The main change for companies taking out insurance is the new duty of disclosure. Obligations are now placed on companies to advise the insurer of anything that may affect the terms on which the insurer provides cover. This, and the rest of the main changes, are set out in more detail below:
- A new duty of disclosure - A new duty of "fair presentation" is placed on policyholders. Fair presentation requires disclosure of every material circumstance which the policyholder knows or ought to know would influence the judgement of a prudent insurer. Alternatively the duty of fair presentation can be discharged by a policyholder if it provides sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing material circumstances.
- New rules on warranties - "Basis of contract” clauses, whereby statements made by a policyholder are automatically converted into warranties, are abolished. The Act also provides that an insurer's liability is only suspended (rather than discharged) in the event of a breach by a policyholder. Therefore, a policyholder will become covered again if and when it remedies the breach.
- New remedies for pre-contractual non-disclosure - The Act abolishes the current "one size fits all" approach of entitling an insurer to avoid all claims in the event of a breach by a policyholder of its duties of pre-contractual disclosure. Instead it introduces a range of proportionate remedies depending firstly, on the whether the breach was deliberate or reckless and secondly, whether the insurer would have entered into the insurance contract at all or on different terms had the representation been fair.
- New rules on non-compliance with contractual terms and warranties - An insurer will not be able to rely on non-compliance with a warranty or other condition in the contract to avoid liability if the non-compliance is not related to the loss suffered. So, for example, non-compliance with a policy requirement in relation to minimising the risk of burglary will not entitle an insurer to avoid liability for loss caused by flooding.
Insurers have 18 months to prepare for the Act's new requirements which will come into force in August 2016. Please get in touch if you would like to discuss how this legislation will affect your business.