RSA commercial product director, underwriting and pricing, Colin Bradbury, talks about the Insurance Act 2015 and its duty of ‘fair representation’.
The Insurance Act (2015) will be upon us next year and the industry has already started working towards implementation. While the act doesn’t apply until 12 August 2016, one of its key provisions, the duty of “fair presentation”, will need to be in place much sooner as many clients and brokers start to prepare their August risk presentations in early 2016.
So what is fair presentation?
The duty of fair presentation replaces the duty of disclosure under the Marine Insurance Act 1906. Under the old law, the insured – being the individual or organisation taking out insurance – had to disclose all “material facts” about their business. A “material fact” was one that would influence a prudent insurer in their decision to accept the risk and/or at what terms and price. It was left to the insured to determine which facts about their business were relevant to insurers. Any failure in disclosure allowed the insurer to void the contract – in essence treating it as though it had never existed. Not surprisingly, such an extreme consequence created a difficult position for both insurer and customer.
Under the Insurance Act, the insured must disclose all material facts known to their senior management, as well as those responsible for arranging the insurance. This includes the insured’s own employees as well any broker or agent working on their behalf. In addition, those responsible for arranging the insurance must make a “reasonable search” of the information available to them. Though this may appear an onerous duty, in reality this limits the extent of the insured’s “knowledge” and establishes the principle that if an insured has taken reasonable steps to find and present the relevant information to insurers, then they have discharged their duty. It will be good practice to keep an audit trail of the process for future reference, particularly on larger risks where scope and scale of searches may be greater.
Insurers, too, will need to aid customers in making a fair presentation. Underwriting questions must be targeted effectively and insurers must be clear about any assumptions made about the risk. If enough information is given to alert a “prudent insurer” that more data is needed, the insurer will be deemed to have waived its rights and accepted the risk if it does not ask for this.
The new rules on fair presentation create a balanced framework in which insurers, brokers and customers can have an open dialogue about the risk, enabling insurers to deliver products and services which work for customers. The act is intended to move the market to a more up-to-date commercial position. If all parties work together we can achieve the fairer, more balanced landscape the law-makers intended.