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"Insuring" Your Business’s Future


New measures are being introduced to make the relationship between insurers and the business they insure fairer, better balanced and more reciprocal.

This follows the introduction of The Enterprise Act 2016, which received Royal Assent on 4th May 2016, and the Insurance Act 2015.
The effect of the new laws will profoundly affect how insurers will, and insured businesses should, approach insurance policies taken out after 12th August 2016.

One of the key changes will address an issue that has been a major point of conflict.
To the surprise of many, insurers are currently under no duty to pay valid insurance claims within a reasonable time.  In many substantial claims, the insurer delays payment and seeks to negotiate the level of payment with the insured.  If the insured then suffers further losses as a result of the delay in payment (or even fails), the insured cannot claim additional loss from the insurer. 
Crucially this has been addressed by the Enterprise Act 2016.

For contracts of insurance entered into after 4th May 2017, there will be an implied term that the insurer will pay valid claims within a reasonable time, which will include time to investigate and assess the claim.  What is “reasonable” will depend on the circumstances – the type of insurance and the size and complexity of the claim will be factors here.

The key change is that an insured who has suffered loss as a result of an insurer’s failure to pay within a reasonable time can now claim remedies (including damages) from the insurer for that failure.  Of course, an insurer will have to prove that the loss sustained was caused by the insurer’s failure and, in addition, the insurer will only be able to recover “foreseeable” loss. 

It is with this in mind that a prudent business should, when presenting the risks to the insurer before the contract is entered into, alert the insurer to the losses that they may sustain if there is a delay in the payment of claims.

The other principal changes introduced by the insurance act of 2015 are as follows:

Duty of fair representation
The duty to disclose material information known by the insured has been revised and given structure.  In addition, the Insurance Act recognises the reality that insurers will already hold information about the risk.  Further, the new law also reflects the fact that businesses are often complex entities, and that information-gathering may not be perfect.

This all means that for renewals, after 12th August 2016, insureds must now disclose:
1. information known to senior management and, if different, the insurance-buying team(including brokers);
2. information held by other areas of the business which ought to be known if a reasonable search is undertaken.

The Insurance Act of 2015 sets out the information which the insured does not need to disclose (although if there is doubt, it still may be prudent to do so):
1. Information held by the insurer and held by the underwriter relevant to the risk;
2. What an insurer writing the risk would be expected to know;
3. Common knowledge.

The current system under which an insurer can avoid a contract for breach of the duty of disclosure will be replaced by a more proportionate system, the key remedies of which are as follows:
• For a deliberate or reckless breach, the insurer can avoid the contract from inception and keep the premium;
• If not deliberate or reckless, the insurer can impose one or more of the following remedies:
o If the insurer would not have accepted the risk, then it can avoid the contract but has to return the premium;
o If the insurer would have charged a higher premium, then it can reduce proportionately any claims payments;
o If the insurer would have included new or different terms other than with respect to premium, the contract will be treated as including such terms.

To comply with the above requirements, insurers will need more time for the information-gathering exercise, and should liaise with insurers and brokers at an earlier stage than previously.

Changes to policy terms
There are three main changes to the operation of policy terms:
1. Basis of contract clauses allow insurers to treat a false statement made during the presentation of risk as a warranty.  The insurer can then avoid the contract altogether, even if the false statement was immaterial to the risk and the judgment of the insurer.  These clauses have now been abolished for business contracts. 

2. A breach of warranty will no longer terminate the policy automatically.  Instead, breach of warranty will lead to suspension of liability and, once the breach is remedied (if the breach can be remedied!), resumption of liability.

3. A new regime applies to non-compliance with terms which serves to reduce the risk of a particular type.  Currently, a breach could lead to avoidance of a claim by an insurer even if the breach was unrelated to the loss that occurred.  Now, if the insured can prove that breach of the term could not have increased the risk of the loss which occurred, the insurer will not be able to use the breach of the terms to avoid liability.

Disclaimer: This article is not intended to constitute legal advice.  For legal advice in connection with the above, please contact us directly.

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