the insured than the Act. It is
uncertain how many insurers will attempt to contract out but this is likely to
happen in speciality insurance.
If an insurer does want to contract out of the Act, the Act requires the
insurer to take sufficient steps to bring each disadvantageous term to the
attention of the insured so the insured understands the term’s effect. What
constitutes sufficient steps will depend on the circumstances, including the
nature of the insured and type of insurance. It is likely that different
approaches will be adopted across the market. As such, insureds should ensure
they fully understand the terms of their insurance and the effects of each term.
Obviously, insurance contracts can contain terms which are more favourable to
the policyholder than what is required by the Act. This means current contracts
may already be fit for purpose and that each provision should be considered
against the requirements of the Act.