- The importance of material facts in the Insurance Act
The Insurance Act is a pivotal piece of legislation that governs insurance contracts across various jurisdictions, emphasising the critical role of material facts. The Act stipulates that policyholders are obligated to disclose all material facts to insurers before entering an insurance contract. In the challenging environment of the public sector and housing associations, risks can evolve rapidly throughout the policy period. For example, an organisation may re-survey one of their sites during the contract period, showing significant deterioration. This could create safety concerns, with an obligation to notify insurers.
- Defining material facts
A material fact is any information that could influence an insurer's decision-making process regarding the terms, conditions, or premium of an insurance policy. These facts are essential for insurers to accurately assess the level of risk associated with insuring a particular activity or property. By considering material facts, insurers can make informed decisions that align with their risk management strategies.
Material facts can encompass a wide array of information, including the geographical location of a property, the construction materials used, and the intended use of the property. It is crucial for policyholders to understand which material facts must be disclosed to insurers. Comprehensive disclosure enables insurers to evaluate the risks accurately and provide appropriate coverage. If you are at all unsure, speak to your insurance broker.
- Real-life implications of material facts
The failure to disclose material facts can lead to significant consequences. Disclosing material facts goes beyond simply sharing known information; it involves proactively identifying key developments within your organisation that insurers should be aware of. For instance, changes in your construction department’s building requirements may introduce new risks that need to be communicated.
- Construction projects and Network Rail
Insurance is essential for all construction projects due to inherent risks. However, when undertaking work on or near railway infrastructure, specific indemnities and liability provisions come into play. These agreements, known as Asset Protection Agreements (APAs), can impose liability limits of up to £155million for third-party claims. Unlike public liability, third-party liability does not require negligence to establish liability, meaning your existing insurance may not cover these risks or the substantial limits required.
In such cases, it is imperative to contact your broker as early as possible. This allows them to engage with the appropriate markets and secure a suitable additional policy alongside your primary coverage. Failing to disclose such significant risks to your broker could expose your organisation to potential liabilities in the hundreds of millions, with no recourse for recovery from insurers.
- Operating as a commercial entity
Another critical area of concern for insurers are your business activities. For example, if a local authority or housing association begins operating a bank, this change must be disclosed as a material fact. The risks associated with running a commercial entity like a bank differ significantly from traditional operations. If a claim arises from this new venture and the insurer was not informed, it is highly likely the claim would be denied.
- Understanding commercial tenants and their activities
For property owners renting to commercial tenants, it is vital to have a clear understanding of the tenants' business activities and to communicate this information to your insurance broker. Each type of business carries unique risks. For instance, if a tenant operates a battery manufacturing facility and the insurer is unaware of this, a fire incident could lead to significant structural damage. In such cases, the insurer may deny the claim, leaving the property owner responsible for the costs. In severe instances, this could even result in policy cancellation. Therefore, accurate disclosure of tenants' activities is essential for ensuring proper coverage and avoiding complications.
- Partnerships and acquisitions
When acquiring a new business or entering into a commercial partnership, it is crucial to inform insurers, especially if you are responsible for providing coverages for all parties involved. These scenarios introduce additional risks, and insurers prefer to be notified promptly to prepare for offering the appropriate coverage. The process of integrating an acquisition or new partnership into an insurance programme can be lengthy and may lead to premium changes. Timely notification allows insurers to assess the situation adequately and provide the necessary coverage.
- Consequences of non-disclosure
The repercussions of failing to disclose material facts can vary significantly. In minor cases, it may result in claim denial related to the undisclosed information. In more severe situations, it could lead to policy cancellation and potential legal consequences.
- Next steps
If you are uncertain about whether to disclose information that may be considered material, it is advisable to consult with your broker. They can provide guidance on the appropriate course of action to ensure compliance and protect your interests.
Understanding and disclosing material facts is essential for effective risk management in the public sector and housing associations. However, by fostering open communication with your brokers and insurers and proactively identifying potential risks, organisations can safeguard their operations and ensure adequate coverage.
Key takeaways:
- Insurance and risk should be considered on all key decision reports, in the same way resource and finance implications are.
- The insurance officer needs access to strategic decisions across their organisation to assess material facts that need to be notified to insurers.
- The insurance officer should be aware of improvements to risks as well as deteriorations.
The insurance officer should engage with brokers and insurers to understand the changing risk landscape and what insurers need to know to provide best possible terms.
