Tatyana Talyanskaya and Jayesh Patel of law firm Bryan Cave look at the key changes brought about by the Insurance Act 2015.
The Insurance Act 2015 came into force on 12 August 2016 and represents the most significant reform to commercial insurance law in over 100 years. It seeks to redress the balance in what was an insurer-friendly market and to modernise some of the more outdated areas of commercial insurance law. The framework laid down by the Act will undoubtedly develop through industry practice and case law. In the meantime, this article looks at the key changes brought about by the Act and addresses some of the considerations for practitioners.
The duty of fair presentation
Perhaps the most significant reform introduced by the Act is the reformulation of the “duty of fair presentation”, which has been long established as common law.
Section 3 of the Act puts the onus on the insured to make to the insurer a “fair presentation of risk” before a non-consumer commercial contract of insurance is entered into. The duty of fair presentation of risk encompasses making appropriate disclosure to the insurer, in a prescribed manner, and in which every material factual representation must be substantially correct and every material representation as to a matter of expectation or belief be made in good faith. Every material circumstance which the insured “knows or ought to know” must be disclosed (subject to certain exceptions set out in section 3(5)). A material circumstance is one that would influence the judgement of a prudent insurer in determining whether to take the risk and, if so, on what terms.
As to the knowledge of the insured, the Act draws a distinction between individuals and organisations. The knowledge of an insured individual is extended to also cover the individuals who are responsible for the insured’s insurance, for instance, an insurance broker. For an organisation, the requisite knowledge of the insured is that of the insured’s senior management or those responsible for the insurance policy.
Whilst the burden placed on the insured is high, it is lessened by the positive duty placed on the insurer to conduct its own investigations where sufficient information has been provided to it to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing material circumstances.
Whilst, at first glance, it may appear that an insured may fulfil their duty under the Act by providing the insurer with all of the information in its possession, the insured would be well advised to avoid taking this approach. A review by the Law Commission in July 2014 called for the Act to include a considered approach to disclosure. This is reinforced by section 3(3)(b), which requires that the disclosure is made in a manner which would be reasonably clear and accessible to a prudent insurer. Policyholders may seek to receive confirmation from the insurer that they have met the standard for a fair presentation to pre-empt future argument on the point.
Given that the Act has not yet been tested by the courts, there is limited guidance to be found in case law on the application of its provisions. It is noted, however, that the courts are encouraged to refer to the existing body of case law in determining whether a sufficient disclosure has been made.
The consequences of failing to make a fair presentation may be stark. Where the failure is deliberate or reckless (the onus of proof being on the insurer), it is considered a “qualifying breach” which would enable the insurer to avoid the contract in its entirety and withhold the premium.
The provisions dealing with the insured’s state of knowledge could mean insurance brokers are now in the line of fire, despite their potentially limited role in arranging contracts of insurance. Again, one can expect that this will be an area for contention, with the potential for disputes to turn litigious.
Where a failure to make a fair presentation would not be a “qualifying breach”, the insurer may avoid the contract if they would not have entered into the contract had all the information been available to them at the outset. In these circumstances, however, the insurer would be required to reimburse the premium. On the other hand, if they would have entered into the contract had all the information been made available to them but for the breach, the insurer will be entitled to introduce new terms into the contract and/or reduce proportionately the premium by reference to a prescribed formula. The lack of guidance as to what would be appropriate in these circumstances gives rise to uncertainty which may see parties to insurance contracts turning to the Courts to determine the reasonableness of any policy terms so introduced.
It is also important to note that whilst the insurer’s liability is suspended until any breach is remedied, it may not now rely on non-compliance with a term to avoid liability where the term is not relevant or related to the actual loss. The insured would need to show that the non-compliance did not increase the risk of loss.
Moreover, the so-called “basis of contract clauses”, which would seek to convert representations made by the insured pre-contract into warranties, have now been abolished. This is a positive change for policyholders and strips away a highly contentious area, forcing the insurer to play a more active role in understanding risk and providing policies.
Whilst the Act introduces a certain level of uncertainty into the field of commercial insurance which only time will clarify, it appears on the face of it to help mitigate the previous inequity in favour of insurers, curtailing the free reign to terminate contracts with ease that they previously enjoyed.
Tatyana Talyanskaya is an associate in the commercial litigation team and Jayesh Patel a trainee solicitor at Bryan Cave.