The 12th August 2016 sees the coming into force of the Insurance Act 2015 (the Act). It is being billed by insurance industry commentators as one of the most fundamental changes to Insurance Law in England and Wales ever. Only time will tell if this claim is correct but it certainly does introduce wholesale change into all non-consumer insurance and reinsurance.
A full and detailed review of the changes to be implemented is outside of the scope of this article. Instead I will introduce the highlights and how they are substantially different from the current regime.
It is worth pointing out here that the Act (like the Third Parties (Rights Against Insurers) Act 2010) is not retrospective. It will only apply to contracts of insurance entered into after 12 August 2016.
The main three areas of change under the Act are as follows:
- Fair Presentation
A new duty of “fair presentation” will be applied to Insureds (someone who had the benefit of or purchased an insurance policy) under insurance contracts.
Previously an insured had a general duty to disclose all material facts. The new duty of “fair presentation” will, in essence, require an insured to undertake a reasonable search for information available to them and to disclose every material circumstance that they know or ought to know. Alternatively an insured must provide disclosure that would give a prudent insurer a reasonably clear and accessible picture of the risks to be insured or if not, what further information would be required.
- Proportionate Remedies
The Act also introduces a new system of proportionate remedies when an insured breaches it’s duty of fair presentation. Historically in similar situations prior to the Act an insurer had the remedy of avoidance for a breach of the duty of utmost good faith. Under the Act this remedy has been ended for a non-deliberate or non-reckless breach. Avoidance will still apply where an insured gives deliberate or reckless disclosure.
Instead the Act stipulates that a proportionate remedy will be granted to the insurer based on what the insurer would have done had it known the true facts. For instance if, after consideration, the insurer would still have entered into the insurance contract but on different terms, then the contract can be treated as if it had been entered into on those new terms. This is the case even if the insured would not have agreed to those terms in the first place.
Before the 12th August 2016 a breach of warranty contained within the insurance contract had the effect of allowing an insurer to discharge its liability (even if the breach was later rectified).
The Act, however, now envisages that a breach of warranty can be cured meaning avoidance by the insurer is likely to be used on fewer occasions. The Act defines these as “suspensive conditions”. Put simply this means that an insurer’s liability will be suspended until such time as the breach is cured.
There are other changes that will be implemented under the Act such as the abolition of basis of the contract clauses (i.e. where insurers try to turn pre-contract representations into warranties) and remedies for fraudulent claims. However, these are relatively incidental to the three changes mentioned above.
As noted above it remains to be seen how far reaching these changes will be in practice. Undoubtedly there will be some tension over the changes between insured and insurer in the short term. Whether that leads to satellite litigation only time will tell.