What does the Insurance Act 2015 mean for trustees? Samantha Brown, pensions partner at Herbert Smith Freehills explains
The Insurance Act 2015 marks the most significant change to the law governing insurance policies for over 100 years. It applies to insurance contracts governed by the laws of England, Wales, Scotland and Northern Ireland, entered into, or varied, on or after 12 August 2016. These changes will be as relevant to trustees as to any other insured.
Here we look specifically at the duty of disclosure in the context of bulk annuities.
Duty of “fair presentation of the risk”
In respect of any disclosure, both during the pre-inception period and if a policy is subsequently varied, trustees must make ”fair presentation of the risk” to the insurer. The duty has two elements: what must be disclosed, and how it must be disclosed.
Breach of the duty can have serious implications. Although the Act introduces remedies that are more proportional than was the case previously, policy terms can vary these remedies. Trustees will therefore need to be aware of potential exposure. It is possible to contract out of the regime (subject to limited exceptions). However, unless a market trend to contracting out altogether develops, trustees would be advised to seek advice on the new regime.
What to disclose
The insured must either disclose every material circumstance that it knows or ought to know, or, failing that, give the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries. Every representation as to a matter of fact must be substantially correct, and every representation as to a matter of belief must be made in good faith.
What does the insured know? Where the trustees are individuals, it will be the actual knowledge of those individuals. In the case of a corporate trustee, it is likely to be the actual knowledge of its directors. This will apply equally where a corporate (such as a professional trustee company) is itself a director of a corporate trustee. In both cases, the insured’s knowledge will also include that of the person arranging insurance. This could be the pensions manager, a corporate risk manager or any of the trustees’ advisers who are arranging the insurance.
The insured must either disclose every material circumstance that it knows or ought to know”
What ought the insured to know? Trustees ought to know all material circumstances that should reasonably have been revealed by a reasonable search. This is a new requirement and careful thought should be given to the scope of a “reasonable” search.
For the purposes of a “plain vanilla” bulk annuity trustees may not need to look further than the scheme administration records, but for all-risk bulk annuities a more far-reaching search is likely to be required – for example, extending to member files and trustee minutes. Particular thought should be given to which professional advisers hold disclosable information. Once the scope of search is determined, trustees should think carefully about how to go about collation and how to document it such that it can be referred to in the event of dispute.
Given the new requirements outlined above, trustees may want to engage with insurers in order to reach a common understanding as to whose knowledge is disclosable and what constitutes a reasonable search (although insurers may be resistant to engaging in such bespoke considerations).
The second element of the disclosure duty (to disclose sufficient information to put a prudent insurer on notice), although helpful, should be treated with some caution: trustees who rely too heavily on disclosing “sufficient information” expose themselves to the risk of disputes if insurers disagree.
How to disclose
Disclosure must now be done in a manner that is reasonably clear and accessible to a prudent insurer. Insureds can no longer “dump” data on the insurer. Trustees should therefore think carefully about how to organise and signpost disclosure, particularly in the case of an all risks policy.
The new duty to make fair representation of the risk demands greater attention to be given by both insurers and insureds to the disclosure process. As a result, when entering into bulk annuity policies trustees should give careful thought to their processes and seek appropriate advice to ensure compliance.
Samantha Brown is a pensions partner at Herbert Smith Freehills