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Changes to Business and Commercial Insurance – Analysis of the Insurance Act 2015

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The Insurance Act 2015 received royal assent on 12th February 2015 and the reforms will come into force in August 2016.  The Act repeals or amends various sections of the Marine Insurance Act 1906 and, from a practical perspective, the new provisions will not apply to existing insurance contracts, but rather to new contracts and variations agreed after the Act comes into effect. 

Andrea Leadsom: House of Commons, 3 February 2015

 

“Together with the Consumer Insurance (Disclosure and Representations) Act 2012 that preceded it, the Bill marks the biggest reform to insurance contract law in more than a century.  It is the product of careful consultation and consideration, and as a result it is well supported.  It demonstrates the Government’s commitment to maintaining and growing the UK’s insurance industry both at home and abroad.”

 

Easy to follow step-by-step guide to the various Sections in the Insurance Act 2015:

PART 2 - THE DUTY OF FAIR PRESENTATION (Clauses 2 -8)

PART 3 - WARRANTIES AND OTHER TERMS (Clauses 9-11)

PART 4 - FRAUDULENT CLAIMS (Clauses 12-13)

PART 5 - GOOD FAITH AND CONTRACTING OUT (Clauses 14-18)

PART 6 - AMENDMENT OF THE THIRD PARTIES (RIGHTS AGAINST INSURERS) ACT 2010

Schedule 1 – Insurers’ remedies for qualifying breaches

Schedule 2 – Rights of third parties against insurers: relevant insured persons

PART 2 - THE DUTY OF FAIR PRESENTATION (Sections 2-8)

The new duty of fair presentation imposes a duty on prospective policyholders to disclose information to the insurer which allows the insurer to assess and price the risk accurately.  It was said by the Law Commission that the existing law could be difficult to understand and even more difficult to comply with fully.  A failure to provide all material information (under the old rules) allows the insurer to refuse all claims under the contract.

Under the Act, policyholders still have a duty to disclose information, and they should make an active search for relevant information, but insurers might need to ask the policyholder questions if they require further clarification. 

If a policyholder fails to make a fair presentation of the risk, there is a new system of proportionate remedies for the insurer, under Schedule 1 to the Act, based on what the insurer would have done had the failure not occurred.

This applies in the event of a variation to a non-consumer insurance contract as well as upon the initial agreement or the contract.

SECTION 3 introduces a requirement on the insured to “make to the insurer a fair presentation of the risk” before the contract is entered into.  That replaces existing duties in relation to disclosure and representations contained in the Marine Insurance Act 1906.  A fair presentation of the risk is one which makes that disclosure in a manner which would be reasonably clear and accessible to a prudent insurer, 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.

The disclosure required is of every material circumstance which the insured knows or ought to know, or, 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.

In the absence of enquiry by an underwriter, an insured is not required to disclose a circumstance if:

(a) it diminishes the risk; (b) the insurer knows it; (c) the insurer ought to know it; (d) the insurer is presumed to know it; or (e) it is something as to which the insurer waives information.

SECTION 4 defines what the insured knows, and ought to know, for the purposes of the duty to disclose every material circumstance known to them, including everything which, “in the ordinary course of business”, ought to be known to them including what should reasonably have been revealed by a reasonable search of information available to them (whether the search is conducted by making enquiries or by any other means).

A corporate insured “knows only what is known to one or more of the individuals who are (a) part of the insured’s senior management, or (b) responsible for the insured’s insurance.”

“Senior management” means those individuals who play significant roles in the making of decisions about how the insured’s activities are to be managed or organised and is described in the explanatory notes as “the board, but can also go beyond it, depending on the corporate structure of the relevant policyholder.”

PART 3 - WARRANTIES AND OTHER TERMS (Sections 9 – 11)

An insurance warranty is typically a promise by the policyholder to do something that mitigates the risk.  Under the current law, any breach of warranty completely discharges the insurer from liability from the point of breach.  That is so even if the breach is remedied before any loss is suffered and if the breached term had nothing to do with the loss.  This is codified in Section 33(3) of the Marine Insurance Act 1906, which states that a warranty "must be exactly complied with, whether it be material to the risk or not".  The insurer is discharged as of the date of the breach: Bank of Nova Scotia -v- Hellenic Mutual War Risks Association ('The Good Luck').  The Law Commission considered this remedy to be overly punitive. 

The Act provides that an insurer will be liable for insured losses arising after a breach of warranty has been remedied.  It also prevents an insurer from refusing payment on the basis of a breached term that could have had no bearing on the risk of the loss that actually occurred, such as where a warranty concerning a fire alarm is breached and the insured then suffers a flood in the insured property. 

Under SECTION 9, the Act also seeks to abolish “basis of the contract” sections which converted every statement made by a policyholder on a proposal form into a warranty.  Under the current law, an insurer may add a declaration to a non-consumer insurance proposal form or policy, stating that the insured warrants the accuracy of all the answers given or that such answers form the “basis of the contract”.  That has the legal effect of converting representations into warranties.  The insurer is discharged from liability for claims if the insured made any misrepresentation, even if it was immaterial and did not induce the insurer to enter into the contract. 

The Law Commission gave the example of a claim for flooding being refused because the insured had failed to install the right model of burglar alarm.  The section seeks to put an end to this practice by abolishing “basis of the contract” sections in non-consumer insurance. 

PART 4 - FRAUDULENT CLAIMS (Sections 12-13)

Fraud is a serious and expensive problem for insurers and innocent policyholders alike.  According to industry statistics, policyholders currently pay an additional £50 on every insurance policy because of the cost of fraud on insurers.  The Act seeks to strengthen and clarifies the civil law aspect of the Government’s drive to combat fraudulent claims by policyholders.  The Act sets out statutory remedies for the insurer where the policyholder has made a fraudulent claim.  It affirms the common law position that the policyholder forfeits the fraudulent claim.  The insurer has no liability to pay any element of it and can reclaim anything it paid before it knew about the fraud.

SECTION 12 sets out the insurer’s remedies where the insured makes a fraudulent claim.  It puts the common law rule of forfeiture on a statutory footing.  Where the insured commits a fraud against the insurer, the insurer is not liable to pay the insurance claim to which the fraud relates.  Where the insurer has already paid out insurance moneys on the claim and later discovers the fraud, the insurer may recover those moneys from the insured.  That provides the insurer with a further remedy giving it an option to treat the contract as if it had been terminated at the time of the “fraudulent act”.  That does not apply where a third party commits a fraud against the insurer or the insured, such as where a fraudulent claim is made against an insured who seeks recovery from its insurer under a liability policy.

PART 5 - GOOD FAITH AND CONTRACTING OUT (Sections 14-18)

Part 5 of the Act deals with two separate matters: the principle of good faith and the ability of parties to contract out of the provisions of the Act. 

SECTION 14 – Good Faith – seeks to retain the statutory and common law principle that a contract of insurance is one predicated on good faith.  However, the clause abolishes avoidance of the contract as the remedy for breach, recognising that avoidance is capable of operating harshly against policyholders.

The provisions are a default regime for business insurance contracts.  They are expected to be appropriate for the majority of insurance contracts, but there may be circumstances when parties prefer to set out their own bespoke arrangements.  However, if an insurer wishes to rely on a term that will operate more harshly against the policyholder than the Act otherwise provides.???

SECTIONS 16 and 17 require it to act transparently when the contract is made by ensuring that the meaning of the alternative provision is clear, and by drawing the attention of the policyholder to it.  Insofar as the Act applies to consumers rather than businesses, it is a mandatory regime.  Insurers are not entitled to contract out of its provisions to the detriment of consumers.

Under the Marine Insurance Act 1906, insurance contracts are ones of “utmost good faith”.  Section 14 removes avoidance of the contract as a remedy for breach of that duty of good faith, both from the 1906 Act and at common law.  The intention of clause 14 is that good faith will remain an interpretative principle, with section 17 of the 1906 Act and the common law continuing to provide that insurance contracts are contracts of good faith.

SECTIONS 15 and 16 prohibit insurers from inserting in an insurance contract, terms that would leave the insured – be they a consumer or a non-consumer – in a worse position than that required by the Act.

SECTION 16 defines transparency in respect of what an insurer must do to draw the insured’s attention to the disadvantageous terms of the contract. 

SECTION 17 sets out the transparency requirements.  For example, the insurer should take sufficient steps to draw disadvantageous terms to the insured’s attention within a reasonable timeframe prior to their entering into the contract, but when an insured has knowledge of the term, they may not claim that the insurer has not brought it to their attention. 

SECTION 18 deals with the insurer’s remedies where a member of a group insurance contract makes a fraudulent claim. 

PART 6 - AMENDMENT OF THE THIRD PARTIES (RIGHTS AGAINST INSURERS) ACT 2010

Part 6 amends the Third Parties (Rights against Insurers) Act 2010 and will assist injured parties who have claims against parties that are now defunct where insurance was in place to cover such claims.  The Act seeks to make it easier for mesothelioma sufferers to obtain compensation due from insolvent employers.

The Act allows the Secretary of State, by regulations, to add or remove circumstances in which a person will fall within the provisions of the 2010 Act.  The intention in the first instance is to use this power to add insolvency and other similar events to the 2010 Act.  Draft regulations are being prepared by the Ministry of Justice.  Once the first set of regulations are made, the 2010 Act can be commenced.  The Government are committed to bringing the 2010 Act into force as soon as practicable.

Late Payment of claims by Insurers 

One issue that was originally suggested in the Law Commission reports did not make it into the Act: late payment.  “We consider that a policyholder should have a remedy where an insurer has acted unreasonably in delaying or refusing payment.” The report recommended “an implied term in every insurance contract that the insurer will pay sums due within a reasonable time”, with appropriate caveats.  This was excluded from the Act as it was deemed too controversial and that “evidence presented to the Law Commission, the Treasury and the Special Public Bill Committee demonstrated that the problems in the existing law are worse in theory than in practice.” Official Report, Insurance Bill Second Reading Committee, 26 January 2015; c.9.

The main arguments against such a provision were that it could lead to speculative litigation, or have the unwelcome effect of being used to exert undue pressure to expedite claim settlement, and those costs have not yet been quantified.  Furthermore, adequate customer protections already exist, so the problems of late payment are worse in theory than in practice.  The Financial Conduct Authority is currently undertaking a thematic review into the handling of commercial claims, and the issue is being considered from a regulatory angle.

Andrea Leadsom: "…the Government support the principle that insurers should make payment of valid claims within a reasonable time, and that they should be liable for compensation where appropriate should they fail to do.  The Government are always looking at ways to support and improve the position of the UK insurance industry, and it is hoped that legislative opportunities will arise to include that measure with other insurance-related provisions."

If you wish to find out more about these changes or enquire about in-house training please call Charlotte Waters at our London office on 44 (0) 207 993 6960 or email waters@fsw-law.com.

Fisher Scoggins Waters is a leading construction, engineering and manufacturing litigation firm, specialising in disputes and disasters. For further information on this article or any of our litigation services, please contact us on: +44 (0) 207 993 6960.

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