It is now a little over four years since the Insurance Act 2015 (the Act) came into force. This substantial piece of legislation, which Mactavish actively supported by supplying detailed evidence, represented the most significant change to UK insurance law since 1906 and has caused a fundamental evolution in market practices. However, one aspect of the Act, the Duty of Disclosure, despite being of critical importance to every commercial policyholder in the country, has perhaps not been as well understood as it should be.
What did the Duty of Disclosure set out to achieve?
Prior to the Act, there were no clear standards for what a policyholder had to communicate to an insurer. Instead, there was an open-ended obligation to disclose anything that might be deemed ‘material’ to an underwriter – but no clear definition of what that might mean in practice. This made a great deal of sense when commercial insurance was still largely focused on shipping, where the variables are fewer and well understood by all parties.
The law had not kept pace with economic and social progress and in particular, the ever-growing complexity of insurable risks – a large Business Interruption or Cyber risk is fundamentally different to a Hull or Cargo peril, with many more ways of interpreting what is and is not ‘material’. Inevitably, this meant that almost any complex claim could be denied on the basis that the policyholder should have disclosed more. In turn, policyholders reacted by ‘data-dumping’ – transferring every partially relevant piece of data they could get their hands on to the underwriter so that ‘everything’ had been disclosed.
The Act set out to remedy this situation by stipulating the duties that a policyholder had to the insurer. Now the policyholder must make a “Fair Presentation” of the risk. Two crucial concepts came into play. Firstly, there is ‘company knowledge,’ this is what a leadership team knows about its company. Secondly, there is information that is not held by the leadership team, but could be found via a ‘reasonable search’. Information which does not fall into either of those categories does not have to be disclosed, and cannot be used by an insurer as an excuse to avoid paying a claim.
How have policyholders and insurers reacted?
Anecdotal and survey evidence suggests that the Act has had a positive impact on the general quality of company disclosure, with both brokers and underwriters agreeing that the submissions they see are generally ‘more professional’. There has also been a noticeable trend in litigation, with more negotiated settlements and fewer disclosure disagreements reaching the courts.
While the decline in litigation is certainly no bad thing, it does create something of a problem. The Act set out to define a set of principles, but expected the usual processes of Common Law to then go to work and, thereby, flesh out the detail. With so few cases reaching the courts, the Act has not been tested and developed – in other words, this regulatory evolution is unfinished.
The lack of high-profile cases may have also had another unintended consequence in that it may have led to lower levels of awareness of policyholders’ duties.
Are buyers putting themselves at risk?
Quite understandably, non-specialist buyers are unlikely to dedicate substantial amounts of time to changes in insurance law. Without sound advice from a well-informed broker they may not fully understand the way in which their duties have evolved, and may, therefore, fail to fulfil them. While that has not been a major problem over the last four years, it may well become one in the immediate future.
Since around 2002 the insurance market has been intensely competitive, with falling rates and plenty of appetite for writing risks. As of the end of last year prices started to rise and have now reached dizzying heights – not least as a result of the pandemic. This return of the ‘hard’ market is not just painful from a cost perspective, but will also lead to increasing claims disputes as insurers are less willing to pay out. Suddenly, this relatively untested area of the law may well become a battleground.
We also expect insurers to increase their demands for information at renewal. Some of this will stem from a generally more conservative approach to underwriting. Insurers will also be more choosy about the risks they accept and ask more questions where there is any doubt. That may also increase the scope for potential disputes as there is more information that could be queried and contested. More cautious underwriting is likely to increase the time needed to agree a new policy and late renewals could lead to a withdrawal of cover or harsher terms and pricing. What occurs in the hard market may have a lasting effect on future market practices and fundamentally change the way in which the market views the Duty of Disclosure and what constitutes a Fair Presentation.
What should policyholders do?
You should assume that the Duty of Disclosure will become a more common source of disputes in the months ahead, and that some of these disputes will reach the courts. While we cannot know what precedents will be set, we can say with some confidence that buyers who have simply persisted with ‘data-dumping’ or partial disclosure based on readily at hand information or who leave renewals to the last minute are putting themselves at unnecessary risk.
This is more of a challenge for smaller and less bureaucratic organisations. While a large corporation will be able to demonstrate a plethora of systems (and indeed, people) which can add weight to their claim to have carried out a ‘reasonable search’ for relevant information, less well-resourced firms may find it harder to evidence their working. Frustratingly, a smaller business is also more likely to be dependent on its insurance; meaning that a delayed or repudiated claim could have a real impact on its growth, or even its viability as a going concern.
If your business is relying on its insurance to not just pay out, but to pay out quickly then now really is the time to learn more about your obligations under the Insurance Act. Our own guide, produced in 2015 will make a great starting point, or you can always get in touch with a member of our team if you’d like to discuss the issues we raise here.
David Hertzell, Chairman – Dispute Resolution