Inside the Insurance Act

In august last year, new legislation came into force that has fundamentally changed the legal framework governing commercial insurance. The Insurance Act is a game-changing shift in favour of UK businesses, and should be strongly welcomed. However, the new law comes with new responsibilities – including on senior management teams.

The 2015 Insurance Act has rewritten the rulebook so that it better protects policyholders from insurance companies refusing to pay out a claim on outdated technical grounds. Under the old system, the cards were stacked heavily in favour of insurance companies. For example, there were draconian penalties for non-disclosure of underwriting information (however innocently) and for breaches in warranties (however irrelevant to a particular loss). This meant, for instance, that an insurance claim could have been refused based on an innocent and irrelevant mistake such as a misspelling of a name.

The insurance industry operates in good faith, but if an insurance company is advised that it has legal grounds to avoid (or reduce) a claim, there is undoubtedly pressure on it to do so – especially if it is a large claim. The new law redresses the balance, providing safeguards for businesses so that an insurance policy is more likely to work as intended.

It does mean, however, that because the legislation is more balanced between the insurer and the insured, that courts are likely to be much tougher in their interpretation of the facts. Under the old regime the law was so stacked against the policyholder that the judge would bend over backwards to protect the insured, wherever possible. This is unlikely to happen in the new and fairer system.

Senior executives will be expected to have an understanding of the key changes under the Act, so they should speak to their insurance advisors to see how their business will be impacted.

More specifically, they should be prepared for greater due diligence. One of the key features of the new law is “duty of fair presentation” which must be based upon a “reasonable search” by the policyholder for information which needs to be disclosed to the underwriter. The Act is explicit that this should include information known by senior management, so boards will need to be part of the process.

In recent years, insurers have tended to take a legalistic approach to large claims, and with premiums being forced down in a competitive market this is unlikely to change. The Insurance Act is not going to change this trend but it will level the playing field. Companies may therefore like to consider getting a legal review of their insurance policies before they are purchased to ensure that wordings are water tight.

Vital as it is, insurance is of course part of a much bigger picture. The Insurance Act undoubtedly gives businesses greater assurance, but even the best legal framework and the most carefully written policy in the world are no substitute for good risk management based on complete risk information and a thorough understanding of a company’s exposures.

This article was published in our Business Reporter Online: Future of Insurance.

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