The Insurance Act 2015 has been described as the "the biggest reform to insurance contract law in more than a century", modernising, as it does, key insurance provisions that date back to the Marine Insurance Act of 1906.
Although entitled 'The Insurance Act 2015', the legislation will only apply to insurance contracts (including variations or endorsements to current policies) entered into on or after 12th August 2016 where the governing law of that policy is a UK country.
Who does the Act apply to?
The Act applies to all non-consumers, those being buyers of insurance who are doing so in relation to their trade, business or profession. Therefore the Act applies to ALL solicitor practices in England and Wales when they are seeking renewal of their Minimum Terms and Conditions (MTC) Professional Indemnity Insurance (PII) policy.
Key provisions of the Act
The Act deals with:
- the Duty of fair presentation of risk, both before a contract incepts and when amended
- Warranties (including basis of contract clauses)
- Terms not relevant to the actual loss
- Fraudulent claims by insureds
- Good faith
Similarly to the recent changes in regulation to the legal profession, the Act, rather than being a rigid code, sets out principles to be followed, with the aim of being suitably flexible regardless of the size of a firm.
'Duty of Disclosure' replaced by 'Duty of Fair Presentation of Risk'
The Act brings some clarity to the problematic area of disclosure, namely, what to tell your insurer before the start of an insurance contract. Previously known as the 'Duty of Disclosure', this is being replaced with 'Duty of Fair Presentation of Risk'.
What's the difference?
Previously Insurers relied upon 'utmost good faith', Duty of Disclosure was defined as '...every material circumstance which is known to the insured, and the insured is deemed to know every circumstance which, in the ordinary course of business, ought to be known by him...'
whereas Duty of Fair Presentation of Risk is now defined as ...
'Disclosure of every material circumstance which the insured knows or ought to know, or failing that, disclosure which gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances'.
'Disclosure in a manner which would be reasonably clear and accessible to a prudent insurer'.
Every material representation as to a matter of fact is substantially correct, and every material representation as to a matter of expectation or belief is made in good faith'.
The Act does however state that a 'fair presentation' does not have to be made in a single document or oral presentation. All information which has been provided to the insurer by the time the contract is entered into will therefore form part of the presentation to be assessed for the purposes of considering whether or not the presentation is fair.
This is intended to recognise that the insurer may need to ask questions about the information in the initial presentation in order to draw out the information it requires to make the underwriting decision, so there may be a series of exchanges.
More onus on Insurers to ask the relevant questions
The Act puts more onus upon the insurers to make sure that they do ask the appropriate questions in order to assess your risk. Nonetheless, insureds need to make sure that a full investigation is undertaken relating to the risk and that the outcome of such investigation is presented to the insurers in a clear and structured way.
Traditionally, for the majority of policies, insurance contracts could be cancelled 'ab initio' for non disclosure. The Minimum Terms and Conditions for Solicitors PII are a rare exception to this - on the grounds of public protection, nonetheless non-disclosure can still have serious implications on the cover provided. Solicitors need to remember that the majority of other insurance polcies they hold are subject to ab initio cancellation. Whilst this remains a possibility under the Act, the circumstances in which this can occur have reduced.
However there are other remedies available to insurers for a breach of the duty of fair presentation of risk - and solicitors remain obliged to take every precaution to avoid any misrepresentation or lack of disclosure in their proposal forms.
What is the impact for you?
(i) More detailed Proposal forms in some cases
While you can expect to see some changes in proposal forms, particularly round any declarations you are required to sign, the Legal Profession should not be impacted unduly by the introduction of the new legislation (though see paragraph (iii) below). This is in large part because prudent PII insurers have always had quite extensive proposal forms in order to properly quantify the risk, and price your policy accordingly.
We have already noticed an increase in the length of some proposal forms, however, and we are likely to see an increase in the number of quotations issued subject to additional questions (subjectivities).
(ii) more detailed due diligence required
The duty of fair presentation of risk requires you to act differently in respect of your disclosure investigations than you did under the duty of disclosure and we would recommend that you start this process early and collate evidence of your investigations in case of any future disputes with insurers. You should present information clearly and flag material issues to insurers. 'Data dumping' is prohibited.
You will need to be able to summarise and document:
- who has been consulted
- what information was asked for
- how the information has been collated and checked
Effective due diligence and a comprehensive proposal form response is likely to assist ensure a faster renewal process in the long-term with fewer subjectivities.
For more information on the duty of fair presentation of risk please download our guidance note, using the link below.
(iii) Changes to MTC wording: insurers more likely to seek re-imbursement from insured practices who fail to disclose properly
The Act has no impact to the extent of coverage that the insurers will be offering: the priority of policy continues to be the protection of the public.
The SRA have issued an amendment to the Minimum Terms and Conditions citing the Act, It now provides insurers with broader grounds for seeking reimbursement from an insured practice, where information has not been fairly disclosed. It is therefore important that you fully comply with the Act.
How Lockton can help
We can help advise you on your renewal process, and provide assistance with any queries you may have about how to complete your proposal form or the due diligence you should be undertaking in order to comply with the new duty of fair representation.
Engage with your Lockton Account Manager early - and don't hesitate to get in touch with any queries you may have.
You can also download both our Guidance on the Insurance Act and our latest client briefing on the Duty of Fair Presentation of Risk using the links below.