what is the meaning of fair presentation

Accounting Policies – Fair Presentation and Faithful Representation for IFRS

What does fair presentation mean.

Financial statements are described as showing a ‘true and fair view’ when they are free from material misstatements and faithfully represent the financial performance and position of an entity.

In some countries, this is an essential part of financial reporting.

Under International Financial Reporting Standards, financial statements are required to present fairly the financial position, financial performance and cash flows of the entity.

This issue is not dealt with directly by the Framework.

However, if an entity complies with International Financial Reporting Standards, and if its financial information is both relevant and faithfully represented, then the financial statements ‘should convey what is generally understood as a true and fair view of such information’.

Under IAS 1, ‘Fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions and recognition criteria for assets, liabilities, income and expenses set out in the IASB Framework.

What does faithful representation mean?

Faithful representation means more than that the amounts in the financial statements should be materially correct.

The information should present clearly the transactions and other events that it is intended to represent.

Also, the financial information must account for transactions and other events in a way that reflects their true substance and economic reality, their commercial impact, rather than their strict legal form.

If there is a difference between substance and legal form, the financial information should represent the economic substance.

An example of this is when a company enters into a finance lease, the substance of the transaction requires the entity to record an asset in its financial statements and a corresponding liability for the lease payments due.

Faithful representation also requires the presentation of financial information in a way that is not misleading to users, and that important information is not concealed or obscured as this may be misleading.

Fair presentation and compliance with IFRSs

“Fair presentation” is presumed when the International Financial Reporting Standards are applied with necessary disclosures.

Under IAS 1:

• When the financial statements of an entity fully comply with International Financial Reporting Standards, this should be disclosed.
• Financial statements should not be described as compliant with IFRSs unless they comply with all of the International Financial Reporting Standards.

So IAS 1 assumes financial statements are presented fairly when they comply with accounting standards.

However, it is important to remember the spirit and nature of the accounting standard, and not its strict definition when preparing financial statements.

This is especially true for complex transactions which may not be covered by an accounting standard.

In these cases, the substance of the transaction should take precedence over the strict legal form of the transaction.

Under IAS 1, fair presentation also requires an entity:

• to select and apply accounting policies in accordance with IAS 8 Accounting policies, changes in accounting estimates and errors. IAS 8 sets out guidance for management on how to account for a transaction if no accounting standard is applicable
• to present information in a manner that provides relevant, reliable, comparable and understandable information
• to provide additional disclosures where these are necessary to enable users to understand the financial position and performance of the entity, even where additional disclosure is not required by the accounting standards.

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Fair Presentation

An accounting standards’ requirement that an entity’s financial statements should be presented in a fair way to all relevant users of these statements. In other words, it is premised on the requirement that these statements should not be misleading. Under the principle of fair presentation, financial statements must fairly present the financial position, financial performance and cash flows of the entity. Fair presentation requires the faithful (unbiased) representation of the monetary effects of transactions, other events and circumstances in accordance with the applicable concepts and recognition criteria for assets , liabilities , income and expenses .

Fair presentation is the US and International Accounting Standards (IAS) equivalent of the British requirement that financial statements provide a true and fair view (which entails that statements/ accounts have been truly prepared and fairly presented in accordance with applicable accounting standards and framework . It also implies that the financial statements are free from material misstatements and faithfully represent the financial position and performance of an entity, subject-matter of an audit process.).

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The requirement that financial statements should not be misleading. ‘Fair presentation’ is the US and International Accounting Standards equivalent of the British requirement that financial statements give a true and fair view.

From:   fair presentation   in  A Dictionary of Finance and Banking »

Subjects: Social sciences — Economics

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Fair presentation

IAS 1 says that the statements must present fairly the financial position, financial performance and cash flows of the entity. It specifies that it is presumed that this will be achieved by compliance with IFRS. However, it does allow that ‘in extremely rare circumstances’ an entity may decide that compliance would not result in a fair presentation, and in such circumstances it may depart from individual standards. If it does this, it must explain why and show the effect on the financial statements.

It adds a proviso that this is available to the extent that the relevant regulatory framework, normally national law, allows or does not prohibit such a departure. For example, the EU company law directives specify that if following GAAP does not give ‘a true and fair view’ an entity should in the first instance disclose extra information, and only if that is not thought workable, not follow the standard concerned. (The UK Accounting Standards Board obtained a legal opinion that producing statements that fairly present under IFRS is equivalent to providing a true and fair view.)

the statements must present fairly the financial position, financial performance and cash flows of the entity

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True and Fair presentation

Table of Contents

True and Fair presentation Definition

Financial statements are produced by the Board of directors which give a true and fair view of the entity’s results. The auditor in reviewing these financial statements gives an opinion on the truth and fairness of them. Although there is no definition in the International Standards on Auditing of true and fair it is generally considered the meaning of

True and Fair presentation as following

True  – Information is based on facts and conforms with reality in that there are no factual errors. In addition, it is assumed that to be true it must comply with accounting standards and any relevant legislation. True includes data that is correctly transferred from accounting records to the financial statements.

Fair  – Information is impartial, clear and unbiased, and representing the commercial substance of the transactions of the entity.

Board of directors = The person who is responsible for overviewing the strategic direction of the entity and obligations related to the accountability of the entity. This includes overviewing the financial reporting process.

Management –  The persons with executive responsibility for the conduct of the companies operations. In some cases, all of those charged with governance are involved in managing the company, Example, a small business (sole trader) where a single owner manages the entity and no one else has a governance role

Engagement partner –  The partner in the firm who is responsible for the audit engagement and its performance (who is authorized to sign the audit report), and for the auditor’s report that is issued on behalf of the firm and who has the authority from a professional, legal or regulatory body.

Professional judgment –  The application of audit training, experience and knowledge, within the context provided by the client, accounting and principles of ethical standards, in making decisions on the base of information about the courses of action that are appropriate in the circumstances of the audit engagement.

Professional skepticism –  An attitude that includes a questioning mind, being alert to conditions which can indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence. Professional skepticism includes being alert to, for example:

• Audit evidence that conflicts with other audit evidence obtained by the auditor.

• The questionable information brings the reliability of documents and responses to inquiries to be used as audit evidence.

• Conditions that may indicate possible fraud.

• Circumstances that suggest the need for audit procedures required by the ISAs.

• Appointment Removal & Role Of An Auditor
• Fundamental principles of ethics

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The ​​Duty of Fair Presentation: An Essential Refresher

• Back to Insights

One of the most common arguments between policyholders and their insurers arises from an allegation that material information was omitted from disclosure provided to the insurer prior a policy’s inception. The consequences of such an allegation, if it can be sustained, range from very little (say, if the non-disclosure would not have affected the insurer’s underwriting, or if the policy contains an “innocent non-disclosure” clause), through to the very serious (i.e. avoidance of the policy).

It follows that one of the most effective ways for policyholders to avoid coverage disputes is to ensure that the disclosure process is fully understood, and that the correct disclosure is made to an insurer prior to a policy’s inception.

What is the Duty of Fair Presentation?

The requirement for policyholders to comply with a Duty of Fair Presentation before entering into (or varying) commercial (as opposed to consumer) contracts of insurance was introduced by the Insurance Act 2015 (the “ Act ”). It effectively brings together, into one duty, policyholders’ pre-Act obligations in respect of non-disclosure and misrepresentation.

In essence, the Duty of Fair Presentation requires those seeking insurance to volunteer and disclose the information that a prudent insurer would want to know when it is: (i) deciding whether to issue the policy and, if so, on what terms; and (ii) determining the premium payable for the cover sought.

The Act provides that a fair presentation of the risk is one which makes the disclosure referred to above in a manner that would be reasonably clear and accessible to a prudent insurer (in effect, banning the practice of “data dumping”, or the provision of brief/cryptic disclosure in respect of facts that warrant a fuller explanation to properly understand their implication), and in which every material representation as to a matter of fact is substantially correct, and every material representation as to a matter of expectation or belief is made in good faith.

What does this mean in practice?

Helpfully, the Act provides guidance on what should be disclosed by a policyholder in a “fair presentation” of the risk.

Disclosure is required of every material circumstance which the policyholder knows or ought to know. A “ circumstance ” includes any communication made to, or information received by, the policyholder. It is “ material ” if it would influence the judgment of a prudent insurer in determining whether to take the risk and, if so, on what terms.

Subsection 7(4) of the Act gives the following examples of things which might be material circumstances:

• Special or unusual facts relating to the risk;
• Any particular concerns which led the policyholder to seek insurance cover for the risk; or
• Anything which those concerned with the class of insurance and field of activity in question would generally understand as being something that should be dealt with in a fair presentation of the risks of the type in question.

Accordingly, if facts or matters could be relevant to, or impact on, the insurer’s decision making process in any way when it is assessing the risk for which cover is sought, they should be disclosed to the insurer.

When making that disclosure, care must be taken to ensure that factual information provided to insurers in respect of those circumstances is substantially correct. Statements of fact are “ substantially correct ” if a prudent insurer would not consider the difference between what was represented and what was actually correct to be material. Further any expressions of expectation or belief (e.g. “we do not expect [x] to occur during the policy period”) must be to be made in good faith.

Whose knowledge is relevant to fulfilling the Duty of Fair Presentation?

Where the policyholder is an individual (e.g. a sole trader) they can only disclose what is known to them and/or what is known to the person or persons who are responsible for procuring their insurance (e.g. their broker).

Where the policyholder is a company or partnership, it is required to disclose what is known by:

• its senior management team (being those individuals who play a significant role in the making of decisions about how the business’ activities are to be managed or organised); and
• the person within the business (e.g. risk managers), or externally (e.g. a broker), who is responsible for its insurance procurement.

In either case, circumstances which a policyholder ought to know about are those which could reasonably have been revealed by a reasonable search of the information available to it or by making reasonable enquiries. Those enquiries should encompass not just information held within the policyholder’s business, but also any external parties (e.g. agents) who might hold relevant information. Businesses should therefore have procedures in place to ensure that any potentially material circumstances are reported to senior management and communicated to the person(s) tasked with getting appropriate insurance cover in place.

A policyholder cannot circumvent the Duty of Fair Presentation by deliberately failing to investigate matters which might be, or become, material circumstances, so it can say that it had no knowledge of the relevant information prior to entering into the contract of insurance. The Act provides that an individual’s knowledge encompasses both their actual knowledge and matters which the individual suspected, and would have had knowledge about, but for their deliberately refraining from confirming or enquiring about those matters.

How far does the Duty of Fair Presentation extend?

At first blush, the duty appears to be an onerous one. However, the Act assists policyholders by providing that the Duty of Fair Presentation will be satisfied if the policyholder has failed to disclose every material circumstance, notwithstanding its attempt to do so, but has provided sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances before it issues the policy. This puts the onus on insurers to conduct their own enquiries if sufficient information is provided to reveal the need for such enquiries.

Further, the Act provides that a policyholder is not required to disclose a circumstance if:

• it diminishes the risk;
• the insurer already knows about it;
• the insurer ought to know about it;
• the insurer is presumed to know about it; or
• it is something as to which the insurer waives information.

For the purposes of (ii), (iii) and (iv), the “ insurer ” is anyone who participates in the decision making process by which the insurer determined whether to issue the policy sought and on what terms. For the purposes of (iv), the insurer is presumed to know things that are common knowledge and things which an insurer offering the type of insurance in question, and in the field of activity in question, would reasonably be expected to know in the ordinary course of business.

Treating proposal forms with caution

Many insurers require a proposal form to be completed. However, the Duty of Fair Presentation is not (absent an express waiver by an insurer) confined to simply answering the questions asked in that form. The policyholder is required to disclose material circumstances regardless of whether the insurer has specifically asked for that information or not, unless it can show that the reasonable person reading the proposal form (and applying the ordinary meaning of the words used in the questions asked) would be justified in thinking that the insurer had implicitly waived its right to receive all material information and/or consented to the omission of the particular information not disclosed (e.g. where the insurer could have, but fails to, ask questions in the proposal form that address an issue which it later claims to be material to its consideration of the risk) [1] .

Remedies: What can an insurer do if a policyholder fails to give a fair presentation?

If the insurer can show that, but for the policyholder’s breach of the Duty of Fair Presentation, it (i) would not have entered into the contract of insurance at all; or (ii) would have only done so on different terms, the insurer will have a remedy against the policyholder. What that remedy is will depend on whether the insurer can show that the breach was deliberate or reckless, or simply accidental/careless.

If the breach was deliberate or reckless, the insurer may avoid the policy (i.e., treat it as cancelled from the start) without returning any of the premiums paid and refuse all claims.

If the breach was neither deliberate nor reckless, but was accidental or as a result of carelessness on the part of the policyholder, the remedy will depend on what the insurer would have done had the proper presentation been made.

If the insurer would not have issued the policy on any terms, it may avoid the policy and refuse all claims, but must return the premiums paid.

If the insurer would have issued the policy, but on different terms (e.g. it would have excluded certain risks from the cover provided, say by way of a “specific matters exclusion”), the policy will be treated as if those different terms were put in place at the outset.

In addition, if the insurer would have charged a higher premium, the insurer may reduce proportionately the amount to be paid out in relation to any claim made on the policy. For example, if the premium paid for the policy was £750, but the insurer would have charged £1,000 but for the failure of the policyholder to comply with its Duty of Fair Presentation, the insurer will only be required to pay 75% of any claim made on that policy (i.e. the premium actually paid / the higher premium x 100).

As we note above, alleged breaches of the Duty of Fair Presentation are one of the most common reasons we see for disputes arising between policyholders and their insurers. It seems likely that declinatures/purported avoidances on this basis will only increase as insurers react to adverse market and economic conditions by taking a more forensic approach to the validation of claims, and by attitudes to running more aggressive arguments against a policyholder hardening.

Policyholders should therefore ensure that they seek appropriate guidance from their brokers to ensure that they have a full understanding of their obligations prior to purchasing (or varying) their insurances. Likewise, policyholders should err on the side of caution when completing proposal forms and/or making presentations to insurers – the risks of not disclosing something that may be material almost always outweigh the benefits of attempting to present (perhaps inaccurately or incompletely) a clean bill of health to an insurer.

The key takeaway should be that if you are in any doubt at all as to whether a fact might be material, disclose it.

Emma Hockley Indemnity Legal 30/06/2022

[1] In the Scottish case of Young v Royal & Sun Alliance plc [2020] CSIH 25 it was argued that the insurer had asked a ‘limiting question’ in the proposal form relating to the insolvency history of the insured and that the policyholder had reasonably inferred that the insurer did not want to know about information which fell outside the scope of that question. The policyholder did not succeed in that argument. The Court found that waiver is not readily to be inferred and that it was for the policyholder to prove the waiver. However, in Ristorante Ltd t/a/ Bar Massimo v Zurich Insurance plc [2021] EWHC 2538 the Court found that, in relation to a similar question, the insurer had waived its right to certain information and/or consented to its omission by the way the question had been worded in the context of the proposal form as a whole. See article here

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What is the difference between Faithful representation and Fair presentation?

IASB framework provides conceptual guidance regarding preparation and presentation of financial statements whereas IAS 1 sets out the principles and rules for preparation and presentation of financial statements. So the difference between these two documents must be clear as framework does not amount to standard and is separate from International Accounting Standards . The provisions stated under framework as opposed to the standards are not instructions based because standards provide clear cut rules that must be followed. Also when framework and standards are in conflict over any matter then standards prevail. But there is one exception to this rule which will be discussed later.

IASB Framework

Faithful representation is one of the qualitative characteristics of financial information that enhances reliability. Faithful representation is achieved by presenting the transactions and events in the way they are reasonably expected to be reported in the financial statements. For example, only the effects of those transactions should be reported that meets the recognition criteria of the elements of the financial statements. Also, to represent the transactions and events faithfully in the financial statements, the effects of transactions and events are reported on the basis of economic substance of the transactions instead of legal form of the transaction. For example, company had sold the asset but is still responsible for maintaining it or other risks then if this transaction is reported as sales instead of secured loan will not faithfully represent the transaction and thus will distort the effect of the transaction and may have the potential to influence users decisions.

Table of Contents

Fair presentation means financial statements portrays the entity and its operations in true and fair view i.e. financial statements must be in line with the ground reality or in other words the financial position and financial performance of the entity according to the financial statements should be the same as the position and performance is in reality. According to IASB framework fair presentation is expected to achieve fair presentation by:

• the application of qualitative characteristics as discussed under framework; and
• the application of appropriate accounting standards

Simply put, fair presentation is the end result that is expected to be achieved by maintaining principle qualitative characteristics and the application of accounting standards.

IAS 1 Presentation of Financial Statements

According to IAS 1 fair presentation requires the faithful representation of the effects of transactions, other events and conditions in accordance with the definitions, recognition criteria and substance of transactions. Simply put, IAS 1 almost equates the fair presentation with the compliance with accounting standards which is presumed to result in the fair presentation of financial statements.

Para 17 – IAS 1

In virtually all circumstances, an entity achieves a fair presentation by compliance with applicable IFRSs. A fair presentation also requires an entity:

• to select and apply accounting policies in accordance with IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors. IAS 8 sets out a hierarchy of authoritative guidance that management considers in the absence of an IFRS that specifically applies to an item.
• to present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information.
• to provide additional disclosures when compliance with the specific equirements in IFRSs is insufficient to enable users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance.

Compliance with standards

As stated earlier the general rule is that if there is a conflict on any matter between the framework and the standard then standards prevail i.e. compliance with both framework and standards is necessary but when they are in conflict then standards will be complied and for the same reason IAS 1 almost equates the fair presentation with compliance as standards are made in a way that ensure true and fair financial statements.

However, under extremely rare circumstances management may conclude that compliance with the certain provisions of standards will be so misleading that it would conflict with the objectives of financial statements as stated in the IASB Framework. Under such circumstances management may depart from the provisions of the standard. This is known as true and fair override . In short, in extremely rare circumstances framework can prevail over standards.

Therefore, fair presentation is NOT just compliance with the standards but as standards are detailed so in virtually every circumstances compliance is presumed to achieve fair presentation. But its up to management to ensure that financial statements achieve true and fair view by achieving the objectives of the financial statements as laid down under IASB Framework.

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• True and Fair statement published by FRC
• Technical activities and advice

The Financial Reporting Council (FRC) has published a statement to confirm that the requirement to present a true and fair view remains of fundamental importance in IFRS and UK GAAP, including the new UK standards FRS 100-103

The statement published by the Financial Reporting Council (FRC) reflects developments in UK GAAP, legal advice on the true and fair requirement obtained and published in October 2013 and feedback from stakeholders seeking clarity as to the primary requirement to present a true and fair view. 

In particular, the precedent to the statement was, in October 2013, the confirmation by the Department for Business, Innovation & Skills (BIS) and the FRC that the current legal framework requires the financial statements of companies to present a true and fair view.

The confirmation was issued on the basis of the legal opinion received from Martin Moore QC in response to a divergent legal opinion commissioned earlier in 2013 by a group of major investment funds, who argued that substantial legal flaws in International Financial Reporting Standards (IFRS) result in accounts produced under international standards to be unable to present a true and fair view as required by UK legislation.

BIS and FRC confirmed the legality of IFRS accounts in view of the true and fair requirement in UK legislation, specifically section 393 of Companies Act 2006, as Mr Moore’s opinion confuted the arguments raised by the group of investment funds, and stressed that the overriding objective in preparing financial statements is that of achieving a true and fair view.

A detailed analysis of the issues involved has been published by ACCA. 

The new true and fair statement

The new FRC True and Fair document highlights the centrality of the true and fair requirement, and provides guidance on how that is relevant to accounts preparers, those charged with governance and auditors.

Section 393 of the Companies Act 2006 requires that the directors of a company must not approve accounts unless they are satisfied that they give a true and fair view and the FRC clarifies that the introduction of IFRS in the UK did not change such fundamental requirement, even though the routes by which that requirement is embedded may differ slightly.

In particular, concerns were raised on the operation of the true and fair override in IFRS and the absence of the term 'prudence' in the International Accounting Standards Board’s Conceptual Framework.

However, the FRC notes that, while terminology is different under IFRS, the true and fair override requirement still exists in the same substantive form, and the absence of the term 'prudence' in the 2010 Conceptual Framework does not prevent accounts prepared in accordance with IFRS from presenting a true and fair view.

Preparation of accounts

The FRC’s statement points out that the relevance of the true and fair requirement is indicated by the fact that professional judgement should be applied at all stages of accounts preparation, as opposed to mechanically following the accounting standards. For example:

• where there is a choice of  policies allowed under accounting standards, ensuring that those selected are appropriate according to the circumstances of the company
• establishing accounting policies for items not specifically covered by accounting standards or where they are ambiguous
• making judgements, for example about valuation, aimed at giving a true and fair view
• not using detailed accounting rules as an excuse for poor accounting
• considering what is and what is not material
• giving appropriate disclosures even where not specifically required by accounting standards
• ensuring that significant information is not obscured by immaterial or irrelevant disclosures
• standing back at the end of the process and making sure that, overall, the accounts  do give a true and fair view. 

For companies reporting under new UK GAAP, both FRS 102 and company law require that directors make prudent judgements in their consideration of accounts, particularly where there is uncertainty. 

For companies applying IFRS, IAS 8 requires that financial statements are prudent and neutral, ie free from bias.

More emphasis is placed under IFRS on neutrality, which is seen as the absence of deliberate manipulation of financial information intended to make its reception by users more or less favourable.

The concern in IFRS is that the use of excessive prudence, resulting in the deliberate understatement of assets or overstatement of liabilities, does not lead to useful information and may be conducive to smoothing of the profits.

However, as part the second phase of its review of the Conceptual Framework, the IASB is now proposing to reintroduce an explicit reference to prudence, though this is not expected to be finalised until 2015.

The FRC statement points out that, in any case, the concept of prudence continues to underlie the preparation of accounts under both UK GAAP and IFRS through, for example, asymmetry in the recognition of profits when compared to losses and the measurement of assets and liabilities where uncertainty exists.

Substance of transactions

IFRS and new UK GAAP do not contain separate standards that require accounts to reflect the substance of a transaction rather than its legal form where this is different.

However, both frameworks include provisions to report information in accordance with economic substance rather than strictly in adherence with its legal form.

The FRC concludes that it would be difficult for accounts to present a true and fair view if form had overridden substance. 

True and fair override

In the majority of cases a true and fair view would be achieved by compliance with the accounting standards as the standards are designed to provide for recognition, measurement, presentation and disclosure for specific aspects of financial reporting in a way that reflects economic reality.

The FRC’s statement, however, clarifies that, where directors and auditors do not believe that following a particular accounting policy will give a true and fair view, they are legally required to adopt a more appropriate policy, even if this requires a departure from a particular standard. Disagreement with a particular standard does not, on its own, provide grounds for departure from it.

The true and fair override, as noted by the FRC, is enshrined in both FRS 102 and IFRS (specifically IAS 1, Presentation of Financial Statements ) which both require departure from the requirements of a specific standard when compliance would conflict with the objective of financial statements.

In response to concerns about the proper operation of the true and fair override under IFRS, the FRC clarifies that, under IAS 1, an accounting policy would conflict with the objective of financial statements 'when it does not represent faithfully the transactions, other events and conditions that it purports to present or could reasonably be expected to represent' and that, where the true and fair override is applied, IAS 1 requires disclosure that the departure from a particular requirement is 'to achieve a fair presentation'.

The FRC therefore concludes that the true and fair override is fully applicable under IFRS and points out that there have been examples of its application under IFRS both inside and outside the UK.

Auditors' approach to true and fair

The FRC statement stresses that auditors are legally obliged, under Companies Act 2006, to state, when giving their opinion on a company’s financial statements, whether the accounts, in their opinion, give a true and fair view.

For auditors to discharge their legal and professional responsibilities, It is therefore necessary that they should stand back as they approach finalisation of an audit and consider whether, as a whole and in light of the issues identified during the audit, the accounts do indeed give a true and fair view.

FRC's expected approach from preparers, those charged with governance and auditors

The statement highlights what is expected by the FRC as a result of the clarifications outlined in respect of the true and fair requirement: 

• to always stand back and ensure that the accounts as a whole do give a true and fair view; 
• to provide additional disclosures when compliance with an accounting standard is insufficient to present a true and fair view; 
• to use the true and fair override where compliance with the standards does not result in the presentation of a true and fair view; and 
• to ensure that the consideration they give to these matters is evident in their deliberations and documentation.

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What does "Fair Presentation" mean to your business?

Buyers of commercial insurance should be aware of the Insurance Act 2015 which affects all business insurance subject to the law of England, Scotland, Wales or Northern Ireland arranged or amended after 12 August 2016.

The change in law updates the legal framework to be more appropriate for modern business requirements. The key new requirement that businesses need to be aware of is the Duty of Fair Presentation.

The law is being updated to make it simpler and easier for businesses to get claims paid by insurers and to assist insurers, brokers and customers ensure that insurance contracts are fit for purpose.

In essence, businesses get fairer outcomes in the event of a claim, but only if they demonstrate an adequate approach to disclosing information about their risk to insurers before the insurance is agreed ñ in the form of the new Duty of Fair Presentation.

The key things to remember about Fair Presentation are:

• All commercial insurance arranged or amended after 12 August 2016 will be affected, so businesses should start to prepare now.
• It builds on existing underwriting practices, but is more process focused than the duty of disclosure it replaces.
• It should not mean reinventing the wheel ñ building on existing practices and internal information processes is key to avoid unnecessary business disruption.
• Successful Fair Presentation is measured in relation to your specific business, not a standardised checklist

The central requirement of Fair Presentation is still to share all material facts, accurately and in good faith. However the new duty introduces some new concepts:

Material accuracy and good faith

• The core requirements from you essentially remain unchanged ñ you need to take reasonable steps to ensure information provided when seeking insurance is accurate and complete to the best of your knowledge.
• The Act also specifies examples of important details to include, such as special or unusual details of the business or existing areas of concern relating to the types of risk covered by the insurance.

Whose knowledge to include

• The relevant knowledge of senior management ñ defined as the key individuals who decide how the business is run.
• If the risk and insurance team (or individual buying the insurance) is separate to senior management then their knowledge must also be included.
• In addition your insurance brokerís relevant knowledge should also be included.

Reasonable search

• Sufficient enquiries to build a picture of your risk must also be conducted and material information arising must be included. This may include enquiries made of external parties such as managing agents, accountants, solicitors or your insurance broker.

Clear and accessible presentation

• The presentation of information should include adequate signposting and flag important points to insurers.
• Data dumping is prohibited.

Insurer duties

• Information that an insurer should know does not need to be included in the presentation, but check with them before omitting any risk information
• Insurers will make further enquiries if there are obvious omissions, questions or gaps to the information presented.

Taken together this means there will be more focus on the information gathering process not just the facts themselves

BE PREPARED: INSURERS KEY EXPECTATION

Each Fair Presentation will be unique and specific to a business ñ whatís reasonable for one business may not be reasonable for another. However insurers expectations for customers are guided by the same principles. These are the key areas you should consider:

1. Audit trail of how risk information is put together

• Principal requirement is for you to have an audit trail of how the information was gathered.
• Who is consulted.
• What information is asked for.
• How information is collated and checked.

2. Accurate and complete information

• The core information we ask for as part of proposal forms or insurance submissions (such as claims information or asset value) will continue to lie at the core of a Fair Presentation and should be complete as accurately and fully as possible.

3. Flag changes and differences

• In addition to answering our questions you must flag special or unusual facts about the risk.
• These will be unique to your business but could for example include:
• Operational factors which make your business different from competitors or industry standards.
• Recent or planned business developments such as new products and services, acquisitions, customers or contracts, which will affect your risk profile.
• Known issues where you already have a concern about the potential for increased risk in future.
• Changes in business operations, which might not be fully explained in the standard underwriting information such as business units with different working practices.
• For all changes it is important to describe the circumstances and what you think the risk impact could be.

4. Well-structured information

• The presentation should include clear structuring and signposting of key information.
• For larger more complex businesses, with extensive information sets, an executive summary and detailed contents page would be expected.

5. Ongoing notification of changes

• Having an ongoing process in place to monitor and flag fundamental changes to your risk during the period of the policy is important, as this could change your insurance needs.

6. Additional enquiries

• It is critical to consider the range of people you need to consult within the business. This will naturally be specific to your business but could include:
• Who counts as senior management may differ by type of risk but as well as directors it is likely to include line management and those who control policies affecting risk or with specific risk management responsibilities.
• Relevant third parties who also hold information on your risk ñ like outsourced service providers (e.g. property managing agents, IT providers or facilities management) or the knowledge of your broker (e.g. survey reports, claims data or sector specific risk knowledge).
• For such enquiries you should record not just the information identified but also the list of consultees and reasoning behind their selection.

7. Build on existing processes

• Current processes can be enhanced by adding more detail, thinking through the list of individuals consulted and including supplementary explanatory notes where necessary.
• Drawing on and adapting existing internal sources of information ñ such as board reporting, risk or contract registers ñ to build the more detailed information set that Fair Presentation requires.
• Recording and explaining the current enquiries made.

For more information please do not hesitate to contact ourselves.

Source: www.rsabroker.com/system/files/The Insurance Act – What does Fair Presentation mean for your business March 2016.pdf

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