The biggest reform to insurance for more than a century comes into force in just 3 days but businesses are being warned to ensure that they do not fall foul of the changes.

The Insurance Act, which affects all new contracts from this Friday, 12th August onwards, introduces a more policyholder friendly regime. Billed as good news for business, the Act addresses the imbalance in rights and remedies, currently in favour of insurers, and provides enhanced protection for policyholders who all too often are tripped up by the onerous obligations presently found in commercial policies.

However, according to Garbhan Shanks, partner and Head of Insurance & Reinsurance at Michelmores, businesses must keep their eye on the ball if they are to benefit. Garbhan explains:

Fundamental change

Some businesses are sleepwalking into trouble.

“The Insurance Act fundamentally changes the way insurance is underwritten and corporate policyholders need to be fully aware of both its implications, and their duties, otherwise they run the risk of not having policies in place which will properly respond to protect their business and employees. 

Directors beware

“A fair criticism of many boards of directors is that they do not tend to engage much with the business’ insurance programs, unless and until of course something goes wrong and there is a problem with the insurance responding for the company, or indeed themselves.  Boards should be currently overseeing that the correct systems and controls are implemented internally so as to collate the necessary disclosure information for insurers.  If they do not, and a substantial loss occurs to the business where insurance cover is invalided or limited due to a failure to comply with the new regime, the spot light may turn on directors.

“Some businesses are still completely in the dark, whereas insurers are very well-prepared for the introduction of the Act. It is in their interests to have claims fail and businesses need to be careful not to trip themselves up by failing to comply with the new requirements.

Onerous obligations

“Under the Act, businesses will be subject to new more onerous disclosure obligations. They will have to make a ‘fair presentation of the risk’ to an insurer before entering into a policy which requires them to either disclose every material risk which they know or ought to know – this will now require businesses to undertake a ‘reasonable search’ for information both inside and potentially outside its organisation. Failure to do so could result in claims failing and significant financial risk. 

“The best thing is to open a dialogue and engage with insurers now to seek commitments from them as to what information and searches will be satisfactory from their perspective – that will hopefully bind them in to an agreed process and reduce the risk of any later arguments that the policyholder failed to give a ’fair presentation’.  

Subject to interpretation

It is recognised that the courts will have to provide clarification on some aspects of the Insurance Act, and no doubt input on what constitutes a ’reasonable search’.  It is critical that businesses have an audit trail of what steps they took to search for information.  Some insurers are keeping their powder dry by not indicating at this stage, despite requests, what they would consider to be a reasonable search.  That is certainly not in the spirit of the new regime.  If a policyholder proposes to their insurers what and where they intend to search for information as part of the disclosure process, and invites comments and confirmation, that would provide evidential protection in any subsequent dispute, even if the insurers failed to commit to a position.”

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