On 12 August 2016, the new Insurance Act will come into force and will change the way the law deals with UK insurance. The Act will replace the Marine Insurance Act, which is over 100 years old. The aim is to make insurance law fit for the twenty-first century, but what does this mean for business owners?
The new Act provides a more up-to-date framework for commercial insurance in the UK and will apply to all commercial policies taken out, renewed or amended from 12 August. The Act focuses on fairness, transparency and certainty over the rules that govern insurance policies so that a fair relationship between Insurance Companies and policyholders exists.
Currently, a prospective customer is required to tell their insurer all the ‘material facts or circumstances’ they need to know about them and their business operations. This could include the construction of buildings, previous claims, alarm details, rebuilding costs, etc. The new Act still requires customers to do this but now insurers must also seek clarification on anything they have been told where the information is unclear. The intention is to ensure all parties work more closely together to make sure relevant and accurate information is gathered and provided to insurers, and that consequently when a claim is made, the policy responds.
Insurance contracts will still be based on good faith and customers will have a duty to make a fair presentation of their risk to insurers. This includes disclosure of:
- Every material circumstance which as an insured you are expected to know or ought to know about the risk for which you are seeking insurance; or
- Sufficient information to put a prudent insurer on notice that it needs to make further enquires to reveal those material circumstances.
Information provided must be correct to the best of the customer’s knowledge and it is the responsibility of the customer to make a reasonable search for information about their business.
Sean McClarron, Managing Director of McClarrons, warns: “The Insurance Act represents a major change in legislation within the insurance industry and there are likely to be people who are unsure about what this means in practical terms. We are speaking to our clients about the importance of taking the time to discuss their business and its operations in detail, as well as the information required. It is important not to make assumptions and we welcome the changes.”
You can think of it as the insurer getting to know you and your business in the widest sense. It is about more than simply describing the type of buildings or vehicle you wish to insure; this information will help draw out anything unique about your business. Customers will need to give some thought to who they need to approach to obtain the type of information that they are expected to present, which could include:
- Managers
- Employees who have in depth knowledge
- Accountant
- Sub-Contractors
- Suppliers
- Consultants, e.g. Health & Safety, Employment
Customers will not be expected to obtain information which is accessible to the Insurer or information that Insurers should already know given their expertise and common knowledge.
Once the information has been collected, it must be provided to your insurance advisor in a clear and accessible manner so that the insurance policy can be arranged to suit the needs of the business.
Getting it Wrong
The Act impacts upon how a policy works if a claim is made and a fair presentation of the risk has not been made. Previously, the policy may have been cancelled back to its start date with all claims refused, if not all of the material information had been shared or some of it was incorrect, even when this was unintentional.
Now however, if the insurer would have still offered the insurance based on that new information, they must pay the claim based on the cover and the terms they would have offered. For example, they may impose a higher excess on the policy.
If they would have charged a higher premium, they must pay the claim but may reduce the payment proportionally. Some Insurers have opted out of this approach and have chosen to pay the claim in full and instead charge the additional premium to the policyholder. It is important that customers understand their Insurers approach.
Case Study
A business pays an insurance premium of £5,000 based on the information they provided. However, they made an honest mistake and the Insurer would have charged £10,000 premium had they known all of the information. The business suffers a £100,000 loss and submit a claim.
Prior to the Act, the Insurer may cancel the policy and refuse the claim.
Under the new Act, the claim would be paid but reduced by 50% as only half of the correct premium had been paid.
Some Insurers have “opted out” of this part of the Act and have chosen a different approach – to pay the claim in full and deduct the additional premium.
Proportionate Reduction in claim example:
(£5,000/£10,000) x £100,000 claim = £50,000 claim payment
Additional Premium Approach example:
£100,000 claim – £5,000 additional premium charge = £95,000 claim payment
Now however, if knowing all of the necessary information from the start the insurer would not have offered cover, they may cancel the policy entirely, refuse all claims but must return any premium already paid.
In the event that the inaccurate information provided is considered to be deliberate or reckless, an insurer will be allowed to avoid the policy meaning that any claims made will not be met and no refund of the insurance premium will be made.
The Act also includes changes to the way that the law deals with insurers rights in the event of breaches of warranties and terms. Warranties are terms in an insurance policy that require a policyholder to do something. For example, setting a burglar alarm when the home is empty for long periods is a warranty which may be on a home insurance policy.
An insurer will no longer be able to avoid a policy simply because a breach of warranty occurs; the breach has to have contributed to the loss that occurred.
Sean McClarron notes, “It is important that policyholders understand if their insurer requires them to do or have certain things in order to benefit from their insurance cover. If in any doubt, talk to your insurance advisor who can help you understand and, if necessary, adapt them to your circumstances”
Insurance Act – What you need to do
- Speak to your insurance advisor – has your insurer opted out of the new Act or any part of it?
- Allow plenty of time to gather all of the relevant information you need as you come up to the renewal date for your insurance
- Think about “unique or unusual” features of your business
- Present details in a clear, concise and accessible manner
- Think about who else you need to approach to obtain the correct information:
- Inside your business – employees, managers
- Outside your business – accountant, suppliers, customers
- Be ready to answer any further questions from your insurer on your business. You are responsible for making sure your insurance advisor knows everything about your business pertinent to your insurance cover.
- Ensure you understand and agree with everything your insurance advisor has passed to your insurer so any mistakes can be corrected. In the same way that you sign off your business accounts, make sure you are satisfied with what is being presented.
- Have a process for monitoring changes to your risk during the policy period as this could affect your insurance needs
