At RebuildCostASSESSMENT.com we’ve had quite a few conversations with brokers and underwriters in recent months about underinsurance and the Insurance Act (2015).
Since the Act came into force in August 2016 we’ve been wondering what difference the legislation might make in cases of underinsurance. Some people we’ve talked to think the Act won’t make much difference at all. Others see it as being far more significant.
So who is right and who is wrong?
Well when it comes to legal stuff, we always think it makes sense to talk to legal experts. So we turned to some very clever lawyers at Herbert Smith Freehills LLP in London and asked them what they thought…
Now the first thing they told us is that under the new Act, the insured must make a "fair presentation of the risk" to the insurer. Previously the duty related to “disclosure and representations” and many key aspects of this have in fact been retained.
However, the big change is that whereas previously the insurer's only remedy for breach of the duty of disclosure was avoidance of the policy, the new Act now provides for a range of “proportionate remedies” if the insured breaches the duty of fair presentation. If the breach is “deliberate or reckless” avoidance will still be available and the insurer can keep the premium. For all other breaches, the onus is now on the insurer to show what it would have done had it received a fair presentation of the risk.
So here are those “proportionate remedies” under the new Act:
The insurer will still be entitled to avoid the policy (but must return the premium) if it can show that it would not have entered into the contract;
If the insurer shows that it would have entered into the contract, but on different terms, then it may treat the policy as having included those terms from the outset; and
If the insurer would have entered into the contract but only at a higher premium, the insurer may reduce the amount to be paid on the claim proportionately. Thus, if it would have charged double the premium, it is only liable to pay 50% of the amount of the claim.
Now that’s quite a few more options and in the legal world this actually opens up an even wider range of possibilities to insurers in cases of underinsurance than you may perhaps expect.