What’s new?

The Act introduces a replacement for the existing “Duty of Disclosure,” which is the duty to report all risk information to insurers before the policy begins. What comes in its place is a duty to deliver a “fair presentation of the risk”, and the Act explains what is required in order to do this, providing clarity on what information needs to be disclosed to the insurer.

So, in order to give a fair presentation, you need to meet the following criteria:

1. You must disclose every material circumstance that the policyholder’s senior management knows, or ought to know, following a reasonable search

A material circumstance is anything that could possibly influence an Insurer’s decision to take on the risk, and, if they do take it on, upon what terms. There isn’t a complete list of what constitutes a material circumstance, but examples of this include your prior claims or any criminal convictions of related employees.

For the purposes of the Act, senior management is defined as anyone who has a key role in making decisions on behalf of the business, regardless as to whether or not they have an official management role. If influential information that anyone in senior management knows or should know following reasonable and diligent investigation, is not presented to the Insurer, you will have failed in your duty to fairly present the risk of the policy.

2. You must disclose this information in a clear and accessible manner

All information that you provide to Insurers must be clear and unambiguous. The new laws in the Act prevent policyholders suppressing key facts that could influence an insurer's decision, for example, by burying it amongst an abundance of irrelevant information.

What happens if the risk is not fairly presented?

An important part of the Act is the implementation of an entirely new system of remedies that are proportionate to the extent by which the aforementioned duties are breached. If there has been a deliberately unfair presentation of the risk, Insurers will now be allowed to void the policy and retain all premiums, treating the policy as if it had never existed. Policyholders may also have to return any claim payments that have already been made. If the risk was unfairly presented but it was not deliberate or reckless, Insurers can still void the policy if they can demonstrate that it would not have been provided had the risk been presented fairly. The Insurer may have to repay the policy premium, but insured parties may have to repay or forgo claims.

On the other hand, if the Insurer is able to demonstrate that they would have provided the policy on different terms, they can treat the policy as though it had been provided on those terms. This could result in additional exclusions or added excess. Alternatively, if the Insurer would have provided the policy, but charged an increased premium for it, any payouts made would reduce proportionately to the difference between the premium paid and the premium that would have been paid, had the risk been presented fairly.

The new Act also sets out changes to what happens following a fraudulent claim. Previously, all cover under the policy was cancelled and insurers could keep the premium. The new laws state that Insurers will only be able to terminate the policy from the date upon which the fraud was committed - all claims relating to incidents before the fraudulent act must still be covered.

What does this mean for you?

With a few exceptions, the Act favours Insurers. John Hurell, CEO of Airmic, the UK's risk management trade body speaks favourably of it, claiming that it will bring the industry "right up-to-date". In reality, the Act gives Insurers more opportunity to reduce or avoid payouts.

There are a number of ambiguities in the Act, which will be clarified and enforced with the resulting case law, but sensible advice is to double check your presentation of risks. If insurance proposal forms don't give you the opportunity to provide what you feel is relevant information, go out of your way to do so.

If your presentation of risk is fair and comprehensive however, good news: reduced claims and/or payouts should mean a leaner and more competitive insurance industry. This just might have a positive impact on premiums.