The Insurance Act 2015 comes into force today. The new Act represents the greatest change to insurance contract law in the UK in over 100 years. It has the potential to have a significant effect on construction firms' insurance policies.
On the one hand, construction firms should benefit as insurers’ ability to refuse claims is restricted, and a completely new and additional remedy of proportional claims payments is now made available to policyholders.
Another key change in the Act is the new duty of fair presentation of the risk. The insured construction firm is now required to disclose material circumstances that it knows, or to give insurers sufficient information to put a prudent insurer on notice that it needs to make further enquiries.
What an insured construction firm “knows” will include what should have been reasonably revealed by a search of information available to the insured.
This aspect of the Act has the potential to cause difficulties for a large construction company. It is currently unclear what the extent of a reasonable search would be, but it would appear to be drawn very widely and to include agents.
Therefore, it may be necessary for an insured construction firm to seek information, for example, from architects or engineers who are not employees of the firm.
There is potential here for insurers and insureds to agree what should generally be disclosed as part of a fair presentation of risk. However, it may often be difficult for such information to be agreed, given the nature of large construction companies, which often have an international aspect.
This information may be needed for the insurer to assess fully the risk and the level at which to set the premium. This could mean that an insured construction firm may need to disclose contracts undertaken by subsidiaries, the level of fees paid to subcontractors and subconsultants and any contractual limitations of liability agreed with designers, which is a tall order for large construction companies.
What do construction firms need to do?
Like all new statutes, the full impact of the Act will not be appreciated until some of the provisions are interpreted by judicial precedent. Over the coming years we will see further definition of the Act as it is put into practice.
At this stage it is key that construction firms are in close contact with their brokers about the new provisions of the regime, and what is now required of them at renewal.
Further, this may necessitate a comprehensive review of the firm’s internal processes for searching for and collating information to disclose to insurers on renewal. For insurance managers at large international firms, this could be quite a substantial undertaking.