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Law Commission Reforms

Architects professional insurance, PI cover

“Insurance underpins a healthy and prosperous society. It enables businesses and individuals to protect themselves against risk. However insurance contract law is out of date and no longer reflects the realities of today’s commercial practices.

The provisions of the Insurance Act 2015 will modernise the law, balance more fairly the interests of insurers and buyers and provide a framework for an effective, competitive and trusted business insurance Market”, Stephen Lewis, Law Commissioner.

WHY ?

The UK’s Commercial insurance contracts are based on an Act that came into effect more than 100 years ago.

The Marine Insurance Act 1906 imposed a duty to disclose every material circumstance which would influence a ‘prudent underwriter’, potentially giving insurers the opportunity to decline claims where there may be no related material impact, for example intruder alarm failings on a flood claim (although this is rarely used in today’s market it does bring uncertainty to the contract).

So much has changed during that time and the need to modernise rules governing insurance contracts between businesses and insurers is essential.

WHAT CHANGES ARE BEING IMPLEMENTED .

Change 1. Non Deliberate or Non-Reckless Non-Disclosure/Misrepresentation

There remains a responsibility for presentation of the risk by the customer and this is explained further in the Act.

  • If the insurer would have charged a higher premium had they known about the circumstances of the misrepresentation then market practice will be that the insurer will look to charge the insured the additional premium when the non- disclosure or misrepresentation becomes know to them.
  • Where the insurer would not have written the risk then they can treat the insurance as if coverage was never attached but must return the premium.
  • If the insurer would have imposed terms, they can treat the insurance as if it had been entered into on those different terms ( from the date of the breach).

Change 2. Deliberate or Reckless Non Disclosure/Misrepresentation – Fraud

Where non-disclosure or misrepresentation is deliberate or reckless, the insurer has the right to avoid the policy and also to retain the premium.

Change 3. Warranties

The insurers will aim to remove warranties from their policies and replace with conditions precedent to liability and conditions.

Whilst insurance companies envisage most policies will be “Warranty Free”, they may apply by exception. In these instances they would explain the rationale to the broker or customer. Where warranties are used and are not complied with by the insured, it will only suspend cover and not terminate the policy in accordance with the Insurance Act.

Change 4. Basis Clause

This will be removed from the wordings as such clauses are being abolished

In practice this means :
• The insurer will treat the basis of contract clause as having no effect in all documentation.
• The insurer will not void the policy or refuse indemnity where the breach of specific risk condition is not related to the risk of loss.

WHAT DOES THIS MEAN FOR CUSTOMERS
Confidence in the insurers ‘Fair’ settlement of claims and certainty that the policy will perform as expected. Benefit of the insurers insight and ‘good customer outcomes’ approach.

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