The recently assented Insurance Act 2015 (UK) will modernise significant areas of UK insurance law, including disclosure requirements, basis of contract clauses and remedies.
The Act comes into effect in August 2016, however UK insurers are already preparing for its introduction. It will apply to all UK insurance and reinsurance contracts, and contracting out will only be available in limited circumstances.
While Australian insurers will recognise many similarities between the new UK legislation and Australian law, there are a number of striking differences which could lead to calls for reform of the Insurance Contracts Act 1984 (Cth).
In January 2006, the Law Commissions for England and Wales and Scotland began a joint review of insurance contract law. They published a joint report and draft Bill in December 2007 concerning changes to the law affecting consumer insurance contracts. The main recommendation was replacement of the duty of disclosure with a new duty to take reasonable care to answer the insurer's questions fully and accurately. The result of this recommendation was the Consumer Insurance (Disclosure and Representations) Act 2012 (UK), which came into force on 6 April 2013.
The Law Commissions published a further report in July 2014, which included recommendations for reform of business insurance disclosure, warranties and remedies for fraudulent claims. The Insurance Act 2015 (UK) (Act), which was assented to on 12 February 2015, includes most of the Law Commissions' recommendations.
The Act modernises 100 year old insurance rules and codifies existing insurance best practice. As such, and after nearly ten years of consultation, it has largely met with industry approval.
The three areas which have seen key changes are:
- disclosure and misrepresentation in business and other non-consumer contracts;
- warranties; and
- insurers’ remedies for fraud.
Disclosure in business and other non-consumer contracts
'Duty of fair presentation'
When making pre-contractual disclosure, non-consumer policy holders will now be under a duty to make a “fair presentation” of the risk.
This is defined as 'disclosure of every material circumstance which the insured 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.'
This will require insurers to adopt a more proactive approach to pre-contract disclosure. It will no longer be open to insurers to argue that an insured failed to provide material information in circumstances where sufficient information has been provided to put them on notice to make further enquiries.
The Act defines what is meant by both insured and insurer knowledge and, in the case of corporate entities, whose knowledge within the entity is relevant.
Every material representation of fact must be substantially correct, and every material representation of expectation or belief must be made in good faith.
An insured will not be required to disclose a circumstance if:
- it diminishes the risk;
- the insurer already knows of the circumstance;
- the insurer ought to know of the circumstance; or
- the insurer is presumed to know of the circumstance.
As for the form of pre-contract disclosure, an insured will have to ensure that information is presented in a manner which would be reasonably clear and accessible to a prudent insurer. This is intended to bring an end to "data dumping", where an insurer is provided with an overwhelming amount of unstructured information.
The Act provides the insurer with a number of proportionate remedies when the duty of fair presentation is breached. These are more flexible than current avoidance remedies.
The insurer must show that it would have acted differently if the insured had not failed to make a fair presentation, ie it would not have entered into the contract or would have done so on different terms.
In terms of remedies themselves, if the insured's breach is deliberate or reckless, and the insurer proves that it would not have entered into the contract, the insurer is entitled to avoid the contract and retain the premium. If the breach is innocent, the remedy is based on what the insurer would have done had the breach not occurred. For example, if the insurer would have contracted on different terms, the claim will be treated as if the contract contained those terms (eg to include an exclusion or charge a higher premium).
The three main changes concerning warranties are:
- 'Basis of contract clauses', which would otherwise convert pre-contractual information supplied to insurers into warranties, are rendered ineffective.
- A breach of warranty will only have the effect of suspending, rather than permanently discharging, an insurer's liability until the breach is remedied. Coverage is restored after the breach has been remedied. The insurer will have no liability for anything which occurs during the suspension period.
- Breach of a warranty or similar term designed to reduce a risk will not allow an insurer to refuse to pay a claim if the insured shows that the breach could not have increased the risk of the loss which actually occurred.
The Act provides that an insurer will not be liable to pay a claim to which the fraud relates.
Insurers will be able to elect to terminate the contract from the time of the fraudulent act and can refuse all liability in respect of a relevant event after the fraudulent act. The premium does not need to be returned.
Where the insurer has paid a claim and later discovers the fraud, it may recover those monies from the insured.
In the case of fraudulent claims by members of group insurance policies, the Act allows an insurer to utilise remedies against the fraudulent insured but protects innocent co-insureds and preserves their rights under the policy.
Generally speaking, parties to non-consumer contracts of insurance can agree to terms that are less favourable to the insured than contained in the Act, but such terms will only be valid if the insurer complies with certain "transparency requirements" (including bringing the term(s) to the attention of the insured).
Parties cannot contract out of the 'basis of contract' prohibition.
Next steps for reform
The Act facilitates reforms intended to be brought into effect by the Third Parties (Rights against Insurers) Act 2010. This will allow a third party to bring a claim directly, and far more easily, against a liability insurer where the policyholder has become insolvent.
The Law Commissions for England and Wales and Scotland are now working on further reform proposals concerning insurable interest and policies and premiums in marine insurance.
Implications for Australian insurers
Since the Act will apply to reinsurance contracts governed by UK law, Australian insurers may find themselves subject to its terms although the highly commercial nature of reinsurance may see more generalised contracting out.
While a number of the reforms will bring UK law into line with Australia, in particular in relation to remedies for breach of policy terms or disclosure requirements, the recast duty of disclosure in the form of the 'duty of fair presentation' is quite different and could lead to calls in Australia for further reform of the Insurance Contracts Act 1984 (Cth) (IC Act).
Australian insurers of prescribed consumer-type policies, such as motor accident and home buildings and contents, are quite familiar with the modified duties of disclosure in sections 21A and 21B of the IC Act, which require them to be proactive in seeking information relevant to the risk from the insured. The new UK disclosure regime does not require insurers to be quite so proactive, but it does appear to introduce a concept of constructive disclosure into non-consumer contracts of insurance where an insured has provided "sufficient information" to put a "prudent insurer" on notice that it needs to make further enquires.
Australian insurers would also no doubt welcome reforms aimed at preventing data dumping when it comes to an insured providing adequate disclosure.