The main provisions of the Insurance Act 2015 come into force today. With the consumer insurance reforms that came into force in 2013, this represents the biggest shake up of insurance law in over 100 years.
The majority of the changes introduced by the Act apply to insurance contracts entered into on or after 12 August. The changes coming into force today include:
- Significant changes to the remedies available to insurers for non-disclosure and misrepresentation by business insureds. Except where a breach of the new duty to make a fair presentation of the risk is deliberate or reckless, a scheme of proportionate remedies (based on what the insurer would have done if full disclosure had been made) will apply.
- Important modifications to insurers’ remedies for breaches of policy terms.
- In cases of fraudulent claims, insurers will have the option to terminate the cover from the date of the fraudulent act without returning premium.
Looking further ahead, from May 2017 insurers will have a new duty to pay claims within a reasonable time.
This Law-Now is intended to highlight the key changes. For more detail on the legislation, including the changes to consumer insurance law, visit our dedicated Insurance Act Zone.
This part of the Act applies only to non-consumer insurance, the duty owed by consumer insureds having been reformed by the Consumer Insurance (Disclosure and Representations) Act 2012.
For non-consumer insurance the requirement to give disclosure of material circumstances before the contract is entered into remains but is restated so that it will be fulfilled if the 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.
It is not yet clear how the second limb will be interpreted by the courts but insureds and their brokers would be prudent to treat it as a ‘catch all’ rather than an alternative to the requirement to give full disclosure. What it clear is that this marks a new onus on insurers to make enquiries where presentations raise questions or flag areas where more information is needed. Insurers and coverholders should be reviewing their underwriting guidelines and practices accordingly.
The new law on what needs to be disclosed by insureds (what the insured ‘knows or ought to know’) is one of the more complex parts of the Act. For corporate insureds, what is known or ought to be known means what is known to individuals who are part of its senior management team or responsible for its insurance. This is broader than simply the insured’s board of directors and could include, for example, a general counsel who is not a board member.
The insured is also expected to know what would be revealed by a reasonable search for information. This includes information held by the broker or a person covered by the insurance, such as the individuals covered by a D&O policy.
Remedies for breach of the duty of fair presentation
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 new remedies depend on the nature of the breach. If the insurer can prove to the court’s satisfaction that the breach was deliberate or reckless, the insurer will be able to avoid the contract (and retain the premium). In other cases a scheme of proportionate remedies will apply, depending on what the insurer would have done if a fair presentation had been made.
- If the insurer can show that it would not have entered into the contract on any terms, it will still be able to avoid the contract and refuse to pay claims (but will have to return the premium).
- If the insurer would have written the risk but on different terms, it can treat those different terms as applying from the commencement of the policy.
- If the insurer would have charged a higher premium, it can reduce any claims payments in accordance with a formula set out in the Act.
The Act retains the concept of warranties in insurance law but with three important modifications:
- ‘Basis of contract’ clauses (whereby pre-contractual information is converted into a warranty) are abolished.
- A breach of warranty will suspend the insurer’s liability until the breach is remedied (if it can be).
- If a warranty – or other policy term such as a condition precedent - is designed to reduce the risk of loss of a particular kind, or at a particular location or particular time, there must be a link between the loss and breach of the term. For example, a lock warranty requiring the hatch of a yacht to be secured by a particular type of padlock is intended to reduce the risk of theft. Breach of the warranty will not discharge the insurer from liability for loss of a different kind, such as loss in a storm.
The Act introduces a default statutory regime of remedies for fraudulent claims. Insurers remain liable for claims arising before a fraudulent act is committed but have the option of terminating the contract as from the date of the fraudulent act without returning premium.
The Act makes no changes to the definition of a fraudulent claim. This will continue to be determined by the courts and in Versloot Dredging v HDI Gerling the Supreme Court has recently narrowed the application of the fraudulent claims rule to exclude valid claims supported by collateral lies. To read our Law-Now on the decision click here.
The Act provides a default regime for non-consumer insurance contracts. With the exception of the prohibition of ‘basis of contract’ clauses (which cannot be contracted out of), parties to non-consumer policies can contract out of provisions in the Act. To be effective, policy terms that would put an insured in a worse position than they would be in under the Act must be clear and unambiguous and sufficiently drawn to the insured’s attention before the contract is entered into. A general opting-out clause is unlikely to be sufficient and insurers intending to opt out of particular provisions in the Act will need to draw each disadvantageous term to the insured’s attention.
Duty to pay claims within a reasonable time
From 4 May 2017 insurers will have a new duty to pay claims within a reasonable time. What is a reasonable time is not defined but the Act sets out a non-exhaustive list of factors to be taken into account, including the type of insurance, size and complexity of the claim and factors outside the insurer’s control. Insurers will also have a reasonable time to investigate and assess claims.
Insurers will be able to exclude or limit their new liability for damages for late payment of claims in business insurance policies. It will not, however, be possible to exclude or limit the liability for damages in consumer insurance.