Lord Carrington’s description of what is now the Insurance Act 2015 during the committee stages of the Bill in the House of Lords may come to seem ironic in the eyes of the insurance market and their lawyers. Along with the Consumer Insurance (Disclosure and Representations) Act 2012 (CIDRA - which deals with consumer insurance) it is the first reform of English insurance contract law since 1906 and has been planned for over 50 years.
This article summarises the main provisions of the Act and attempts to assess their implications for insurers.
The provisions relating to the proposal, non-disclosure and misrepresentation and remedies apply to non-consumer insurance (the position in consumer insurance is dealt with in CIDRA) whilst those relating to warranties and fraudulent claims apply to both consumer and non-consumer insurance.
The proposer must make a “fair presentation” of the risk in a “manner which is reasonably clear and accessible to a prudent insurer”. This is intended to discourage data dumping in proposals but probably makes little significant change to the existing law. Material representations as to fact must be substantially correct and representations as to expectation must be made in good faith, which again leaves the existing law unchanged.
An individual insured must disclose every material circumstance which is known or ought to be known to the insured or, failing that, disclosure which gives the insurer notice that it needs to make further enquiry. This strengthens the insurers’ obligation to make enquiries of the insured.
The definition of materiality remains unchanged – everything that would influence the judgment of a prudent insurer (formerly underwriter) in determining whether to take the risk and, if so, on what terms.
There are specific provisions dealing with what is known to the insured (and must be disclosed if material) and the knowledge that is attributable to the insurer. An individual insured is taken to know only what is known to him or her or is known to the individual responsible for the insured’s insurance. A corporate insured is taken to know what is known to its senior management or the individuals responsible for the insured’s insurance (both internally and externally eg, brokers). There are provisions intended to exclude information held by brokers and which is confidential to the broker’s other clients. This may prove troublesome.
The knowledge attributed to the insurer is limited to matters known to the individuals who participate in the decision to take the risk or the terms on which it is taken. Again, there are provisions about the knowledge attributed to the insurer which may prove troublesome. The significance of all this is that the insured need not disclose matters which are known or deemed to be known by the insurer.
Non-disclosure and misrepresentation
The insurer’s remedy of avoidance is abolished (see below) but the requirement for the insurer to prove that it was induced to enter the contract by the non-disclosure/misrepresentation remains.
The Act makes significant changes to the insurer’s remedies:
- If the breach of the duty to make a fair presentation is deliberate or reckless, the insurer may avoid the policy and return the premium
- If the breach is neither deliberate nor reckless and:
- If the insurer would not have written the policy on any terms, the insurer may avoid the contract but must return the premium
- If the insurer would have written the policy on different terms, the policy is treated as containing those terms
- If the insurer would have written the policy on the same terms except as to premium, the claim payment is reduced in the proportion the actual premium bears to the premium which would have been charged.
The old rule that an insured’s breach of warranty discharged the insurer’s obligation to provide indemnity is abolished.
It is replaced by two provisions:
- The insurer is discharged from liability after a breach of warranty but the obligation to provide indemnity is restored after the breach has been remedied
- The insurer may not rely on non-compliance with any term of the policy (not just a warranty) tending to reduce the risk of loss of a particular kind, at a particular location or at a particular time if the non-compliance has not increased the risk of the loss that has actually occurred.
The first provision means that a breach of warranty is only suspensive: once the breach is remedied, cover is restored. The second provision means that there has to be a causal connection between the breach of policy term and the loss suffered if insurers are to deny indemnity. Thus the breach of a policy requirement to maintain a functioning burglar alarm will enable the insurer to deny indemnity for a burglary but not for a fire resulting from an electrical short circuit.
In addition, “basis” clauses (by which the insured warranted the accuracy of the information in the proposal form) are abolished outright. Previously, an insurer could rely on the breach of such a warranty to deny cover without needing to prove either the materiality of the misrepresentation or that it had induced the insurer to write the policy.
The existing law on fraudulent claims remains largely unchanged but is codified so that:
- The insurer is not liable to pay a fraudulent claim and may recover any sum paid for such a claim from the insured; and
- The insurer may treat the policy as terminated following a fraudulent act by giving the insured notice to that effect (without returning the premium) but remains liable for matters occurring before the fraudulent act.
The Act does not specifically deal with “fraudulent devices”, that is to say cases where the claim is not fraudulent but is bolstered by dishonest representations. The position here seems to be that an operative fraudulent device must be subjectively intended by the insured to improve its chances of recovery and that there must be an element of objective materiality so that the fraudulent device yields a not insignificant improvement in the chance of the insured’s recover from insurers (see the recent Court of Appeal decision in Versloot Dredging v HDI Gerling (2013) but this may be appealed to the Supreme Court).
Contracting out of the Act is not permitted for consumer insurance.
In non-consumer insurance contracting out is permitted except for “basis” clauses where contracting out is not allowed. However, any other provision contracting out of the Act must comply with the “transparency requirement”, that is to say:
- The insurer must take steps to draw the disadvantageous term to the insured’s attention before policy inception; and
- The disadvantageous term must be clear and unambiguous as to its effect.
Third Party (Rights Against Insurers) Act 2010
The Act also amends and at last implements (from 12 April 2015) the Third Party (Rights Against Insurers) Act 2010. The 2010 Act makes it much easier for a claimant to make a recovery from an insolvent insured defendant’s insurer. It also makes it much easier for a claimant to obtain information from the insured, its brokers, insurers and others about its insurance cover. This may have an (almost) immediate impact and insurers will need to be alert to the need to deal appropriately with requests for information.
The implications of the Act
Before 12 August 2016 underwriters will need to consider the implications for their underwriting procedures and whether they wish to:
- Contract out of any of the provisions of the Act and, if so, how they are going to comply with the transparency requirement - which will entail consideration of the practical steps needed to draw the term to the insured’s attention and a review of policy wordings
- Obtain a warranty in the policy of any information contained in the proposal (for example, the insured’s claims history in a liability policy) and how to achieve that result – which may not be straightforward
Claims managers will need to consider:
- The calibrated remedies for non-disclosure/misrepresentation where it will be important to identify the remedy at an early stage (avoidance, change of policy terms, reduction in indemnity) so that e.g. cost protective offers can be made to the insured at the earliest possible stage
- The impact of the changed law relating to warranties where it will be much more difficult to rely on breach of policy warranties than hitherto
- The impact of the provisions relating to fraudulent claims where notice of termination of the policy will have to be served on fraudulent insureds and policy provisions relating to fraudulent claims will need to be reviewed to ensure compliance with the transparency requirement.
This is almost certainly an over-short summary of the implications of the Act which will only start to become apparent with the passage of time. It remains to be seen, for instance, whether these changes will incur significant costs for insurers thereby leading to increased premiums and a reduction in the competitiveness of the London market. That seems relatively unlikely but it is too early to tell.
However, it is clear is that as with all statutory changes it is essential to be prepared and to address these issues before they become law in August 2016.