The UK has waited a century for the major reforms that make up the Insurance Act and two other important Acts of Parliament. With the international reach of the UK insurance market, they will impact far beyond the UK via a series of insurance law reforms resulting in three new Acts of Parliament.
- The Third Parties (Rights against Insurers) Act 2010
- The Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA)
- The Insurance Act 2015
- The last two acts make extensive changes to the principles of the Marine Insurance Act 1906.
The economic and social context in which the 1906 Act was drafted was very different to that which evolved over the second half of the twentieth century and continues to this day. The law generally has the ability to evolve to keep pace with such changes by developing new precedents. Court decisions can reflect contemporary social and economic conditions and apply existing legal principles to new facts and situations in a way that produces an acceptable outcome. To an extent that has occurred with insurance law, but the courts have only been able to go so far. The pace of change may simply have been too much. In addition, the 1906 Act is drafted in clear, forthright terms that limit the ability of judges to develop the law. Furthermore, in recent years consumer disputes have generally been resolved by the Financial Ombudsman Service and many commercial disputes by arbitration. Neither of these mechanisms produces new legal precedents. Unsuccessful attempts to reform insurance law were made in 1957 and 1980 and in 2002 an eminent subcommittee of the British Insurance Law Association recommended that the issue should again be referred to the Law Commission.
The Law Commission Project
Having accepted the project to reform insurance law in 2006, the Law Commissions in England, Wales and Scotland began an intensive round of consultation that was to last eight years. The reforms which were proposed enjoyed widespread support from across the market. The three new Acts were enacted using the Law Commissions’ procedure for uncontroversial legislation.
The Insurance Act 2015
The Insurance Act 2015 comes into force in August 2016. The Insurance Act is concerned with both business insurance and consumer insurance. It covers the following topics:
- The pre-contract duty of disclosure for all non-consumer insureds. It introduces the new duty to make a “fair presentation” of the risk.
- The insurer’s remedies for breach of the duty of fair presentation.
- Basis of the contract clauses.
- Remedies for breach of warranty.
- “Irrelevant” risk mitigation clauses.
- The insurer’s remedies for fraud.
The Law Commissions decided to retain the obligation to volunteer relevant information for all insureds who are not consumers – the so called duty of disclosure. However, the framework of the duty has been developed. The duty to make a fair presentation of the risk incorporates both the law on non-disclosure and that on representation. Additionally, the new duty gives some guidance as to how information should be disclosed and who is obliged to provide it. The new duty recognises that gathering information in large organisations involves a lot of processes and seeks to allow for the impact of IT. The duty deals with both the substance of the presentation and the form.
The insured must: a) Disclose all “material circumstances” which it knows or ought to know or, failing that, provide sufficient information to put the underwriter on notice to ask further questions. b) The insured cannot comply with its obligation by providing a “data dump” of every possible fact and circumstance. A fair presentation of a complex risk requires adequate signposting to draw the underwriter’s attention to the relevant facts.
The insured ought to know what its senior management knows, what the people arranging the insurance know and what would reasonably have been revealed by a reasonable search. “Senior management” is defined as the people who “play significant roles in the making of decisions about how the insured’s activities are to be managed or organised”. Often senior management will be the board. However, the definition is wider as some insureds will not be companies. The individuals arranging the insurance could include, for example, the insured’s risk manager or broker – although a broker is not obliged to disclose confidential information obtained through a business relationship unconnected to the relevant contract of insurance.
Duty of disclosure
The 1906 Act provided some limits on the insured’s duty of disclosure and these have been carried forward into the new act. An insured does not have to disclose information if the insurer knows it, ought to know it or is presumed to know it. The insurer knows what is actually known to its underwriter or their agent. The insurer ought to know what should have been passed on to the underwriter (for example, by a surveyor or the claims department) or what the insurer holds in its systems provided this is “readily available” to the underwriter. The insurer is presumed to know what underwriters writing that class of business should know.
If the insured fails to make a fair presentation then the insurer always has a remedy provided it can show that, had it known the truth, it would have done something different. If the insured was deliberate or reckless then the insurer can avoid the policy and keep the premium. For all other breaches of the duty of fair presentation:
- If the insurer would have imposed additional terms or limits then these are imposed from inception and/or
- If the insurer would have charged a higher premium then the claim is reduced pro rata.
Although the duty of fair presentation is based on the existing law, policyholders and their brokers would be wise to review their existing practices. For example, what is the process for gathering information? Is there a reasonable search and how is this documented? Are there adequate discussions with the board or senior management? Are there proper discussions between the insured and their broker?
Insurers too will have to review their processes. Are underwriters sufficiently well trained and knowledgeable to ask the right questions? They are expected to have a reasonable degree of knowledge about the type of business they are underwriting. Is knowledge properly passed across the organisation? Is communication with an agent or surveyor sufficient? Are communications between claims and underwriting adequate? What is held in the insurer’s systems and can underwriters access what they need? What evidence will there be as to what underwriters might have done if a fair presentation had been made?
The provisions in the Insurance Act that relate to warranties and to fraud apply to both business insureds and to consumers. The new act follows CIDRA and abolishes basis clauses. Any term which seeks to make information provided when the policy was purchased into an insurance warranty will have no effect.
The new Act does not define “warranty”. Whatever a warranty is currently it remains. However, instead of discharging cover from the date of breach a warranty will become a suspensive condition. Cover is suspended whilst the insured is in breach but will be restored once the breach is remedied. For example, if an insured is obliged to inspect an alarm system but fails to do so cover is suspended until the inspection is carried out.
Warranties and similar terms which seek to mitigate risk will not be effective if the insured can show that non-compliance “would not have increased the risk of the loss which actually occurred in the circumstance in which it occurred”. A risk mitigation term is one that “tends to reduce the risk of” loss of a particular kind, loss at a particular location or loss at a particular time. It is not a term which defines the risk as a whole. To take a simple example, a sprinkler warranty will apply if there is a fire but not if the property suffers a loss by flood from an adjacent river.
These changes are a departure from the current law in which a warranty discharges the insurer from any liability under the policy from the date of breach regardless as to whether there is any connection between the breach of warranty and the loss that occurred.
If the insured makes a fraudulent claim then the Insurance Act provides a clear set of remedies. The entire claim is forfeit – including any honest part – and the insurer can keep the premium. The insurer will remain liable for any genuine claims before the fraud but has the option to terminate the policy from the date of the fraud.
The Insurance Act is a default scheme for business and all “non-consumer” insureds. As it is based on best practice and was widely supported by the market it is unlikely that insurers will wish to contract out of it on a regular basis. However, it would be appropriate to do so if the risk insured was very specific or complex. Equally, the new regime is probably not appropriate for many reinsurance contracts. If the insurer wishes to contract on different terms and if the term is “disadvantageous” to the insured the insurer must:
- take sufficient steps to bring the term to the insured’s attention and
- ensure that the term is clear and unambiguous.
This is a deliberately flexible test. What would be sufficient in a sophisticated market with well informed and advised parties would not be adequate if the insured was a small business buying cover direct on line.
After more than 100 years, there has been a thorough overhaul of insurance law in the UK. The new laws commanded wide support. It is to be hoped that they will provide as firm a foundation to the business of insurance in the twenty first century as the Marine Insurance Act in the first half of the twentieth century. Due to the large international insurance market in London the new law is likely to have an effect that stretches far beyond the UK.
AUTHOR: David Hertzell is a BLM consultant and former Law Commissioner