On 18 May 2016, Practical Law Dispute Resolution hosted an insurance breakfast briefing, Insurance Act 2015: minimising the risk of disputes. The speakers were Tony Dempster, partner in Herbert Smith Freehills’ insurance and reinsurance disputes group, and Sarah Irons, professional support lawyer at Herbert Smith Freehills.
In a very interesting and thought-provoking presentation, Tony and Sarah considered the practical implications of the Insurance Act 2015, which comes into force on 12 August 2016. They also identified various practical steps that insurers, insureds and brokers can take to comply with the Act and to realise its full benefits. Their key message was to be prepared. In this blog post we outline some of their suggestions for achieving that.
Duty of fair presentation
The new duty of fair presentation differs from the current law in two material respects: it changes the law around what constitutes knowledge of material facts and it introduces a range of remedies for breach.
In order to comply with the duty, Tony and Sarah suggested that it is crucial for insureds to ensure that there is a robust disclosure process by, for example:
- Improving communication between insured, broker and insurer. The provisions under the Act relating to knowledge will dictate what an insured needs to disclose. Accordingly, insureds should educate those in their organisation about what information they will need to provide to insurers and in what format. The necessary steps will depend on the size and nature of the organisation, and also on the type of insurance being sought.
To minimise risk, insureds could consider agreeing with insurers whose knowledge within the insured’s organisation is relevant and the scope of a reasonable search for the purpose of discharging the duty.
- Starting the disclosure process early. Insureds should embark on negotiations with insurers to, for example, limit the scope of their searches for material information early, in advance of any policy renewals. If their current policies include terms which are more advantageous than under the Act (for example, non- disclosure clauses), they should consider negotiating with insurers to maintain those clauses.
- Keeping audit trails. Insureds should have an auditable disclosure process evidencing their searches for information.
As far as insurers are concerned, they should ensure that they fully understand the information they are being provided with by the insured or its broker. The Act encourages active rather than passive underwriting.
The Act introduces a range of proportionate remedies for breach of the duty of fair presentation, including avoidance, a variation of the policy terms and a reduction in the amount payable on a claim to reflect an increased premium. The appropriate remedy will depend on the nature of the breach, but also on insurers’ ability to show what they would have done had there been a fair presentation of the risk (for example, charged a higher premium, included different terms or rejected the risk). To enable them to prove what they would have done differently, insurers should think carefully about their underwriting guidelines and how best to document their underwriting decisions.
Warranties and terms designed to reduce risk of loss
The Act provides that warranties will operate as suspensive conditions, meaning that following a breach, the insurer will be relieved of liability until the breach is remedied. A well prepared insured may want to consider removing warranties from the insurance policy, or amending their current policies to take advantage of the benefits that the Act offers. Indeed, to fully benefit from the new provisions, insureds will need to manage their warranties, which will require them to be (a) completely aware of whatever warranties are included in their policy and (b) alerted when there is a breach of warranty so that they may remedy it, if possible.
Insurers, on the other hand, could consider recasting existing warranties as conditions precedent to liability and perhaps using “sweep-up” clauses to convert all of the insured’s obligations to conditions precedent to liability. However, it remains to be seen how courts view this approach.
The Act limits the effect of terms designed to reduce the risk of loss (including warranties), but that do not go to the risk as a whole. Insurers will no longer have a remedy for breach unless the term was relevant to the claim or loss. Tony and Sarah identified that there are bound to be difficulties in determining which terms fall within the scope of the Act. Insureds may also find it challenging to prove that the breach of a particular term could not have increased the risk of loss, as they will be required to do.
Damages for late payment
It will be some time before we see claims against insurers for damages for breach of the implied term that insurers are to pay claims within a reasonable time as the new duty will come into force on 4 May 2017.
Although there have been concerns that this new provision will open the floodgates, in reality an insured has the difficult task of proving that the alleged loss was caused by the insurer’s breach of the implied term and that the loss was foreseeable when the policy was placed. Tony and Sarah speculated that this new right to damages is likely to be of greatest benefit to small businesses, as they are most likely to be able to demonstrate that the late payment of a claim caused additional losses, over and above the loss of interest.
It is likely that the new provision will affect the dynamics of negotiations between insureds and insurers during the handling of claims. Insurers should ensure that, among other things, they have good claims handling practices in place and that they document any steps taken to investigate any claim, including the time taken to respond to correspondence from the insured. Insurers should also be aware that privilege issues may arise where the delay in payment is due to their seeking legal advice on whether a claim is covered under the policy. If they wish to rely on the fact that legal advice was obtained, they must be careful not to waive legal advice privilege.
The new duty and the risk of claims for late payment will also have an impact on the level of reserves held by insurers.
Tony and Sarah emphasised that the aim of the Act is to bring the UK up-to-date with modern insurance markets. It also aims to help the English insurance market maintain its competitive advantage in the global arena by addressing the perceived imbalance in the law in favour of insurers. The Act has the benefit of introducing greater certainty in this area of the law, although there are likely to be disputes over the scope and application of some of its provisions which will need to be tested by the courts. Although, in relation to non-consumer insurance, insurers are able to contract out of the provisions of the Act (subject to compliance with certain transparency requirements), Tony and Sarah consider that insurers are unlikely to do so on a wholesale basis.
If you missed the session, Herbert Smith Freehills’ slides are available here.