Kiran Soar and Franco D’Andrea of Ince & Co discuss the Insurance Act 2015 after it cleared its final legislative hurdles at the start of the month. How will it impact captive insurance companies and reinsurance arrangements?
The Insurance Act 2015 provides the most significant change to English insurance law for over 100 years.
Captives are often based in locations whose law is heavily influenced by English law, so the Act’s importance will extend well beyond the British Isles.
The Act makes important changes, particularly around the duty of good faith, what needs to be disclosed and whose knowledge is relevant.
Although in general terms, the Act makes insurance law more friendly for policyholders, the changes will be significant for captives, either relating to the policies a captive writes, its fronting arrangements, or reinsurance that it purchases.
The Act will necessitate captives looking closely again at their policy wordings, and making amendments in light of the new provisions.
Whose knowledge is it anyway?
Captives are in a unique position. Compared to a third party insurer, they often know a lot about their insured’s business, and can have access to risk information and knowledge that an external insurer would not have.
That can create ‘knowledge’ issues when it comes to claims – both claims coming in to the captive and (where the captive has reinsurance) outwards reinsurance claims.
For the purposes of a business, the insured’s knowledge covers what is known by its “senior management” or by those actually employed or retained by the insured that are “responsible for the insured’s insurance”.
The Act defines senior management as “those individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised”.
A risk manager must clearly fall within that definition, but the Act arguably provides scope to say that not all executives fall within that definition.
Where there is a dedicated risk manager, it may well be that any disclosure surrounding insurance risk falls to what the risk manager knows (subject to what we say below about the extent of any enquiries that must be made).
The classic situation is where there are executives who sit on both the boards of a captive and the insured, who know a lot about the insured’s commercial activities, but who do not play an active role in the insurance activities of the insured.
Arguably, under the existing law, their knowledge in their capacity as officer of the insured could be attributed to the captive.
Care still needs to be taken but the Act makes some welcome clarification that in such a case, where there is a dedicated risk manager and such director plays no part in the insurance arrangements of the insured, their knowledge may not be relevant for the purposes of disclosure.
Obligation to make enquiries?
The Act makes clear that the insured has a duty to make a “fair presentation” of the risk, as summarised in the table.
Of note is the obligation for risk managers and those involved in the insurance placement to make enquiries. The Act deems an insured to know what should reasonably have been revealed on conducting a reasonable search of the information that is available.
Where a captive purchases reinsurance, the question will always be asked as to whether information in the hands of the ‘insured’ is ‘available’ to the captive.
The Act does not expressly deal with this situation, but absent some contractual obligation on an insured to make all of its information known to the captive, we think the better view is that information known to the insured is not available to the captive.
Data, data, data!
In an increasingly digital age, the Act attempts to remedy the perceived issue of ‘data dumping’ by an insured.
This attempts to remedy a situation where an insured provides vast quantities of data to its insurer on the basis that what makes the insured’s presentation fair is ‘in that data somewhere’.
Captives should be aware that where they have been presented with large amounts of data from its insured that may make sense to those managing the captive, the captive’s reinsurer will not be in the same position.
This could mean the captive is now required to further sift and re-present the data that it had been presented with by its own insured.
Mind the Gap!
The mismatch in policy terms, through a programme of insurance and reinsurance is always kept under review.
As the law will change, and the new Act takes effect, it is vitally important for captives and their insureds to look again at mismatches in policy terms, particularly for fronted arrangements and reinsurance arrangements.
Two key areas are. (i) the changes to warranties and (ii) the ability of commercial parties to ‘contract out’ of the new law.
The changes to warranties may be more favourable to an insured, but in some situations, captives and reinsurers may prefer more stringent terms to ensure good risk management policies.
These will now need to be spelt out clearly. Also, whilst it is not anticipated that any commercial insurer/reinsurer will on a wholesale basis seek to contract out of the new law, it is anticipated that some insurers and reinsurers will be looking at the remedies for a breach of warranty carefully and may impose remedies that differ from the Act.
The Act provides welcome clarity to many areas of insurance law and seeks to provide a fairer balance between insurers and insureds.
Yet, as with anything new, it also creates a degree of uncertainty. It is fair to say that the main challenges for captives under the Act will be to review their wordings, update them in light of the new Act and ensure that their policies are all ‘back to back’ where appropriate.
There will inevitably be litigation in the coming years on what some of the new terms mean, but investing early in policy reviews will lessen the risk of dispute.
Summary of the Insurance Act 2015
Application and effect
- The Act received Royal Assent on 12 February 2015.
- It will become effective 18 months from that date, although some insurers are already acting on the basis that the new law is in force.
- The new law will apply to all non-consumer insurance including reinsurance.
Duty of disclosure
- The insured must make a “fair presentation” of the risk to insurers:
- the insured must disclose all material circumstances about the risk; or
- give the insurer sufficient information to put the insurer on notice that it needs to make further enquires; and
- the insured must disclose any information relating to particular concerns which led the insured to seek cover
Whose knowledge is relevant?
- An insured ought to know what should reasonably have been revealed on conducting a reasonable search of the information that is available to the insured.
- For the purposes of a business, the insured’s knowledge covers what is known by its “senior management” or by those actually employed or retained by the insured that are “responsible for the insured’s insurance” (such as a dedicated risk manager)
- The Act does not require an insured to present material information that the insurer knows, ought to know or is presumed to know.
If the duty of disclosure is breached?
- The single remedy of avoidance of the policy from inception for breach is abolished.
- Instead there will be a new system of graduated remedies based on what the insurer would have done had a fair presentation been made.
- “Basis of contract” clauses can no longer convert statements in the proposal form into warranties.
- A breach of warranty will no longer automatically discharge insurers from further liability under the contract.
- Instead, the contract will be ‘suspended’ until the breach of warranty is remedied; insurers will not be liable in respect of losses occurring or attributable to something happening during the period of breach.
- Where a loss occurs when an insured is not in compliance with a term which ‘tends to reduce the risk’ of loss, the insurer will not be able to rely on that non-compliance to exclude, limit or discharge its liability if the insured can show that its non-compliance did not increase the risk of the loss which in fact occurred in the circumstances in which it did occur.
Parties can contract out of the Act but only where transparency requirements in the Act have been met.