The far-reaching reforms affect any business using insurance and go into effect August 2016.
The Insurance Act 2015 (the Act) will come into force 12 August 2016. The Act introduces a raft of changes and will be relevant to any business that uses insurance. The insurance market is already gearing up for the changes and it is important for policyholders to understand how the insurance landscape will be changed by the Act and the practical consequences for them. In this LawFlash, we discuss the reform of duty of disclosure and the law relating to warranties in an insurance contract (and the remedies for breach) and also explore how fraudulent claims will be dealt with under the Act and the ability for parties to contract out of the changes that have been introduced.
The Duty of Fair Presentation
The Act reforms the law on information to be provided to an insurer. Policyholders have always had a duty to provide certain information to an insurer before a policy would be issued. The precise scope of the duty has been reformed by the Act and the old “Duty of Disclosure” is to be replaced by “The Duty of Fair Presentation.” The new duty continues to apply prior to inception of the original policy, on amendment (for example, by endorsement), and at renewal.
A fair presentation requires the disclosure of every material circumstance which the policyholder knows or ought to know, or, failing that, disclosure which gives the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances. Every material representation as to a matter of fact must be substantially correct and every material representation as to a matter of expectation or belief must be made in good faith.
A fair presentation also requires disclosure of the information to be made in a manner which would be reasonably clear and accessible to a prudent insurer. The Act here aims to prevent unfocused submissions of large quantities of documentation by a policyholder (known as “data dumping”).
The Act goes on to deal with certain exceptions to the duty (including when the insurer knows, ought to know, or is presumed to know the information) and addresses whose knowledge is important in the context of both insurer and policyholder. There are also provisions dealing with what parties ought to have known (for example, the Act provides that a policyholder ought to know what should reasonably have been revealed by a reasonable search of information available to the policyholder).
A significant change in this area is the remedy for the breach of duty. Breach of the old duty of disclosure allowed the insurer to avoid the policy (i.e. treat the policy as if it never started and return the premium to the policyholder). The remedy of avoidance remains under the new regime where the breach was deliberate or reckless, and the insurer can also keep the premium in these circumstances.
However, a new system of proportionate remedies has been introduced for non-deliberate or non-reckless breaches. The insurer still has a remedy, therefore, for innocent breaches, but the remedy will depend on what the insurer would have done had the information been disclosed:
- If the insurer would not have entered into the contract at all, the insurer retains its right to avoid the contract and refuse all claims, but must return all premium.
- If the insurer would have entered into the contract on different terms (other than in relation to premium), it is treated as having done so.
- If the insurer would have charged a higher premium, the insurer may reduce the amount to be paid on the claim proportionately (so, if the premium would have been doubled, the claim is reduced by half).
Breach of Warranty
The rule that a breach of warranty results in the discharge of an insurer’s liability under an insurance contract is abolished. Previously, a breach of warranty resulted in discharge of the policy from date of breach, no matter how trivial the breach. Breach of warranty may still allow an insurer to avoid liability under the new regime, but there are two limitations introduced by the Act.
- First, if a breach of warranty is capable of being remedied (for example, by repairing a broken sprinkler system), the policyholder is permitted to remedy it. There will be no liability whilst the breach is ongoing, but once remedied, coverage (which is treated as suspended) resumes.
- Second, in certain circumstances, a breach of warranty will not allow an insurer to avoid liability if the policyholder can show that the breach of warranty did not increase the risk of loss which actually occurred in the circumstances in which it occurred. For example, a failure to set a burglar alarm will not affect a claim for flood.
Both of these limitations will be developed by the courts in due course. It is also notable that the second limitation referenced above does not apply to terms that define the risk as a whole.
The concept of “terms that define the risk as a whole” will also require development. As an example, explanatory notes produced by HM Treasury state that it is expected that this would include a requirement that a property or vehicle is not to be used commercially. So if a policyholder is using a vehicle commercially, contrary to a restriction in the policy, the insurance will not respond, even if the policyholder can show that the commercial use did not increase the risk of loss.
Basis of Contract Clauses
Basis of contract clauses are abolished by the Act. These controversial clauses purport to turn pre-contractual representations into warranties, meaning that any pre-contractual representation that is incorrect, no matter how trivial, could allow the insurer to avoid the policy. Any such clause is no longer effective under the new law.
The new act codifies and clarifies insurer remedies in the event of a fraudulent claim. If a policyholder makes a fraudulent claim, the insurer is not liable to pay the claim and may recover any sums paid in respect of that claim. It may also treat the contract as having terminated from the date of the fraudulent act (and, if it does so, may keep the premium). Claims arising prior to the fraudulent act are still covered.
Other than the basis of contract clause prohibition, it is possible to contract out of the provisions of the Act in relation to non-consumer insurance. The Act provides a default regime and the parties can contract on different terms that are more disadvantageous from the policyholder’s perspective, provided that the insurer meets certain tests as regards its transparency in the use of those terms (broadly, using clear and unambiguous language and drawing it to the attention of the policyholder).
Damages on Late Payment
Under the current law, an insurer is not liable to pay damages if it wrongly delays payment of an insurance claim and the late payment results in damage to the policyholder (for example, if the policyholder goes out of business as it cannot settle bills without the insurance payment). It had been proposed to reverse this position in the Act, but the provisions were removed in order to ensure the passage of the draft bill into law.
The government has now published a new Enterprise Bill 2015, which re-introduces these provisions. The new bill has various parliamentary processes to go through before it can become law, so it will be some time before these potential provisions would take effect. This is an issue we are keeping under review.
The point at which policyholders will first see these reforms in action will likely be at the first renewal after 12 August 2016. However, it may be possible to negotiate improved terms based on the Act at renewals prior to that date. Policyholders will, in any event, need to take steps long before renewal to ensure that they will be in a position to meet their duty of fair presentation.