1. Paul Lewis, Partner, +44 20 7466 2138, paul.lewis@hsf.compaul.lewis@hsf.com Sarah McNally, Partner, +44 20 7466 2872, sarah.mcnally@hsf.comsarah.mcnally@hsf.com Alexander Oddy, Partner, +44 20 7466 2407, alexander.oddy@hsf.comalexander.oddy@hsf.com David Reston, Partner, +44 20 7466 2244, david.reston@hsf.comdavid.reston@hsf.com 7 JUNE 2016 CLAIMS HANDLING UNDER THE INSURANCE ACT 2015

2. 2 OVERVIEW Claims handling: an overview Impact of Enterprise Act 2016 Case Study 1: Non-disclosure / Proportionate remedies Case Study 2: Warranties / Section 11 / Claims handling issues

3. 3 CLAIMS HANDLING: SUMMARY New legislation inevitably brings a period of uncertainty Important when there is uncertainty to handle claims effectively Best practice tips: Risk mitigation at placement Proper claim presentation Active claim management Responding to insurers’ legitimate enquiries in a timely manner We will look at some issues that may arise in the case studies

4. 4 IMPACT OF ENTERPRISE ACT 2016 New law: Applies to policies entered into from 4 May 2017 It will be an implied term of every insurance contract that the insurer will pay any sums due in respect of a valid insurance claim within a reasonable time “reasonable time” includes a reasonable time to investigate and assess the claim Gives policyholders a right to claim damages for late payment of claims Policyholder must bring its claim for damages within one year of insurer paying all sums due in respect of the claim Likely to affect the dynamic between insured and insurer in claims negotiations Positive news for policyholders but…. … Good claims handling practice essential – little prospect of a policyholder succeeding if it has not advanced its claim properly and responded to insurers' legitimate requests

5. CASE STUDY #1

6. 6 Supermarket Co 5 UK stores London Harrogate BristolEdinburghCardiff

7. 7 CASE STUDY #1 Supermarket Co Mrs Risk London Harrogate Mr Harrogate BristolEdinburghCardiff

8. 8 CASE STUDY #1 May and June 2 x Heating Malfunctions at Harrogate store 1 August Mrs Risk sends out questionnaires to property managers at each store Mr Harrogate is on holiday Mr Harrogate fails to return questionnaire 26 August Mrs Risk confirms to Mr Broker that the questionnaires did not disclose any additional material facts 1 September Combined Property and Liability policy incepts 5 September Fire at Harrogate store £10m loss

9. 9 CASE STUDY #1 Scenario A: policy incepts on 1 September 2015 Current law applies (not Insurance Act 2015) Are 2 x heating malfunctions at Harrogate store material facts? If so, non-disclosure of material fact… …avoidance of the policy from inception No cover for any store Although check for any innocent non-disclosure / severability provisions and/or composite policy with stores covered by subsidiaries who are separately insured

10. 10 CASE STUDY #1 Scenario B: Policy incepts on 1 September 2016 Insurers argue that if they had been told about heating malfunctions, they would have made it a condition precedent to cover for the Harrogate store that its heating system be checked by registered engineer within 48 hours of inception of the policy

11. 11 CASE STUDY #1 Scenario B (cont.) Insurance Act 2015 applies Was there a breach of the duty of fair presentation by the insured? Disclose every material circumstance… …which the insured knows Knowledge of “senior management” Knowledge of individuals responsible for insurance …which the insured ought to know What should reasonably have been revealed by a reasonable search

12. 12 CASE STUDY #1 Scenario B (cont.) Was there a breach of the duty of fair presentation by the insured? – Material fact? – Actual knowledge: known by senior management or those responsible for the insurance? – Deemed knowledge: should it have reasonably been revealed by a reasonable search? If there is a non-deliberate/reckless breach, proportionate remedies available Insurer can seek to argue it would have written the policy on different terms

13. 13 CASE STUDY #1 Scenario B (cont.) Insurers’ remedy Where does the burden of proof lie? “The insurer has a remedy against the insured for breach of the duty of fair presentation only if the insurer shows that, but for the breach, the insurer (a) would not have entered into the contract of insurance at all, or (b) would have done so only on different terms.” Section 8(1), Insurance Act 2015 What evidence might insurers rely on? What evidence might insured rely on? If insurers successful – no cover for Harrogate store but rest of cover intact

14. 14 CASE STUDY #1 Observations Start renewal/disclosure process in plenty of time Ensure robust disclosure process Importance of audit trail for disclosure and placement process Can you agree definition of “senior management” with insurers? Can you agree what constitutes a “reasonable search” with insurers? What if insurers won’t agree? LMA clauses Positive statements as to what has/has not been done with express words so insurers must ask questions if they have any

15. 15 CASE STUDY #1 Scenario C: what if insurers had been told by Mrs Risk/Mr Broker that Mr Harrogate had not returned the form? Does this alter our analysis of whether there has been a breach of the duty of fair presentation? Remember second limb of duty of fair presentation “(a) disclosure of every material circumstance which the insured knows or ought to know, or (b) failing that, disclosure which gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances.” Section 4(b), Insurance Act 2015

16. 16 CASE STUDY #1 Observations Keep a record of those you have asked questions of Track responses received (and those not) Be clear with insurers as to what you have and have not disclosed If any information is limited or missing, tell the insurer Don’t hide what has not been provided Expect to get more questions and prepare the business to answer them quickly

17. 17 CASE STUDY #1 Scenario D: innocent non-disclosure clause in the policy Outcome will depend on wording of the clause Innocent non-disclosure clauses may put you in a better position than under the Act Need to ensure clauses remain fit for purpose when Insurance Act 2015 applies

18. 18 CASE STUDY #1 Scenario D: innocent non-disclosure clause in the policy The Insurer will not: (a)seek to avoid or repudiate this Policy for non-disclosure or misrepresentation other than fraudulent non-disclosure or fraudulent misrepresentation; or (b)seek damages for, or seek to reject a claim on the grounds of non disclosure or misrepresentation other than fraudulent non-disclosure or fraudulent misrepresentation. On its face – no remedy for insurers unless there is fraud. Insured in better position than under the Act. But is clause fit for purpose for when the Act is in force? Clause triggered by non-disclosure/misrepresentation not breach of the duty of fair presentation (Insured does not have benefit of “second limb”) No mention of proportionate remedies – could insurer argue these still apply? How will clause apply to breaches of the duty of fair presentation in relation to variations?

19. 19 CASE STUDY #1 Observations Important to review current innocent non-disclosure clauses Ensure they are fit for purpose when new Act is in force

20. 20 CASE STUDY #1 Scenario E: May and June 2 x protests at Harrogate store Minor property damage 1 August Mrs Risk sends out questionnaires to property managers at each store Mr Harrogate is on holiday Mr Harrogate fails to return questionnaire 26 August Mrs Risk confirms to Mr Broker that the questionnaires did not disclose any material facts 1 September Combined Property and Liability policy incepts 5 September Minor fire at Harrogate store £10m damage to pet store next door, Harrogate Hounds

21. 21 CASE STUDY #1 Scenario E: Harrogate Hounds sues Supermarket Co for £10 million of damage to its pet shop Insurers argue if they had known about protests at Harrogate, they would have doubled the premium from £100K to £200K

22. 22 CASE STUDY #1 Scenario E (cont.) Has there been a breach of the duty of fair presentation by Supermarket Co? Insurers’ knowledge – what if protests were televised? Is this something insurer “ought to know” and therefore no need for insured to disclose? “An insurer is presumed to know – (a) things which are common knowledge, and (b) things which an insurer offering insurance of the class in question to insureds in the field of activity in question would reasonably be expected to know in the ordinary course of business.”Section 5(3), Insurance Act 2015

23. 23 CASE STUDY #1 Scenario E (cont.) Assuming, there has been a breach, how will proportionate remedy apply? X% = Premium actually charged x 100 Higher premium Calculation: 100,000 x 100 = 50% 200,000 50% of claim payable – £5 million £5 million uninsured What impact will this have on claims control?

24. 24 CASE STUDY #1 Scenario E (cont.) What if Supermarket Co had latest Airmic-HSF clause in its policy? 1.In the event that the Insured breaches the duty of fair presentation prior to inception of this insurance, or prior to any variation; and 2.the breach is not deliberate or reckless; and 3.the Insurer can show that it would have charged a higher premium, then the Insured shall be liable for such additional premium as would have been charged had the duty of fair presentation not been breached. It is agreed that in these circumstances the Insurer will have no right whatsoever to reduce proportionately any amount to be paid on a claim. The phrases “duty of fair presentation” and “deliberate or reckless” in this clause shall have the same meanings as given to them in the Insurance Act 2015. It is not intended that this clause shall amend or vary any other provision of this policy.

25. 25 CASE STUDY #1 Scenario E (cont.) What if Supermarket Co had latest Airmic-HSF clause in its policy? Supermarket Co pays additional premium – £100,000 £10 million claim paid in full (subject to terms of policy) Any future claims paid in full (subject to terms of policy) Additional premium payable even if no claim

26. 26 CASE STUDY #1 Practical tips Start renewal/disclosure process in plenty of time Ensure robust disclosure process – map searches to be carried out and record responses given Provide information to insurer in clear and accessible manner If any information is limited or missing, tell insurer Review innocent non-disclosure clauses and make sure fit for purpose Consider with your broker using new Airmic-HSF clause to pay additional premium instead of facing a proportionate reduction in claims

27. CASE STUDY #2

28. 28 Property Damage/BI policy “The insured warrants that on the 2 nd of every month (or the earliest working day after such date) it will fully inspect the plant and machinery insured under this policy to check for wear and tear” CASE STUDY #2

29. 29 CASE STUDY #2 Scenario A

30. 30 CASE STUDY #2 1 September Property policy incepts 2 September Plant and machinery inspected 2 October Plant and machinery inspected November NO INSPECTION 2 December Plant and machinery inspected 20 December Flood Scenario A

31. 31 CASE STUDY #2 Scenario A (cont.) Warranty operates as “suspensive condition” Time specific warranties – breach remedied when the risk becomes essentially the same as that originally contemplated 1 September Property policy incepts 2 October Inspection 2 November No Inspection = Breach of Warranty 2 December Inspection = Warranty remedied 20 December Flood No cover

32. 32 CASE STUDY #2 Scenario B Investigation reveals flood caused by poor practice Harry Failed to switch off source water supply Sally Failed to switch off local water supply FLOOD

33. 33 CASE STUDY #2 Scenario B (cont.) 1 September Property policy incepts 2 October Inspection 2 November No Inspection = Breach of Warranty 28 November Flood 2 December Inspection = Warranty remedied

34. 34 CASE STUDY #2 Scenario B (cont.): Section 11, Insurance Act 2015 “(1)This section applies to a term (express or implied) of a contract of insurance, other than a term defining the risk as a whole, if compliance with it would tend to reduce the risk of one or more of the following – (a) loss of a particular kind, (b) loss at a particular location, (c) loss at a particular time. (2)If a loss occurs, and the term has not been complied with, the insurer may not rely on the non-compliance to exclude, limit or discharge its liability under the contract for the loss if the insured satisfies subsection (3). (3)The insured satisfies this subsection if it shows that the non-compliance with the term could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred. (4)This section may apply in addition to section 10”

35. 35 Lawyer discusses: Does section 11 apply? If so, can you show that the breach could not have increased the risk of loss? Source water supply next to location where insured should have spent several hours undertaking checks in compliance with warranty Might inspection in November have identified Harry’s poor practice? Scenario B (cont.) Insured argues: Breach of warranty to inspect plant for wear and tear has nothing to do with the poor practice which was the cause of loss Section 11 applies Warranty does not define risk as a whole but is a “section 11” clause Breach of warranty could not have increased the risk of loss that actually happened CASE STUDY #2

36. 36 CASE STUDY #2 Practical tips Changes to the law only benefits those insureds who know what warranties are in their policies, are alerted when there is a breach and can remedy them Record keeping around warranties very important – ensure cover re- attaches as soon as possible Carry out an exercise to communicate policy requirements to the business Systems and controls for compliance/audit Consider identifying expressly “risk mitigation terms” in policy – i.e. those terms compliance with which would tend to reduce the risk of loss of particular kind, or at a particular location or time

37. CLAIMS HANDLING ISSUES

38. 38 CASE STUDY #2: CLAIMS HANDLING ISSUES Insured’s Health & Safety officer produces a report (on instruction from the MD). Extract from report: Conclusion 7: Employee Harry Jones had been operating under significant personal stress and it seems likely that an oversight on his part meant that he failed to observe appropriate protocols in relation to switching off source water supply. This had occurred previously. Suggest counselling for Harry Jones, revision to procedures and audit to check proper process is being followed

39. 39 CASE STUDY #2: CLAIMS HANDLING ISSUES Insured’s Health & Safety officer’s report Investigations for non-insurance purposes (i.e. HSE, lessons learned) rarely focus on the correct issues for coverage Was investigation / report cloaked in privilege? How could it have been? Ensure appropriate records are taken of any physical evidence Fact-finding exercises – best directed and controlled by insured on major losses – collate documents / witness proofs / control access of loss adjusters/other insurer representatives Expert evidence – identify relevant expert disciplines Potentially major exercises which should be informed by an understanding of coverage implications (but the facts are the facts)

40. 40 CASE STUDY #2: CLAIMS HANDLING ISSUES Harry emails Sally From: Jones, Harry Sent: 13 December 2016 15:35 To: Wright, Sally Subject: OMG!!!! I feel like everyone is talking about last month’s flood. Hope I don’t get sacked. I’ve just been under so much stress lately with everything going on at home that I keep forgetting to turn off that stupid water supply. Aaaaaghh! H

41. 41 CASE STUDY #2: CLAIMS HANDLING ISSUES From: Wright, Sally Sent: 13 December 2016 15:55 To: Jones, Harry Subject: RE: OMG!!!! Harry – calm down. You’ve only forgotten once before and that was months ago. Honestly not your fault. From: Jones, Harry Sent: 13 December 2016 15:35 To: Wright, Sally Subject: OMG!!!! I feel like everyone is talking about last month’s flood. Hope I don’t get sacked. I’ve just been under so much stress lately with everything going on at home that I keep forgetting to turn off that stupid water supply. Aaaaaghh! H

42. 42 CASE STUDY #2: CLAIMS HANDLING ISSUES Loss adjuster asks to interview Harry and Sally about cause of loss Remember that loss adjuster is agent of the insurer Loss adjuster’s report(s) is prepared for the benefit of insurers no matter how established the relationship Manage engagement between insured and loss adjuster carefully: Seek to develop constructive relationship Do not allow employees to speculate on claim in front of loss adjuster If possible, brief Harry and Sally before meeting In any event, discourage speculation or non-essential discussion of the loss in documents, primarily email

43. 43 CASE STUDY #2: CLAIMS HANDLING ISSUES Loss adjuster sends information request asking for 20 categories of documents pertaining to all aspects of the plant, other locations insured under the policy and the insured’s business more generally Do not ignore information requests, however unreasonable you consider them Respond constructively – consider necessity and relevance Consider alternative way insurer questions may be answered Check claims co-operation clauses in policy Timing implications – bearing in mind Enterprise Act 2016

44. 44 CASE STUDY #2: CLAIMS HANDLING ISSUES Claims co-operation clause Following notification of a claim or loss, the Insured shall provide all reasonable co-operation to the Insurer as may be requested. Such co-operation having been provided, the Insurer will endeavour to set out their position on coverage within 60 days. How do you comply with this clause in light of Loss Adjuster’s requests? What is the effect of any breach of this clause by the Insured? What is the effect of any breach of this clause by the Insurer? What is the impact of the Enterprise Act 2016 after Day 61?

45. 45 CASE STUDY #2: CLAIMS HANDLING ISSUES Is there a claim for damages for late payment? It all depends…… BUT remember: A claim for damages for late payment is a contractual claim Can only claim for loss: caused by the insurer's breach of the implied term; and which was foreseeable, i.e. in the reasonable contemplation of the parties at the date the contract was entered into Query what that loss will be beyond financing costs for a large business? Possibly different story for SMEs Watch out for insurers contracting out

46. ANY QUESTIONS?