Legal perspective

The UK Insurance Act: Will it make insurance harder to place?

By Nigel Brook, partner at Clyde & Co

Some European risk managers are concerned that the UK’s Insurance Act, which came into force on 12 August 2016, might make it harder to place insurance in the London market.

As was the case before the Act, the insured’s primary duty when placing a risk is to provide the material information that it: (i) knows; or (ii) ought to know. Section 4 of the Act explains these concepts. The insured ‘knows’ what is actually known by its senior management and those placing the insurance. And the insured ‘ought’ to know what would reasonably have been revealed by a reasonable search of information available to it. The concept of the ‘reasonable search’ is as yet untested in the English courts.

Risk managers may ask themselves questions such as:

• Which job titles fall within the scope of “senior management” (defined as individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised)?
• How far down the chain must enquiries be made? In the context of group cover, risk managers may have only limited information to hand regarding individual companies’ risks. Working out the scope and nature of the enquiries to be made will therefore be important. What if an individual (for whatever reason) unreasonably withholds a material fact when responding to a request? Will the insured company still be deemed to have knowledge of that information?
• How can commercially sensitive information be protected?
• How can a potentially huge volume of information be corralled so that a presentation can be said to be “clear and accessible” (as required by Section 3 of the Act)?

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Some of these concerns present practical problems, which can be overcome. For example, a non-disclosure agreement can be concluded with underwriters. An open dialogue with underwriters can also flush out how an underwriter would like to see information presented and whether, for example, summaries might be acceptable.

However, other concerns are perhaps unfounded. It is true that insurers may push back on attempts to have them confirm that a reasonable search has been carried out (on the basis that they do not know what they do not know, so only the insured can really confirm whether the search has been reasonable in all the circumstances, given its knowledge of its own business). But it should be recognised, too, that the law has not changed to any marked degree in this context and therefore the insurers’ approach is unlikely to have changed much in practice either.

Prior to the Act, an insured was still deemed to know that which it ought to know in the ordinary course of business, and the knowledge of its directors would also be imputed to it. Risk managers and others arranging insurance would therefore have been expected to ask questions before putting together the placing information.

Accordingly, a failure to take reasonable care and carry out a reasonable search would most likely have exposed an insured to non-disclosure/misrepresentation arguments even before the Act came into force (although it is fair to note that it had been unclear whether the old test was a subjective, rather than objective, one).

The Act has certainly underlined the steps that insureds should take when placing insurance, and an increased dialogue between insureds, insurers and brokers may have served to highlight pre-existing shortcomings. But in such circumstances, problems would have arisen even in the absence of the Act.

It might be suggested that insurers should be pressed to accept a presentation based on only limited enquiries. While tempting, that course may only defer a problem, rather than solve it. If it later emerges that a reasonable search would have brought material information to light, then insurers who have been deprived of a remedy will probably be reluctant to renew.

In most cases, the better approach will be to make the appropriate enquires and document them.

It is also worth bearing in mind that much of the Act is helpful to insureds. In particular, it moderates the remedies available to insurers for breaches of the duty of fair presentation and, in some cases, for breaches of warranties or conditions precedent.

In many, if not most, cases the available remedy for an unfair presentation will be something less draconian than avoidance of the policy. In any event, there is anecdotal evidence that recent years have seen a large reduction in the number of challenges for non-disclosure and/or misrepresentation.

by Nigel Brook, partner at Clyde & Co

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