The Insurance Act 2015 – No ask no tell?

August is typically a quiet month, newspapers enter “silly season”, schools empty for holidays and most of us leave the office for a much needed break. Not much happens, and we are supposed to return in September refreshed without much having changed in our absence. Not this year. On 12 August, the Insurance Act 2015 came into force, sweeping aside more than 100 years of legislation - the wonderfully named Marine Insurance Act 1906.

So what actually changed whilst our collective backs were turned and we were all on leave? Much has been made of the end of “utmost good faith”. It is important to be clear, the new Act does not mean parties can now act in “bad faith” to one another, but what they are required to disclose in the run up to taking out a new insurance policy has shifted.

Insurance contracts are unique in English law as the insured party is under an obligation to tell the insurer all that is material to the contract before the insurer gives his price and covers the risk. Contrast that to say, when selling a house not mentioning that the next door neighbour has a dog that barks throughout the night, every night. Telling the buyer would almost certainly cause a price reduction. English contract law allows for keeping one’s cards close to one’s chest in the commercial cut and thrust - a sort of “no ask no tell” policy.

Insurance contracts are unique in English law as the insured party is under an obligation to tell the insurer all that is material to the contract before the insurer gives his price and covers the risk

The law for insurance contracts follows a different set of rules and actually, the rules haven’t changed that much. Insureds will have to give either: every material detail it knows or ought to know; or give sufficient information to put a prudent insurer on notice that it needs to ask further questions to understand all of the material factors in relation to the policy. It is probably safe to say that the new Act has shifted the onus from a “complete disclosure” to a “virtually complete and in any event everything that is material disclosure”.

Nor has the insurer completely lost the ability to “avoid” the policy, for example, avoid having to honour the policy and pay out a claim. Under the new Act, if the insured recklessly or deliberately breaches its duty to make a fair representation then the insurer can still avoid the policy (and retain the premium paid). Plus, even if the breach was neither reckless nor deliberate, the insurer can still avoid the policy and pocket the premium if had it known the missing information it would not have offered to insure.

Something that is genuinely completely different under the Act is the insurer’s proportional remedy. Simply put, if the insured failed to disclose something material, the insurer can either include a new term that it would have included had it known the missing information; or it can charge a higher premium on the basis that the risk profile is greater. Interestingly, if it elects to charge a higher premium this will allow the insurer to proportionately reduce its pay out on a claim by the percentage of increase it would have made to the premium.

There has been something of a shift in the balancing of risk and remedies for the insurance industry. But how will this affect us in the construction world? Have we returned to our desks in September to a brave new world of insurance? Well, perhaps not. All construction professionals and companies working in the industry have to take out various insurance policies. Our duty to disclose information has probably not, on a practical level, altered that much - everything relevant will still need to be declared. It may mean that come renewal time (the Act will only apply to policies taken out or renewed on 12 August 2016) that brokers start asking different questions, but that largely remains to be seen.

We also don’t know how the courts interpret some of the new rules brought by the Act. Will we need numerous insurance experts to work out what a proportionate increase in premium may have been or whether a fact was “material”? Maybe, as with that other seismic shift in the landscape from earlier in the summer, the true effects of the Insurance Act 2015 are yet to reveal themselves, both to the construction industry and beyond.

Stephanie Canham is head of construction at law firm Trowers & Hamlins