Emily Monastiriotis, a partner and head of construction disputes, was interviewed by Lexis®PSL on what the Insurance Act 2015 means for the construction sector.
What is the significance of IA 2015 for the construction sector?
IA 2015 which received Royal Assent on 12 February 2015 radically overhauls areas of UK insurance law. The construction sector is closely linked to insurance as construction projects have the benefit of insurance policies. For example, architects are required to maintain professional indemnity policies, as are quantity surveyors. The industry has 18 months to prepare for these changes as IA 2015 comes into force in August 2016. That said, it has already been reported that many insurers are implementing the changes early (as an optional 'contract in') and those involved in procuring and dealing with insurance policies will need to get up to speed swiftly with the changes. For example, the law on warranties is radically altered by IA 2015 and these amendments are key to insureds on construction projects claiming under their commercial insurance policies. Often losses on construction projects are substantial and many major contractors will have reinsurance policies. IA 2015 applies equally to those types of policies.
What changes (if any) will IA 2015 introduce to the insurances held by the various parties involved in construction projects?
The various parties involved in construction projects are likely to be insured by non-consumer insurance policies. IA 2015 has introduced a default statutory regime for such policies. There are a number of fundamental changes that have been introduced all of which will have an impact on insureds and insurers involved in construction projects. These include:
- So called 'basis of contract' clauses, which converted pre-contractual information supplied to insurers into warranties, are abolished and it is not possible for the parties to opt out of this.
- A breach of warranty simply suspends the insurer's liability, it no longer discharges it. So an insurer will still have to pay claims that arise after a breach of warranty has been remedied.
- A new provision has been introduced which provides that insurers are unable to rely upon a breach of a warranty by an insured if the breach is irrelevant to the risk of loss. The test that applies is that 'the non-compliance with the term could not have increased the risk of the loss which actually occurred in the circumstance in which it occurred'. For example, if on a construction project a flood occurs but a contractor has breached a warranty that it was to secure a site with a mesh wire fence to protect against trespassers if the insured can establish that even if the fence had been erected the flood damage would still have occurred insurers will be liable.
- An insured no longer has a duty to disclose every material circumstance known (or which ought to be known) to an insured. Instead, an insured has a duty to make a fair presentation of the risk. If this duty is breached deliberately or recklessly the insurer is able to avoid the policy (which means it is treated as if it never existed), retain the premium and not pay any claims. If the breach is not deliberate or reckless then proportionate remedies will apply--these will depend upon what the insurer would have done had full disclosure been given.
Will this have an impact on the insurance provisions in construction contracts and professional appointments?
IA 2015 may have more of an impact on the procedures during placing, renewal and claims, rather than on the wording on the insurance clauses themselves. This is because I anticipate that insurers will have to tighten up their risk surveys as a result of the relaxations on breaches of warranty. If parties to a non-consumer contract want to contract out of IA 2015, they can agree to do so (although they cannot opt out of the abolition of basis of contract clauses) but only if terms that are less favourable to the insured than those provided in IA 2015 are sufficiently brought to the insured's attention and are clear and unambiguous.
What are the key considerations for contractors, developers and consultants arising out of IA 2015?
One of the key changes from an insured's point of view is the new duty to make a fair presentation of the risk. Construction entities will need to review how they have conducted their disclosure to insurers and make sure that they comply with the new requirements. The question of what is known or ought to be known by an insured means:
- what the insured has told its broker
- what is known by individuals who are part of its senior management team or responsible for its insurance
- what would be revealed by a reasonable search of information available to the insured
What should construction lawyers be brushing up on in relation to IA 2015?
As explained above, it cannot be assumed that no changes will be made for 18 months when IA 2015 comes into force. Construction lawyers needs to familiarise themselves with the changes implemented by IA 2015 as they will have to advise clients how to prepare for the changes and to ensure that proper procedures are in place to deal with the new requirements.
Are there any other points of interest?
IA 2015 also includes amendments to the Third Parties (Rights Against Insurers) Act 2010 (TP(RAI)A 2010) (which is not yet in force) which enables the government to introduce secondary legislation to enable it to come into force. The enactment of TP(RAI)A 2010 will simplify the procedure for parties with a liability claim against a party that has become bankrupt or insolvent to claim against that party's insurers. Insolvency is still impacting the construction industry so the introduction of TP(RAI)A 2010 will be welcomed by many in the industry.
* This article was first published on Lexis®PSL Commercial on 20 February 2015.