In the 110 years since codification of Insurance Law, the volumes of data and information available to both insurer and insured and the complexity of commercial business has increased substantially.
A. Fair Presentation
The new Act adjusts the disclosure obligations by requiring the insured to make “a fair presentation of the risk” to the insurer including “disclosure of every material circumstance which the insured knows or ought to know or gives sufficient information to put a prudent insurer on notice that it needs to make further enquiries”.
Knowledge is by senior management and persons responsible for the insurance arrangements. It includes what ought to or should be known in the ordinary running of the business. It must be disclosed in a straight-forward and concise manner to minimise ambiguity and misunderstandings.
Under current law, in the event of material non-disclosure or misrepresentation, the insurer is allowed to void the policy and refuse to pay claims, even for the most trivial or accidental breach.
The new Act introduces the concept of “Proportionate Remedies”. The insurer would have to show that, but for a breach of fair presentation, it would:-
- Not have accepted the insurance at all; or
- Have done so on different terms
If the breach is deliberate or reckless, the insurer
- May avoid the contract of insurance, refuse to pay all claims; and
- Refuse to return any premium paid.
Where the qualifying breach has been neither deliberate nor reckless then the new proportionate remedies will be applied:-
- If the insurer would not have entered into the policy on any terms, the insurer may avoid the policy and refuse to pay all claims, but must return the premiums paid.
- If the insurer would have entered into the policy but on different terms, other than terms relating to the premium, the policy is to be treated as if it had been entered into on those different terms. For example, if the underwriter would have imposed a theft exclusion, had there been fair presentation, the claims would have to be dealt with under the policy, but subject to application of the theft exclusion. Therefore, if the claim submitted was for theft of equipment, for example, the insurer can reject it. It could not, however, seek to avoid the policy.
- If the insurer would have entered into the policy but would have charged a higher premium, the insurer is entitled to reduce, proportionately, the amount to be paid on a claim, eg if the premium would have doubled if fair presentation had taken place, then the amount of the claim payable is reduced by 50%.
“Basis of the Contract Clauses which seek to turn all insureds’ representations into warranties are banned. In the event of a breach, the insured’s liability is merely suspended. The insurer cannot rely on a breach of a warranty where that warranty relates to a risk that is irrelevant to the loss that actually occurred.
The main act provides that:
- Warranties should become ‘suspensive’ conditions, meaning that the insurer will not be liable for losses occurring while the insured is in breach of the warranty, but that its liability will be restored once the breach is remedied.
- A breach of warranty will be taken as remedied where the risk to which the warranty relates becomes essentially the same as that contemplated by the parties (an example would be an insured doing something later than required by a time limit in a warranty).
- Where a warranty relates to loss of a particular kind, location or time, the insurer cannot rely on breach by the insured to discharge its liability if the insured can show that its breach (of that warranty) could not have increased the risk of the loss that actually occurred.
- Basis of the contract’ clauses are prohibited; hence any warranty in the policy will have to be expressly agreed between the parties.
C. Fraudulent Claims
- Where an insured commits any fraud in relation to a claim the insurer will have no liability to pay that claim (a codification of the long-established legal principle that any fraud taints the entire claim).
- As a consequence, any payments already made in relation to the fraudulent claim are recoverable by the insurer.
- The insurer, on giving notice to the insured, may treat the contract as having been terminated with effect from the time of the fraudulent act.
- Upon termination, an insurer’s liability under the contract for claims occurring before the time of the fraudulent act is unaffected, but they may refuse any liability in respect of a claim that occurs after the time of the fraudulent act.
- Additionally, if the contract is terminated, premiums are non-refundable at the discretion of the insurer.