‘Fair presentation of risk’ and the Insurance Act 2015
What does it mean for the construction industry?
The Insurance Act 2015, which does not come into force until August 2016, changes the way in which insurance is conducted. The delay in commencement of the Act is intended, at least in part, to give insurers time to change their policy wording and procedures. It is likely that some of the new policy wordings and procedures will give rise to disputes and in the context of construction insurance in particular, there are likely to be issues relating to the concept of fair presentation of risk that is introduced by the Act.
The Act makes three important changes to the law regarding the insured’s pre-contractual duty to the insurer, which will apply to construction insurance contracts. The nature of the existing duty, which is described in the Act as the ‘Duty of Fair Presentation’ has changed. The Act also changes the existing law concerning the knowledge of the insured and the insurer for the purposes of the duty of fair presentation. The existing remedy of avoidance for breach of the duty of utmost good faith is removed, and new remedies for breach of the duty of fair representation are created which will depend upon the nature of the breach (i.e. whether it is deliberate or reckless) and, consistent with the current position, how the insurer would have responded if a fair presentation of the risk had been made.
This article focuses on what constitutes fair presentation of risk under the Act and how construction companies and their insurers in particular may be affected by it. It is assumed that the insured is likely to be a design and build engineering company (the company), who will typically undertake a number of high value projects each year, some of which will be offshore and the company is also likely to have a number of subsidiaries who wish to share the benefit of annual group insurance.
Under the existing law the company owes a pre-contractual duty of utmost good faith not to make misrepresentations and to disclose all relevant facts to the insurer. The new duty preserves these duties, though their character and content changes. Thus, under the Act a relevant representation of fact made by the company must be ‘substantially correct’ and representations of expectation or belief must be made in good faith. The test for what amounts to a relevant non-disclosure under the Act is said to be anything which “would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms”, this is the same as the existing Pan Atlantic v Pine Top test.
The Act provides examples of matters which may be considered to be relevant, which includes special or unusual facts relating to the risk, particular concerns which led the company to seek insurance and the catch-all category of “anything which those concerned with the class of insurance and field of activity would generally understand” to be material. The latter category encourages agreement of protocols for specific classes of business, and which list those matters which the company would have to disclose in a presentation. This category has the potential to be problematic, as the nature of large construction companies and their international reach make it difficult for effective protocols to be agreed and if they are agreed the result may be inclusion of a wide range of information which must be disclosed, not all of which will always be relevant. For example, a Construction All Risks protocol could, in addition to disclosure of previous claims, require disclosure of all large construction contracts worked upon in the last 5 years, including those undertaken by subsidiaries, the level of fees paid to sub-contractors and sub-consultants and any contractual limitations of liability agreed with the designers. This type of information assists an insurer to assess the good standing of subcontractors, the likelihood of claims and the potential for subrogated recovery and it would be relevant to setting the premium and more generally for the assessment of risk.
The Act provides that the company may satisfy its duty of disclosure in two ways. First, the duty of disclosure is satisfied by disclosing all relevant circumstances which it knows or ought to know. This is the same as the existing law, with the exception of the meaning of what the insured ‘ought to know’. There are other changes to the duty including a requirement for the disclosure to be reasonably clear and accessible and the introduction of the principle of a ‘reasonable search’ for relevant information, which defines what the company ‘ought to know’ for the purposes of the duty.
If the company fails to satisfy the first part of the test, the Act introduces an additional second part to the test which will be satisfied if the company gives the insurer “sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances.” This means that the company may satisfy the duty if it provides sufficient information to put a reasonable insurer on notice that it needs to ask further questions. The company must make its disclosure in a manner which would be reasonably clear and accessible to a reasonable insurer if adequate information is to be provided to satisfy the second part of the test. It is also important to emphasise that insurance contracts will still be based on utmost good faith, even though there will be no remedy for breach of that duty.
At present the position is that if the company puts an insurer on notice that it needs to ask further questions, and the insurer does not do so, the company may have a defence of waiver, for example see Synergy Health v CGU Insurance. Under the Act, however, putting the insurer on enquiry is not merely a defence but will discharge the company’s duty. Nevertheless, the company will still not be permitted to use the second part of the test to deliberately hide facts by using obscure or misleading statements in its presentation (Derry v Peek and the tort of deceit). Furthermore, it has been suggested that if the company deliberately holds back from disclosing information which it knows to be relevant, this will amount to a deliberate breach of the duty of fair presentation, even if the company may have provided the insurer with sufficient information to satisfy the second part of the test. This is because the company will have deliberately withheld information known to be relevant, which is inconsistent with a contract based on utmost good faith.
The second change to the existing law introduced by the Act is that the company must give disclosure “in a manner which would be reasonably clear and accessible to a prudent insurer”. This requirement is independent of the company’s obligation to disclose what it knows or ought to know. Breach of the requirement to give reasonably clear and accessible disclosure may give rise to a separate cause of action, for example where access to relevant information is provided in a large or incoherent presentation. The change is intended to deter the practice of what is sometimes described as data-dumping, where large quantities of poorly organised information are provided to the insurer in a misguided attempt to protect the company’s position. This requirement may place a significant new procedural burden on the company who will have to collate relevant information, especially if the company is involved in a substantial volume of low value contracts, or where a subsidiary is purchased which has a substantial number of ongoing projects or simply where there are a number of subsidiaries each having the benefit of the same annual cover. In this situation it is possible that insurers may agree policy wording regarding the scope of the fair presentation of risk required or may ask the company to re-present information in a more comprehensible form.
The company will be taken to know that which is actually known to individuals who are part of the senior management, and that which is actually known to individuals who are responsible for its insurance (e.g. the company’s insurance manager). Whilst the Act reflects the existing position, the principle of ‘senior management’ may be considered by the courts to be narrower than that of the existing law based on the directing mind and will of the company.
Potentially the most significant change introduced by the Act is the change to the concept of what the company ought to know. The present position is that constructive knowledge is limited to that which the company ought to know in the ordinary course of business. Under the Act for the purposes of disclosure, the company “ought to know what should reasonably have been revealed by a reasonable search of information available to the insured”, including information which is “held within the insured’s organisation or by any other person (such as the insured’s agent or a person for whom cover is provided by the contract of insurance).” The information can be revealed by making enquiries or by any other means. It is likely this will increase the company’s burden of disclosure. For example it may require information held by a professional, such as an architect, who is not an employee or agent of the company because the information which is subject to the reasonable search may be ‘held’ by ‘any other person’. Under the present law the courts can take into consideration the characteristics of the company when establishing what it ought to know ‘in the ordinary course of business’. Thus, if the management of the business of the company is ineffective, it may not be taken to have constructive knowledge of information which because of its inefficiency it overlooked, see in particular Australia & New Zealand Bank Limited v Colonial & Eagle. Under the Act the ‘reasonable search’ appears to be purely objective in the sense that it is based upon what ‘should’ have been revealed by a reasonable search.
The company is not obliged to disclose matters which the insurer knows, ought to know, or is presumed to know. There are three types of knowledge, actual, constructive and presumed. The legal position of actual knowledge has not changed. With respect to constructive knowledge, the insurer ‘ought to know’ relevant facts if an employee or agent of the insurer, such as a surveyor undertaking due diligence, knows it and ought reasonably to have provided it to the underwriter or if the information is held by the insurer, and is available to the underwriter. Where an insurer has insured the company over many years its claims history is likely to be treated as being information which is ‘readily available’. However, in the unlikely event that the claims history is not available to the underwriter, because, for example, it is stored in a separate location to which the underwriter has no access, it will not be readily available. It is important to note that the information must be ‘held by’ the insurer. The Act uses these words in order to limit the information which comes within the provision, so, for example, information on the internet will not qualify, as it is not ‘held by’ the insurer.
The insurer is presumed to know things which are common knowledge. It is also presumed to know the “things which an insurer offering insurance of the class in question to insureds in the field of activity in question would reasonably be expected to know in the ordinary course of business.” However this do not alter the present position in law.
By the time the Act comes into force many large construction and engineering companies will have introduced their own protocols to ensure that their presentations for insurance are a fair reflection of the risk. This is likely to include the introduction of standard form presentations and internal procedures for collating relevant information. Nevertheless, in the years after the Act comes into force there are likely to be disputes. When the courts have provided guidance and the construction industry has become familiar with the Act the number of disputes which will be decided in court is likely to reduce.
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