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Taking cover

Written by David Adams
September 2016

On August 12th 2016 the Insurance Act 2015 came into effect: a major piece of legislation affecting all non-consumer insurance contracts. Previously, insurance law was based largely on the 1906 Marine Insurance Act, which gave insurers a lot of leeway to refuse claims. The primary purpose of the new Act is to create a fairer balance between insurers and non-consumer policyholders, through imposing new obligations on both parties.

The Act introduces a ‘duty of fair presentation’ of risks for policyholders. They must disclose every relevant material circumstance of which they have knowledge, or ought to have knowledge, in a manner “which would be reasonably clear and accessible to a prudent underwriter” – that is, not hidden in a mass of irrelevant information. All of the information provided to the insurer before the point at which a contract is entered into is seen as part of this presentation. There is an assumption that the information will be provided by senior managers, who may need to consult colleagues in order to disclose all the relevant information.

“[The Act] recognises that the financial director or whoever purchases the policy will not have all the answers and expects them to consult with those that do before sending information to the insurer,” says David Britton, niche director, charity, at Ecclesiastical Insurance. “For example they might need to consult their IT manager about the purchase of cyber insurance, or their fundraising manager about events they may be running.”

Refusing claims

The Act also introduces ‘proportionate remedies’, to be used if the duty of fair presentation has been breached, making it harder for insurers to void contracts and refuse claims on unreasonable grounds.

Insurers can still void a contract, refuse claims and refuse to return a premium, but only if a breach can be shown to have been deliberate or reckless. In cases where the breach is deemed to be the result of an innocent mistake, the following proportionate remedies are now available.

First, if the insurer can say it would not have entered into the contract if it had known all the facts, it can void the contract but must return the premium.

Second, if the insurer would have entered into the contract, but only under different terms, the contract can be treated as if those terms had been applied, even if the policyholder would not have bought the policy under those terms.

And finally, if an insurer would have entered into the contract but only after charging a higher premium, it can reduce proportionately the amount paid to settle a claim.

The Act also stipulates that any fraud means the policyholder forfeits the entire claim, but that this would not apply to all policyholders of a group insurance policy if one policyholder commits fraud.

Warranties

The new legislation also introduces changes in relation to warranties – conditions for cover – applied within policies. Under the previous law, a breach of a warranty meant the insurer would be freed from liability for a claim, even if the breach was unrelated to the type of loss suffered by the policyholder. Under the new Act, in the event of a warranty breach cover is suspended only up to the point at which the breach is remedied by the policyholder.

“Prior to the [2015] Act insurers may have added warranties to a policy to require that a customer must do or must not do a certain thing,” says Britton. “For example, if you had a warranty applying in relation to removal of waste from a building at regular intervals, non-compliance could have affected any claim, whether the breach is relevant or not.

“These conditions are now being replaced with conditions precedent. While charities need to ensure that any such conditions on their policies are complied with, the insurer can only apply them if the breach of the condition is relevant to the loss. For example, if the policy specifies that sprinklers must be installed and operational and the charity fails to do this, it may affect any claim for fire. However, lack of sprinklers could not be used to invalidate a claim for theft or flood.”

Insurers are also now no longer allowed to use ‘basis of contract’ clauses, as these were regarded as turning information provided by policyholders into warranties.

“The Act has been brought in to make policy wordings fairer and clearer – not to catch customers out,” insists Britton. “It is designed to help customers understand the information they need to provide when purchasing insurance. An insurer should be asking more specific questions to ensure that the correct information is presented by the insured.”

Insurers specialising in providing cover to charities and voluntary organisations argue this is why sector-specific knowledge is crucial. “Charities are incredibly diverse,” says Mark Ingram, director and not for profit/social enterprise general insurance and risk management specialist at CaSE Insurance. “It’s about understanding that risk.”

Britton agrees. “Charities are complex and varied organisations and some general insurers may have been treating them like small businesses and applying a standard policy and conditions,” he suggests. “Specialist insurers have deep knowledge and experience of the risks associated with insuring charities. Some providers may decide that they don’t have enough knowledge about the sector to ask the right questions and may adjust their risk appetite to reflect this.”

Implementation

Amy Brettell, head of the charity segment at Zurich Insurance, says Zurich is fully committed to all the reforms outlined in the Act, but will apply an ‘additional premium’ approach in cases where an unintentional breach of fair presentation reveals facts that would have meant a higher premium if known.

Under the Act, the insurer has the right to reduce proportionately the amount to be paid on any claim against the premium that would have been charged. “Zurich has opted out of this right and is taking a different approach which we believe will be a real benefit to all our customers including charitable bodies,” says Brettell. “We have instead decided to charge the additional premium that we would have charged if we had known the relevant material facts and to pay any claims in full. This should give our charity customers real confidence that claims will be paid in full.

“Zurich recognises that for many voluntary sector organisations, the individual responsible for arranging insurance may do this as an adjunct to their day job ... [and that] charities can be disparate entities. These factors can make collating information challenging.”

Cost

Ingram does not expect the Act to have any direct impact on the cost of insurance for organisations in this sector, or in the level of cover available. However, he continues, it is impossible to be sure of the effects of new legislation until it has been tested in court.

Britton thinks prices could be affected once the Act begins to impact settlement of claims, but that this “is likely to be as a result of insurers having a more detailed understanding of the risks associated with insuring charities. If you are dealing with a specialist insurer, they will already be pricing based on their knowledge and experience of the sector.”

Whatever happens, says Brettell, the sector will continue to be served by a competitive insurance market. “The key aspect to remember is to be as transparent as possible when arranging insurances,” she says.

So although the new legislation will help, there is still plenty that charities and voluntary organisations can do to ensure that the right insurance cover protects the organisation properly. Find the right insurer, find out the facts, get the right cover in place and don’t try to hide anything that could invalidate or reduce the value of a claim. And – even if the insurer is as reputable as they come – always read the small print.

David Adams is a freelance journalist



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