The Insurance Act 2015 will come into force on 12 August 2016 and the majority of its provisions will apply to insurance contracts entered into after that date. The Act introduces major changes to insurance law in the UK and, with just a year to go until the Act comes into force, there are significant issues for the market to plan and prepare for.
Key issues for insurers, insurance brokers and insureds include:
Scope of pre-contractual disclosure
The Insurance Act retains the requirement that an insured must give disclosure of material circumstances before the contract is entered into. The duty is restated in a new way, however, so that the requirement will be fulfilled if an insured either discloses all material circumstances of which it is or ought to be aware, or gives the insurer sufficient information to put a prudent insurer on notice that it should make further enquiries. Arguably this introduces a ‘fall back’ to the primary requirement to give full disclosure so that, even if the insured does not disclose all material circumstances, it can still fulfil the duty if the insurer is given sufficient information to put a prudent insurer on notice that it should ask further questions. It remains to be seen how the restatement of the test for disclosure will be interpreted by the courts but insurers should be reviewing underwriting practices and guidelines in light of the new onus on underwriters to make enquiries where presentations raise questions or flag areas about which more information could be asked.
For brokers and insureds, the new law on what needs to be disclosed to the insurer (what the insured “knows or ought to know”) is one of the more complex parts of the Act. For corporate insureds, what is “known” means what is known to individuals who are part of the senior management team or are responsible for the insurance arrangements. This will include, in addition to members of the board of directors, relevant individuals with senior management roles and individuals employed by the broker.
In addition, the insured is expected to carry out a reasonable search for information. This includes searching for information held within the insured’s organisation or “by any other person”. The Act gives, as examples of “any other person”, the insured’s broker or any person covered by the insurance. It does not, however, limit the search that the insured must make to those categories and the entities to which the insured needs to make enquiries is potentially wide. The extent of the search will be limited only by what is “reasonable”, which is likely to depend (among other matters) on the type and size of the particular risk.
The most wide-ranging reform introduced by the Act is to the remedies available for breach by an insured of the duty to make a fair presentation. The insurer’s remedy will depend on whether the breach was deliberate or reckless. If the insurer can prove that the breach was deliberate or reckless, the insurer can still avoid the contract (and retain premium paid). In the majority of cases, however, a new scheme of proportionate remedies will apply, based on what the insurer would have done if a fair presentation had been made, and similar to the remedies available to insurers in many European jurisdictions. This marks a dramatic shift from the current legal position and one that insurers and brokers need to plan for carefully.
The Act provides a ‘default regime’ for non-consumer insurance contracts. With the exception of the prohibition of basis of contract clauses, parties can contract out of provisions in the Act. Where insurers intend to opt out and include a “disadvantageous term”, ie one that would put the insured in a worse position than they would be in under the Act, the term will have to be clear and unambiguous as to its effect. It will not be sufficient for the term to be clearly set out, it is the effect of the term that will have to be clear. In addition, sufficient steps must be taken to draw the term to the insured’s attention before the contract is entered into. A general opting-out clause is unlikely to be sufficient and insurers will need to draw each disadvantageous term to the insured’s attention.
Where parts of the Act are opted out of, insurers and brokers will need to consider what alternative legal position should apply in default of the Act and careful drafting will be required to achieve the parties’ intentions.
Insurance Act Zone
The issues discussed above are only some of the areas that insurers and brokers will be considering and planning for in advance of the Act coming into force next year. The CMS Insurance Act Zone provides insight and commentary on the new legislation and a one-stop easy to use guide, explaining the changes and their impact.