Fair Presentation

For commercial insurance, to comply with the duty an insured must:

• Either disclose all material circumstances of which it is or ought to be aware, or give the insurer sufficient information to put a prudent insurer on notice that it should make further enquiries.
• Make the disclosure in a way that would be reasonably clear and accessible to a prudent insurer.
• Ensure that representations about material facts are substantially correct (and that representations that are expectations or beliefs are made in good faith).

The Insurance Act introduced a ‘fall back’ to the duty of disclosure. The insured can satisfy the duty by disclosing all material circumstances (this mirrors the previous legal position). Alternatively, even if the insured does not disclose all material circumstances, it can still fulfil the duty if the insurer is given sufficient information to put a prudent insurer on notice that it should ask further questions.

The Insurance Act has not changed the test for materiality: a circumstance or representation is material if it would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms.

Where the insured is not an individual, what is known to the insured means what is known to individuals who are part of the insured's senior management team or are responsible for its insurance.

Senior management is defined as the individuals who play a significant role in making decisions about how the insured’s activities are managed or organised. This would include the board of directors and could also cover other individuals with senior management roles.

Individuals who are responsible for the insurance would cover the individuals within the insured’s organisation who are responsible for arranging the insurance, such as risk managers, as well as individuals employed by the insured’s broker.

In addition, the insured is expected to know what would reasonably be revealed by a reasonable search of information. This includes information held within the insured’s organisation or “by any other person”, for example by the insurance broker or any person covered by the insurance.

The Insurance Act sets out what an insured does not need to disclose. This includes information that the insurer knows (or ought to know), information that diminishes the risk and information that is waived by the insurer.

The insurer’s remedy for breach of the fair presentation duty depends on whether the breach is:

• Deliberate or reckless
• Neither deliberate nor reckless.

Deliberate or reckless: the insurer can avoid the contract (and retain premium paid). Deliberate or reckless means that the insured either knew that it was in breach of the duty or did not care whether it was. This is for the insurer to prove.

Other breaches: a scheme of proportionate remedies applies, depending on what the insurer would have done if a fair presentation had been made.

• If the insurer would not have entered into the contract on any terms, it can avoid the contract and refuse to pay claims (but must return premium).
• If the insurer would have entered into the contract on different terms, the policy is treated as though the different terms apply. These might, for example, include an exclusion or higher excess. The contract will be treated as if it had been entered into on those terms. As the terms will apply retrospectively, they could potentially have an impact on previous claims made under the policy.
• In addition, if the insurer would have charged a higher premium, a claim is reduced proportionately using a formula set out in the Insurance Act.

The parties to commercial insurance contracts can agree to contract out of the statutory duty of fair presentation and substitute their own terms. If, however, a term would put the insured in a worse position than they would be in under the Insurance Act, the insurer must meet the transparency requirements contained in the Act.

This means that, to be effective, the term must be:

• sufficiently drawn to the insured’s attention before the contract is entered into; and
• clear and unambiguous as to its effect.