The Act amends some key sections of the Marine Insurance Act 1906, which were regarded as not reflecting good insurance practice and is considered to be broadly neutral between insurer and insured.

James Dalton, director of general insurance policy at the Association of British Insurers commented to the FT that “Modern insurance company underwriting and claims practice is reflected in the [new] Act.”

The 2015 Act prohibits ‘basis of the contract’ clauses and renders ineffective any provision in a proposal form that purports to turn pre-contractual information given by an insured into a warranty.

The Act replaces [the] concept of the insured’s duty of utmost good faith with a clearer duty of “fair representation” prior to entering into a contract with an insurer. Disclosure of every material circumstance the insured knows about or should have known about is required. This disclosure needs to be made in a reasonably clear and accessible manner to avoid what the Law Commission has called ‘data dumping’, where important information is hidden in a mass of other material.

Of course the practice continues that there may need to be an exchange of information; the insurer may have to ask additional questions in order to glean the facts it needs to make an underwriting decision.

Previously an insurer could refuse a claim if the pre-contractual duty of disclosure was breached. By comparison, the new Act introduces a more ‘proportionate’ system of remedies by reference to what the insurer would have done if it had known the true facts. These remedies include avoiding the policy with the return of the premium where the risk would have been declined, treating the policy as having amended terms if the insurers would have accepted the risk on different terms and charging an additional premium if the insurers would have accepted the risk with a higher premium. It will still be possible to avoid the policy and keep the premium if the non-disclosure or misrepresentation was deliberate or reckless.

Legal indemnities underwriting is never straightforward and the nature of the risk lends itself to ambiguity. The new clarity over the duty of disclosure required of the insured, while welcome, places a responsibility on the insured’s senior management team to carry out a reasonable search for information. Changes in practice and systems may therefore be required.

The Act does however make it clear that disclosure does not need to be made in a single document.

Other changes that work in favour of policyholders are also about to come into force. The Enterprise Act 2016 will be effective from May next year, and will imply a term into all insurance contracts that claims must be paid within a “reasonable time” depending on the “relevant circumstances” of each claim. If an insurer fails to do so, the insured will be able to claim damages for additional loss causes as a result. This will be in addition to being able to claim interest for late payment.

The combined result of both pieces of legislation is to rewrite how insurance claims are dealt with. Both Acts are to be welcomed, although insured parties should be made aware of their new responsibilities.

Titlesolv is the trading name of London & European Title Insurance Services Ltd authorised and regulated by the Financial Conduct Authority.