As reported in our earlier alert the new Insurance Act (which will govern insurance policies placed, amended or renewed from 12 August 2016) is designed to provide a more up to date framework for commercial insurance in England and Wales and will replace certain provisions of the Marine Insurance Act 1906, which has been applied to commercial policies in a marine and non-marine context.

The Act aims to address the perceived imbalance under English law in favour of insurers, but it is important that policyholders fully understand its implications, not least because there are certain changes which impose additional obligations on insureds in terms of pre-contract disclosure.

There are a number of steps policyholders ought to be considering in advance of the changes coming into effect to ensure compliance with the new duty of fair presentation which replaces (but in certain respects is more onerous than) the existing duty of disclosure. A pro-active approach is needed for insureds to avoid falling foul of the new requirements.

The Duty of Fair Presentation
Under the new regime, a fair presentation of the risk is one which requires the insured to:

• Disclose, without misrepresentation, every material circumstance which the insured knows or ought to know; or
• Failing that, give sufficient information to put a prudent insurer on notice to make further enquiries; and
• In either of the above cases, present the information in a manner which would be reasonably clear and accessible to a prudent insurer.

This latter requirement imposes an additional obligation on insureds which is aimed primarily at preventing “data dumping” whereby insureds provide excessive amounts of information to insurers in the hope of avoiding any non-disclosure arguments. Insureds will now need to take positive steps to structure and present their disclosures in a clear and accessible manner. Even if the correct information is provided, an insured who provides excessive amounts of data or presents information in an unclear or cryptic manner could find themselves in breach of its duty to provide a fair presentation of the risk.

The Act specifies that a circumstance is material for disclosure purposes if it “would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms”. This mirrors the existing law but the Act does provide some specific examples of things which may be regarded as material, namely special or unusual facts relating to the risk; any particular concerns which led the insured to seek insurer cover for the risk; and “anything which those concerned with the class of insurance and field of activity in question would generally understand as being something that should be dealt with in a fair presentation of risks of the type in question”. This potentially very broad category is designed to encourage insurers to produce protocols for particular classes of insurance which identify those matters which should be disclosed as a matter of common practice. It is recommended that going forward, insureds make enquiries (usually through their broker) as to whether relevant insurers have particular disclosure protocols.

Steps to Ensure Compliance
There are a number of key components built into the duty of fair presentation which insureds must comply with:

Circumstances known to the insured
In the case of corporate insureds, this includes information known to senior management which is described by the Act as “those individuals who play a significant role in the making of decisions about how the insured’s activities are to be managed and organised”. In the case of large corporations, this could potentially include a large number of individuals in a number of different countries.

Corporate insureds are required to disclose information known to those individuals who participate “in the process of procuring the insured’s insurance, whether the individual does so as the insured’s employee or agent, as an employee of the insured’s agent or in any other capacity”. The number of employees involved in procuring the insurance is likely to vary depending on the size of the organisation. Even if the company has a dedicated insurance or risk manager, there may be additional employees involved in collecting relevant data and in liaising with the brokers. As for agents, this will include any broker or other agent responsible for arranging the insurance, including individuals at the broker involved with placing different product lines and those involved in claims handling.

Companies should therefore take steps to:

• Identify the individuals and positions which make up senior management which will most likely include members of the Board of Directors and others on senior management committees.
• Seek to agree with their brokers and insurers a narrower list of positions which fall within senior management, with a view to avoiding potential disputes over whose knowledge is relevant for disclosure purposes.
• Identify relevant positions and individuals both within the organisation and that of any agents/brokers and seek to agree with the broker and insurer a specific list of individuals who are “responsible for the insured’s insurance”, so as to restrict those with actual knowledge that must be disclosed.

Circumstances which ought to be known
The Act refers to this as information which “should reasonably be revealed by a reasonable search of information available to the insured”. This could potentially include not only information held within the organisation but by persons covered by the insurance (including insureds who are not part of the organisation e.g. former employees/directors, tenants or subcontractors) and by brokers or agents involved in procuring the insurance (but not necessarily limited to those involved in placing the insurance). The requirement to undertake a “reasonable search” involves what could potentially be an onerous obligation on insureds, given that what is reasonable in this context is very much open to interpretation.

Organisations should therefore:

• Engage with their brokers and insurers to agree what constitutes a “reasonable search” and what steps need to be taken in their particular circumstances.
• Ensure that steps are taken to complete the search and that the process is properly documented to provide a suitable audit trail.
• Agree a process with their brokers in terms of how material information relevant to their organisation is collated and disclosed.

Disclosure in a Manner Which Would Be Reasonably Clear and Accessible to a Prudent Insurer
This imposes additional obligations on insureds to present information in an ordered and user friendly manner.

Insureds should consider:

• How this requirement impacts their existing data collection processes, and systems for collecting and disclosing material information.
• What changes may be required to ensure disclosure is made in a clear and accessible manner taking account of the volume of information and the need to properly record what information is being provided e.g. the use of indexing, signposting and sub-sections.
• Seeking guidance from insurers as to what information they are particularly concerned about and whether that needs to be highlighted in a particular manner.

Matters Which Need Not Be Disclosed
The Act specifies certain matters which the insured is not required to disclose to the insurer in the absence of enquiry, namely circumstances which diminish the risk or which the insurer knows, ought to know or is presumed to know. Similarly, there is no need to disclose matters in respect of which the insurer has waived any disclosure requirement.

The Act specifies what constitutes insurer knowledge for this purpose. This includes:

• Matters of common knowledge.
• Matters which an insurer underwriting the risk in question would be presumed to know.
• Information which is known to the insurer and readily available to the individual underwriting the risk.
• Information which is known to an employee or agent of the insurer who ought reasonably to have passed such information on to the individual underwriter.

In practice, insureds should not rely on this to limit their disclosure unless they have sought specific confirmation from insurers as to information they already hold about the business (e.g. from previous renewals or in the claims context) and which does not therefore require specific disclosure. Even if an insurer is underwriting more than one class of risk, it would be unwise to assume that relevant information is being shared between individual underwriters. Full disclosure should be given to each underwriter unless the insurer specifically confirms that information is being shared. Similarly, when changing insurers, insureds should discuss with their brokers what information provided at previous renewals (e.g. in relation to past claims, risk assessments, surveys, valuations etc.) will be passed on.

Potential Consequences of Breach of Duty
Under the existing law, the only remedy available to insurers for breach of the duty of material disclosure was the avoidance of the policy from the date of inception. This draconian remedy has been the subject of much criticism, particularly in circumstances where the non-disclosure was unintentional.

The Act introduces a series of “proportionate remedies” whereby, if the breach is not considered deliberate or reckless, the insurer can:

• Avoid the policy and return the premium, where the insurer can prove that it would not have entered into the contract;
• Treat the policy as if it included different terms, where the insurer can prove that it would have entered into the contract, but on different terms; and/or
• Reduce proportionately the amount payable in respect of any claims, where the insurer can prove that it would have entered into the contract but at a higher premium.

As with certain other provisions, it is open to parties to contract out of the provisions of the Act relating to the duty of fair presentation and proportionate remedies, although any provision which puts the insured in a worse position than under the Act must be brought to the insured’s attention before the contract is entered into.

Policyholders may want to consider whether the provisions in their existing policies e.g. innocent non-disclosure clauses might actually be more favourable than the provisions of the Act. Alternatively, if the Act is to apply, policyholders should consider whether to negotiate with insurers in relation to the proportionate remedies, particularly the remedy providing for the proportionate reduction in claims.