One year to go—IA 2015 and disclosure duties

What are the disclosure duties under the Insurance Act 2015 (IA 2015)? Mark Pring, head of insurance at Addleshaw Goddard, Martin Mankabady, partner at Clyde & Co, and Nick Smith, senior manager of commercial customer propositions at Aviva, explore the upcoming changes and what they mean for clients and insurers.

How are the disclosure duties structured in the Insurance Act 2015?

Martin Mankabady (MM): Regarding the new duty of fair presentation, the change introduced by IA 2015 in respect of disclosure in relation to non-consumer insurance contracts is one of the key changes introduced overall by the new legislation.

There is now a new duty on an insured to make a fair presentation of a risk before a contract of insurance is entered into. This duty requires the following:

  • 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

In connection with this duty, every material representation as to a matter of fact must be substantially correct, and every material representation as to a matter of expectation or belief must be made in good faith. This new duty replaces the previous ‘utmost good faith’ duty set out in the Marine Insurance Act 1906 (MIA 1906).

Mark Pring (MP): The new Act provides, in principle, a clearer framework for what is identified as the ‘duty of fair presentation’. The relationship between insured and insurer is still to be characterised above all by the scope of the insured’s disclosure obligations at the time the risk is presented (or renewed), but IA 2015 expressly seeks to create a greater degree of ‘balance’ based on the knowledge of the respective parties.

To that end, the duty of fair presentation requires, in the first instance, the disclosure of every ‘material circumstance’ which the insured knows or ought to know. (A circumstance is any communication made to or information received by the insured and is material if it would influence the judgement of a prudent insurer in determining whether to take the risk and on what terms.) Failing that (which begs the question of why there might be a failure), the insured must provide sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing such material circumstances.

By the same token, there is an associated duty to ensure:

  • that material representations as to matters of fact are ‘substantially correct’ (by reference to whether a prudent insurer would consider the difference between the relevant representation and the true position to be material), and
  • that material representations as to matters of expectation or belief are made in good faith

Nick Smith (NS): Utmost good faith has been retained in IA 2015 as an interpretive principle. IA 2015 sets out a more structured framework on ‘fair presentation’ than the one it replaces, and places more balance between the duties of the insured and those of the insurer. While the core obligations are broadly similar, they bring greater clarity about whose knowledge needs to be captured when presenting risks.

This knowledge can be summarised as information which would be revealed by reasonable search, the knowledge of senior management of the business and also of their insurance broker or team. The key term here is ‘reasonable’ so, for example, if you are arranging cyber insurance then you would expect the knowledge to include that of the person responsible for IT and security.

This knowledge should then be disclosed in a clear and accessible format, and detail every material circumstance which the insured knows or ought to know; or failing that, sufficient information that would prompt a prudent insurer to ask for further details if necessary. It’s this latter part which brings more balance and means the insurer has a responsibility to ask relevant questions to make sure they understand the business risk, but does not detract from the insureds responsibility to make ‘reasonable enquiries’ of their own business in order to fulfil their obligation to make a fair presentation.

The insurer knowledge also plays a part in so far as the insured will not be expected to disclose ‘common knowledge’, information they know the insurer already holds provided it is readily accessible to the underwriter, and any information which an underwriter writing this type of risk would reasonably be expected to know.

How does this differ from the previous duties of disclosure?

MM: The new legislation does not entirely do away with the concept of utmost good faith, as this will still be relevant as a guide when interpreting the application of remedies in the event of breach of the new duty.

MP: IA 2015 expressly introduces the additional requirement that the information provided by or on behalf of the insured must be presented in a manner that is reasonably clear and accessible to the (prudent) insurer. This reflects an underlying intention to make the disclosure process as practical as possible and, again in order to create a sense of balance, IA 2015 sets out both what should actively be disclosed and what is specifically not required to be disclosed.

NS: The key difference is in the structure the new framework brings (particularly around knowledge and reasonable search on the part of the insured and their broker) and the role it sets out for all parties.

Utmost good faith remains as an interpretive principle and the need for an insured to disclose all material facts still remains. IA 2015 does, however, bring more balance around insurer knowledge and the need for insurers to also ask questions where the customer has disclosed sufficient information to put the prudent underwriter on enquiry to ask for further details if necessary.

Could there be any difficulties in complying with the duties?

MM: One challenging area in relation to the new duty is the extent to which knowledge will be imputed to either the insured or the insurer. In either case, knowledge will include ‘blind’ knowledge (ie knowledge of matters which were suspected but which were deliberately not confirmed or enquired into).

In the case of an insured which is not an individual, its knowledge includes knowledge of its senior management or of the persons responsible for the insured’s insurance. Although this is very likely to catch an executive board director and a risk manager (if there is one), it could also, in certain circumstances, catch, for example, a general counsel who does not sit on the board but who is closely involved in the executive decision-making process.

The knowledge imputed to an insured also includes information which ‘should reasonably have been revealed by a reasonable search’, and this includes information held within the insured’s organisation or by any other person such as the insured’s agent or a person for whom cover is provided by the contract of insurance. This does not extend, though, to include confidential information known to, for example, the insured’s broker.

An individual involved in underwriting a risk is fixed with the knowledge which an employee or agent of the insurer has and ought reasonably to have passed on (in the latter case where the agent is, for example, a coverholder and has relevant information on an insured obtained in a confidential capacity that may not constitute knowledge which ought to have been passed on), or of relevant information held by the insurer and which is readily accessible (in the latter case, would this include, for example, physical documents stored offsite?).

Absent contracting out of relevant provisions of the new legislation, certain market practices are likely to develop in relation to these issues but, ultimately, a court may be required to determine these issues.

MP: Market practice, and improvements to that practice generated by the current debate, will play an important role in determining the success of these reforms. In principle, from the insured’s perspective so long as:

  • the knowledge of the (appropriate) senior management
  • the knowledge of the ‘insurance team’ (including brokers), and
  • all information which would be revealed by a reasonable search

have been disclosed, the active duty should be met. Equally, the definition of a ‘reasonable search’ will not always be clear (depending upon, for instance, the size and complexity of the insured business) and, further, the insured should not rely too heavily on assumptions about what information an insurer does or does not hold in relation to the relevant risk(s). IA 2015 strengthens the need for a vigorous planning process on the part of the insured.

NS: This is about understanding what changes we need to make in how we talk customers through disclosure and how we ensure we capture the knowledge in a contemporary way. IA 2015 will require changes in how we do this and this was recognised with the 18-month lead-in period the Law Commission gave the industry. The key will be in finding ways to prepare and implement changes in our business today, meaning customers can get used to the new disclosure levels before the Act comes into force.

What are the practical implications of the disclosure duties?

MM: The legislation is framed in quite general terms which means that, absent contracting out of relevant provisions, it may not be entirely clear if a relevant party is in compliance or not. Parties impacted by the legislation will need to review their current practices and processes to work out what changes will need to be made.

MP: Again, the burden on insureds will vary depending upon the scale and nature of their business, but it will be essential for insureds, during the transition period, to leave sufficient (in all likelihood, more) time for the renewal process, particularly in terms of data gathering. Insureds should also give attention to specific issues highlighted by IA 2015, such as:

  • Is there anything special or unusual about the business that will need to be flagged?
  • Do changes need to be made to the list of relevant ‘senior management’ and the internal/external insurance teams for the purpose of identifying who might have relevant ‘knowledge’?
  • What is the best format in which information should be gathered, as part of the ‘reasonable search’?
  • Should amendments be made to, for example, insured clients’ terms of business agreements (TOBAs) to reflect understandings regarding the scope of new disclosure duties?

NS: The practical implications for the insurance industry are how we help customers understand what should be disclosed is a challenge. Questions sets and templates or factfinders do help, but the industry needs to work harder to help customers understand what would influence an underwriters’ judgment. We don’t believe asking more and more set questions is the answer.

We need to help our customers understand the level of information needed to accurately assess the risk so that they are clearer on the type and scope of things they should mention (and understand what constitutes reasonable search). Every client is different and this uniqueness needs to come through in the disclosure. Visible things (for example, I can see you are a florist or that your premises are built of brick) are often easier to disclose than the less physical or unusual aspects of their business.

What should lawyers be doing now to assist their clients prepare?

MM: The following practical ‘dos and don’ts’ could be worth bearing in mind (and lawyers would be well advised to discuss these kinds of issues with their clients if they are not already doing so):

  • an insured should not simply ‘dump’ information on an insurer—this is very unlikely to satisfy its duty to make a fair presentation
  • an insured, and (where relevant) its broker, should give careful thought as to how much information is to be disclosed, whether there is any other relevant information which may need to be disclosed, and how information obtained is to be presented in writing (which should be ‘reasonably clear and accessible to a prudent insurer’). It should be noted that an insured is exempt from disclosing certain information (for example, where the insurer is already aware of something)
  • the broker should make it clear to what extent it is assisting the insured in the placement process (for example, in respect of assisting with the making of additional enquiries), and this should be evidenced in any relevant terms of engagement so as to avoid any uncertainty around the scope of the broker’s role in this process, and
  • the insurer should be alert to where an insured has discharged its duty by putting the insurer on notice of further matters to be looked into but the insurer does not then look into such matters—in this event, the insurer could potentially lose the ability down the line to assert that there has not been a fair presentation

MP: Lawyers need generally to be reinforcing the practical messages outlined above. Policyholders should therefore be reminded to:

  • liaise as early as possible with their brokers to identify material circumstances
  • consider the format of disclosure
  • if in doubt as to the materiality of any circumstance, ‘err’ on the side of disclosure, since ‘blind-eye’ knowledge may, where appropriate, be ascribed to an insured, and finally
  • ensure that corrections are correct/given in good faith and then kept under review to allow for appropriate corrections to be made before inception (or renewal)

 

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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