The Insurance Act: Considerations for Non Profit Groups
What is the Insurance Act?
Insurance law is ancient, rooted in our marine roots of many centuries ago. However, since 1906, one of the most fundamentally important pieces of insurance legislation has been the Marine Insurance Act 1906.
The Insurance Act is the latest modernising piece of legislation designed to reform how insurance contracts are governed. There are some fundamental changes to principles that have underpinned insurance and some of these might have an impact upon your third sector organisation. They will also change how Ladbrook act as a conduit between our charity clients and insurers.
While officially titled The Insurance Act 2015 (link to the full wording), it is a slightly misleading title as while it achieved Royal Ascent in 2015, it comes into force in August 2016. The law is also principles based, this is because it impacts all organisations, from small community groups to large charitable concerns.
What does the Act do? Disclosure
There are several areas that are effected by the act but some of the headlines involve disclosure. One of the key objectives in the legislation is to address any unfairness in this area.
In legislation dating back to the eighteenth century, judgement was made that if an insured (whether fraudulent or not) had concealed the facts of a risk, then insurers had insured a different risk than that which they thought, the ruling was that the insurer may indeed void such a policy. This was cemented into place in 1906 as part of the Insurance Act released that year.
However, it has at times been found to be a controversial and possibly unfair state of affairs. It enables insurers to make policies void that they might have otherwise accepted, simply because some elements of the risk was presented incorrectly by the insured. It was possible therefore for an unscrupulous insurer to refuse to pay for a property theft following a break in, if the charity had incorrectly stated the nature of the roof construction of the property. Even if the disclosure was not necessarily relevant and not even fraudulent, it opened the door for policies to be made void.
When the Act comes into force, this situation is changed. Charities will still be obligated to disclose any facts that the charity knows (or ought to know) would influence their insurance. However, this obligation is now found to be met if the charity has provided information which reasonably should have prompted the insurer to ask more follow-up questions.
It is expected that a charity would make reasonable steps to consider and search for such information too. We will be speaking to our third sector clients about this obligation. Essentially it means that consideration to presenting information must be made by senior managers in a charity (i.e. not just delegated to a member of the finance team), people in the charity personally insured and, what is more, the presentation of information must be made with a degree of clarity. It is not acceptable to supply huge amounts of information to insurers, with the critical information buried deeply within.
What happens if a charity has mis-represented a risk?
As highlighted above, the current state of affairs means that an insurer may void a policy in the event of a misrepresentation of risk. This option is currently available to insurers for non-disclosure of facts too. Put simply, an insurer can act as if no cover has ever been agreed if some facts were presented incorrectly or if some facts were not presented at all.
This is set to change too. If such a misrepresentation or omission is made and is deemed to be reckless or fraudulent, then an insurer retains the right to act as though the policy never existed. This means that they can still, in those circumstances, refuse to pay a claim and they can also now retain all of the premium too.
However, if the breach was a little more innocent, then the outcome has to reflect that. The following chain broadly determines the outcome.
Step 1 – Was the error or omission reckless or done in bad faith?
Yes – Then the insurer can refuse the policy, keep all the premium and refuse a claim.
No – Move to step 2!
Step 2 – Would the insurer have declined the risk if they had known the mis-represented or omitted facts?
Yes – Then the insurer can still cancel the policy from its start date and it does not need to meet any claims but the insurer must return the premium to the charity
No – Then move to Step 3
Step 3 – Would the insurer have charged more or changed the terms (e.g. a higher excess) if they had known the facts?
Yes – The insurer is entitled to apply any terms that they would have made on the policy but they do need to meet the claim and the policy is not considered as invalid. If a higher premium charge would have been made then subsequent and proportionate reduction in the value of the claim settlement can be made.
It is worth remembering also the impacts of the Insurance Act 2015 on disclosure for charities. If the charity has given information that should have prompted the insurer to seek more detail, then they met their obligations anyway.
Other impacts of the Insurance Act on charities
A warranty is a contractual term in a policy that must be kept to at all times. For example, it might be a warranty that the alarm on a property has to be in operation when the property is not occupied. Historically, a breach of such a warranty has also allowed an insurer to walk away from any liability, even if the warranty itself is not at all connected to the loss.
That changes with The Insurance Act 2015. If a warranty is breached by a charity then the subsequent liability will not be discharged as previous, instead it will be suspended. If the client can resolved the breach, then cover is back in force. So for example, if the alarm breaks, then the insurer can suspend cover for theft (see relevance in the next paragraph!) but only until the charity has had a chance to fix the alarm.
Critically, the insurer will not be able to decline to continue cover if the charity can demonstrate that there is no connection between the warranty and a claim. It was a critical part of the review conducted by the Law Commission, that insurers should not be entitled to avoid a claim where the insured’s breach did not relate to the loss. So if the alarm was not operational but the claim relates to a volunteer tripping over in the charity office, an insurer can no longer decline cover.
What do Charities need to do?
This legislative change happens on the 12th August 2016. It will then relate to all insurance transactions, including mid-term policy adjustments.
The biggest consideration in our view for charities is understanding what taking ‘reasonable steps’ means in relation to the disclosure of your insurance risk. A charity needs to think about who in the organisation holds that important information (management, trustees, even perhaps volunteers). This is the most important thing a charity can do in light of the new legislation.
However, the act, in our view, makes handling the consequences of breaches and commissions, fairer for third sector organisations.
We have created a useful guide to the Insurance Act which you can download here.