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Insurance contracts are not like other contracts and their terms can be archaic, difficult to interpret and often perceived to be unfair.
For businesses and consumers alike, the time was ripe for change. Just a few months ago, on 1 August 2016, the Insurance Act 2015 (the "Act") came into force in the UK introducing what the government has described as "the biggest reform to insurance contract law in more than a century". We would certainly agree that the changes are significant and we have been advising our clients in the construction sector on their implications.
It applies to new insurance, renewals and variations (insurance and reinsurance contracts) entered into after 12 August 2016 for non-consumers. It will therefore be relevant to a vast number of construction projects.
So what are the changes introduced by the Act?
What does it mean for the construction industry?
Previously, an insured party was obliged to disclose all material circumstances that it knew, or ought to know in the ordinary course of business.
Under the Act, the insured party "ought to know what should reasonably have been revealed by a reasonable search of information available to the insured". The Act goes on to state that information available to the insured will include information that is ''held within the insured’s organisation or by any other person (such as the insured’s agent or a person for whom cover is provided by the contract of insurance).”
For large construction projects, a reasonable search of available information may be quite extensive, especially if there are greater than normal risks involved in the project. The greater the risks, the greater the search of information should be.
In projects in which the insured has engaged subcontractors, providing details of all material information held by third parties may prove no mean task. For example, it may require the contractor to make enquiries with each of its subcontractors in order to ascertain any limits on liability that subcontractor may have in place. It may also require the contractor to make enquiries with project related professionals, such as the architect or quantity surveyor, on the basis that they may hold relevant information.
For construction and engineering contracts, it will likely take a great deal of careful management to present the necessary level of information to the insurer, especially where multiple types of liability cover are needed or all risks insurance policies are used. In all cases the reasonable search should be started as early as possible, and the extent of the search carefully documented.
Still to come:
On 4 May 2017, s13A will be inserted into the Act by the coming into force of the Enterprise Act 2016. This will automatically imply a provision into every insurance contract the effect of which is to require sums due in respect of an insurance claim be paid by the insurer within a reasonable time. The insured will have a right to enforce the payment of the sum due and an entitlement to interest on that sum. This will also be a provision that cannot be contracted out of, and will come as good news for the cash flow of construction teams.
By Caitlin Foley and Jessica Evans.