The new Insurance Act 2015 paves the way for the most significant changes to English insurance contract law in over a century. The Act comes into force in August 2016 but all those involved in the placing and underwriting process – risk managers, brokers and (re)insurers – should take note now to ensure they are ready for the changes the Act will bring and can realise its full benefits.
The Act aims to address the perceived current imbalance in the law in favour of insurers, which is said to put the English insurance market at a competitive disadvantage. It updates the law in the following areas:
- Disclosure and misrepresentation in business and other non-consumer insurance contracts.
- Warranties.
- Terms to reduce particular risks.
- Insurers’ remedies for fraudulent claims.
The Act also amends the Third Parties (Rights Against Insurers) Act 2010 so that the 2010 Act can finally be brought into force.
Disclosure
The Act introduces a new duty on the insured to make a “fair presentation of the risk”. This comprises three elements. The insured must:
- Disclose every material circumstance which it knows or ought to know. The Act is prescriptive as to whose knowledge is relevant for these purposes and also includes an obligation on the insured to conduct a reasonable search of information available to it or, failing that, give 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. This is intended to discourage passive underwriting.
- Present the disclosure in a manner which would be reasonably clear and accessible to a prudent insurer. It is hoped that this will discourage “data dumping”, where an insurer is bombarded with vast swathes of material, whether relevant to the risk or not.
- Not make misrepresentations. Every material representation as to a matter of fact must be substantially correct and every material representation as to a matter of expectation or belief must be made in good faith.
Another significant change brought about by the Act is that the sole remedy of avoidance of the policy for breach of the duty of disclosure will be replaced by a range of proportionate remedies. It was recognised that having only the remedy of avoidance was draconian and did not adequately distinguish between innocent and deliberate or reckless breaches. Under the Act, unless the breach is deliberate or reckless (in which case the remedy of avoidance will still be available), the onus is on the insurer to show what it would have done had it received a fair presentation of the risk.
Warranties
There are two key changes to warranties under the Act.
First, a breach of warranty will no longer automatically bring an end to the insurer’s liability under the policy. The Act makes warranties “suspensive conditions” – the insurer’s liability will be suspended while the insured is in breach of a warranty, but can be restored if the breach is subsequently remedied.
Secondly, the Act abolishes “basis of the contract” clauses, which operate to turn the insured’s pre-contractual representations (including answers to questions on a proposal form) into warranties.
Terms to reduce particular risks
Currently, breach of some policy terms (including warranties and conditions precedent) may allow insurers to avoid liability for claims irrespective of whether that breach is material to the loss. Under the Act, where any term is designed to reduce the risk of loss of a particular kind or at a particular time/location, the insurer will not be able to rely on breach of such a term to avoid paying a claim if the breach could not have increased the risk of the loss.
Insurers’ remedies for fraudulent claims
The Act replaces the current co-existing remedies of forfeiture (under common law) and avoidance (under the Marine Insurance Act 1906) with a statutory regime for fraudulent claims. This provides that the insurer (1) will not be liable to pay fraudulent claims; (2) can elect to terminate the contract and refuse to pay claims relating to losses suffered after the fraud; but importantly, (3) will remain liable for all legitimate losses suffered before the fraud.
Contracting out
It is intended that the Act will be the default regime for non-consumer insurance contracts. However, the Act allows parties to non-consumer insurance contracts to contract out of the regime (with the exception of the prohibition on “basis of the contract” clauses) as long as any “disadvantageous term” (which puts an insured in a worse position than that under the default regime) meets certain “transparency requirements”.
Implications
The Act has been strongly welcomed by industry players as bringing commercial insurance law up-to-date with the realities of the modern world, and heralded as a tool to combat the perceived imbalance in the law in favour of insurers. It is hoped that in the long-term the Act will introduce greater certainty, although it seems inevitable that at least initially there will be disputes over the scope and application of some of the provisions as these are tested in practice.
Policyholders will need to consider, among other things, how best to conduct a reasonable search for material information. This will be challenging in instances where there has been a change of broker or a change in personnel. There will be a greater onus on record-keeping and verification of information included in the underwriting submission.
Following the introduction of proportionate remedies, insurers will no longer be able to rely on the draconian remedy of avoidance in relation to an insured’s innocent non-disclosure. The onus will be on the insurer to show what it would have done had it received a fair presentation of the risk. Insurers will need to think about their underwriting guidelines and how best to document underwriting decisions in order to be able to take advantage of the remedies available under the Act.
While the Act is not in force until August 2016, some insurers have already indicated that they are willing to adopt its provisions in the language of their policies in the interim and policyholders (in conjunction with their brokers) might consider seeking policies that implement these changes now.
