Summary: The Insurance Act 2015 (the “Act”) represents the most significant reform of insurance contract law in the UK for over 100 years. The Act will come into force on 12 August 2016 and will apply to all contracts of insurance and reinsurance issued after that date.
- The pre-contract duty of disclosure has been replaced by a new duty of fair presentation.
- There is no longer only one remedy (of avoidance) for non-disclosure/misrepresentation.
- The law on breach of warranty has changed materially.
- Contracting out of most of the Act is permissible.
- Under the Enterprise Act, from 4 May 2017, an insured will be able to claim damages for late payment of a valid claim.
- New duty of fair presentation (Business Contracts only)
The Act aims to encourage co-operation between an insured and insurers at the pre-contract stage. It does this by introducing a new obligation on an insured to make a fair presentation of a risk to its insurer.
Under the Act, an insured is required to:
- disclose every material circumstance which the insured knows or ought to know; and
- conduct a reasonable search of its records to discharge the duty of fair presentation.
The fair presentation should:
- disclose information in a reasonably clear and accessible manner. ‘Data dumping’ will not be permissible and the insured should ‘signpost’ material information to bring it to the insurer’s attention; and
- ensure that: (i) every material representation as to a matter of fact is substantially correct; and (ii) every material representation as to a matter of belief or expectation is made in good faith.
If the insured is in breach of the duty of fair presentation deliberately or recklessly, the insurer can avoid (i.e. rescind) the policy and keep all premium(s) paid.
If the insured’s breach is not deliberate or reckless:
- The insurer can avoid the policy but return all premium(s) paid if it can prove it would not have entered into the policy at all.
- If the insurer would have entered into the policy but on different terms, the policy will be treated as if it included those terms.
- If the insurer would have entered into the contract but would have charged a higher premium, the insurer may reduce proportionately the amount to be paid on a claim to reflect that premium adjustment.
- Warranties (Business and Consumer Contracts)
The Act abolishes “basis of contract” clauses which have been common. These have the effect of turning representations made by an insured into a warranty.
The insurer could then avoid paying a claim if any statement on the proposal form is inaccurate, even if immaterial or minor.
A breach of a warranty will no longer permanently discharge the insurer’s liability. If the breach is remedied prior to loss, cover will remain in place.
Importantly, breach of a warranty unconnected with the loss is no longer a ground for terminating cover.
- Contracting Out (Business Contracts only)
The Act allows insurers to contract out of the new law (except as to “basis of contract” clauses) and introduce less favourable terms to the insured. However, to do this, the insurer must:
- take sufficient steps to draw the disadvantageous term to the insured’s attention, before the policy is entered into; and
- ensure that the disadvantageous term is clear and unambiguous as to its effect.
- Late Payment of Insurance Claims – The Enterprise Act 2016
Under the current law, insurers have no legal obligation to pay valid claims within a reasonable time. From 4 May 2017 the Enterprise Act 2016 will amend the Insurance Act 2015 to enable insureds to claim damages actually suffered as a result of insurers’ unjustified “late” payment of a claim.
The Act implies into every contract of insurance a requirement on an insurer to pay sums due within a “reasonable time”. What amounts to “reasonable time” will depend on the specific circumstances but the Act provides a non-exhaustive list of factors including: (i) the type of insurance; (ii) the size and complexity of the claim; (iii) compliance with any relevant statutory or regulatory rules or guidance; and (iv) factors outside the insurer’s control.