David Kendall of Cooley considers the main issues for underwriters regarding the most radical change to UK insurance contract law for more than a century.
After over eight years of review and consultation, the Insurance Act 2015 came into force on 12 August 2016. It applies to all contracts of insurance and reinsurance (or variations to current contracts) subject to UK law – covering the laws of England, Wales, Scotland and Northern Ireland – underwritten on or after that date.
It is the applicable law of the contract, not where the contract is underwritten, that determines whether the Act applies. A contract underwritten in Bermuda that contains an English law clause will be subject to the Act; a contract underwritten in London that will be construed in accordance with US state law will not.
The Rome Convention may override the choice of law if the insurance is of a mass risk (i.e. not a large risk) and the insured is in the EU, not the UK. A large risk includes a marine, aviation, or transport risk or where the insured is a large organisation.
Presentation of the risk
Those parts of the Act concerned with the presentation of the risk to underwriters apply to non-consumer insurance contracts and reinsurance. The contract is one for consumer insurance if the buyer is an individual and requires insurance wholly or mainly for purposes unrelated to the individual’s trade/business/profession. The consumer insured is under no duty to disclose material information.
If the contract is for non-consumer insurance or reinsurance, the (re)insured must make a fair presentation of information material to the underwriting of the risk to the (re)insurer, and has a duty not to misrepresent material information.
If the (re)insured is a corporate entity, they are under a duty to disclose material information known to senior management, those procuring the insurance, and what would be disclosed by a reasonable search of information. It is thought prudent for the policy to include a clause identifying those in senior management positions (such as LMA Model Clause 9120) to avoid any doubt. Has the (re)insured identified those procuring the (re)insurance (e.g. its risk manager)? The knowledge of these individuals will also count as the knowledge of the (re)insured entity.
What amounts to a reasonable search, touched on above, is likely to depend on the particular circumstances of the (re)insured. The search may be conducted by looking through hardcopy or electronic files or by making enquiries or by any other means, and is not limited to the (re)insured’s own organisation. Underwriters should consider:
· Has the (re)insured described the search it has conducted for material information?
· Was the search sufficient to reveal information that the underwriter would want to take into account when underwriting the risk?
· Did the search include beneficiaries of the cover (e.g. directors), the (re)insured’s agents, and other entities in its organisation?
· Was there anyone else likely to have material information (e.g. accountants)?
The presentation will be fair, even if not complete, if the underwriter is put on notice that he or she needed to make enquiries to elicit material information. The underwriter must consider:
· Are there shortcomings in the placing information?
· Is all the information that one would usually expect to see from this kind of (re)insured included?
· Have all the questions in the placing application/questionnaire been answered?
· Has the underwriter asked for missing information?
· Has the insurer got a written record of any questions/answers posed by the underwriter?
· Has the written record been stored in a place where it can be found?
Under the Act, the (re)insured need not disclose information that is known to the (re)insurer - this focuses on what is known by the underwriting team. Underwriters should check:
· What information is available to the underwriting team in-house?
· What does the team usually review (e.g. claims database)?
· Has a record been kept of relevant data reviewed by the team?
The (re)insurer may have remedies if the (re)insured’s presentation of the risk is not fair depending on what the underwriter would have done had all the material information been disclosed. The following matters will be relevant when assessing what the underwriter would have done:
· What were the key factors taken into account when underwriting the risk?
· Has a record been kept of those key factors?
· Has the risk been underwritten in accordance with a manual or guidelines? If not, has the underwriter recorded where and why he or she departed from them?
· Is there a record of declinature?
· Are the records stored in a place where they can be found?
The Insurance Act changes the law as regards the enforceability of certain terms in both consumer and non-consumer contracts.
Does the proposed contract contain a “basis of contract” clause? These are no longer enforceable, but the insurer may list information of which the truth is critical and a condition precedent to insurer’s liability (such as LMA Model Clause 5253).
Insurers cannot contract out of the Act as regards consumer insurance contracts. Provided the insured or their broker is aware of the clear contracting-out clause, the insurer can contract out of the act in non-consumer insurance. For example, the insurer can contract out of the Act so that:
· Breach of warranty discharges the insurer from liability (rather than suspends liability until remedied), e.g. for non-performance of a premium warranty (see LMA Model Clauses 5258 & 5259)
· Breach of warranty discharges the insurer from liability even though it is not relevant to the loss (see LMA Model Clauses 5260 & 5261)
· The remedy for breach of the duty of fair presentation is avoidance of the contract (see LMA Model Clause 5257)
The Enterprise Act 2016 has made changes to the Insurance Act by introducing a remedy in damages for late payment of an insurance claim. These changes will not come into force until 4 May 2017, at which point there will be further matters for underwriters to worry about.
David Kendall is a partner in Cooley's London office and focuses on all aspects of insurance and reinsurance.