How the Insurance Act 2015 will affect employers with group risk insurance

The purpose behind the Insurance Act 2015, which comes into affect on 12 August 2016, is to bring very old insurance law up to date with modern industry practices, so in the main the changes it brings formalises what is already being done.

The Act applies to all non-consumer insurance contracts in the UK, including group risk insurance.

 Employers won’t see much change in how group risk insurances work, as the impact is minimal, but it does provide an important reminder of their obligations.

Duty of fair presentation

The new Act requires employers who enter into a contract with an insurer to present the risk to be insured fairly, known as the “duty of fair presentation”. Under the new Act, an employer must tell the insurer every “material fact” that is known, or ought to be known, by them, any of their senior management or anyone responsible for insurance within the organisation. 

This means that they must make a reasonable search of their records and their adviser’s records to determine this.

A material fact is something that would influence the insurer’s judgement whether or not to offer cover and if so on what terms.

Some insurers list the items they regard as material facts on their application form, so the employer just needs to review this information and sign the form before cover can commence. Other insurers will have different processes. But the important point is that employers MUST take extra care when disclosing information to their insurer and make sure the information they provide is accurate and complete.

What happens if things go wrong?

Given that the benefits paid by group risk policies tend to be very large, it’s really important that employers – guided by their advisers – take care when starting, reviewing or amending a policy, as any omission of information, whether deliberate or not, can have a huge bearing on the cover provided.

Let’s take an example. An employer starts a group life policy for their 300 staff for which the insurer charges £20,000 annual premium. On the application form the insurer asked the employer to confirm if any members of staff were currently absent from work and had been for one month or more before the policy started. The HR director was not immediately aware of any so none were declared.

One month after the policy started an employee with a benefit of £500,000 died. They had been absent from work for five months suffering from cancer. If the insurer received this information originally they may not have agreed to provide cover, in which case they have the right to avoid the policy (that is, treat it as if the policy never started and so would not pay the claim). The employer may then have to pay the benefit to the employee themselves, a huge financial hit to the business.

Of course, had the HR director checked the company’s absence records when they were requested to, they would have known about the absent employee.

It is clear why employers need to be careful.

In the event of a non-deliberate omission of information the Act allows the insurer to reassess the risk as if they had received the information originally. As described above, if the insurer would not have provided cover originally, the policy would be cancelled from the start, premium refunded and claim declined leaving the employer with a potential liability. However, if the insurer would have offered cover at a higher price, the Act allows the insurer to reduce the benefit paid proportionally.

If the omission of information is considered deliberate or reckless, then the penalties are more severe. The insurer can cancel the policy from the start and keep the premium paid. In the event of a fraudulent claim the Act also allows the insurer to cancel the policy and recover any amount already paid in respect of the claim.

In summary

The new Act will not have much day-to-day impact on group risk policies, but it should serve as a reminder to employers to take extra care when providing information to insurers and answering their questions, as any omission can have significant consequences.

The new Act comes into force on 12 August 2016 and will apply to all group risk insurance policies which start, are reviewed or amended on or after that date.

This article was supplied by Ellipse