Much has already been said on the impact of the Insurance Act 2015 when it comes into force on 12 August 2016, but what impact will it have on reinsurance? For a start, there has been some debate on whether or not the Act applies to reinsurance. It seems clear that the Act will apply to reinsurance: although an issue of some academic debate, reinsurance is likely to be regarded as a “contract of insurance” and there is no express exclusion. Further, the Law Commission has confirmed that they intended the Act to apply to reinsurance. So, on the assumption the Act applies, what are the implications for reinsurers and reinsurance brokers?
The provisions of the Act
To recap, the Act replaces the existing duty to disclose all material facts with a new duty to make a fair presentation of the risk. This requires the reinsured to disclose every material circumstance that it knows or ought to know or to give the reinsurer sufficient information to put it on notice that it needs to make further enquiries.
If the reinsured fails to comply with the new duty, the reinsurer’s remedy will depend on whether the breach was deliberate or reckless. If the reinsurer can prove that the breach was deliberate or reckless, the reinsurer can still avoid the contract (and retain the premium paid). That requires a high evidential threshold. In the majority of cases, if the non-disclosure is negligent or innocent, a new scheme of proportionate remedies will apply, based on what the reinsurer would have done had a fair presentation been made. The rationale being to bring English law into line with that of other jurisdiction and to result in fairer dealing with coverage disputes.
Despite much controversy over warranties, they remain but with three important revisions:
- The abolition of basis of contract clauses;
- Any breach of warranty suspends a reinsurer’s liability until the breach is remedied; and
- Where the warranty (or other term) relates to a loss of a particular kind or at a particular location or time, there must be a causal link between the loss and the breach of warranty.
The Act also covers fraudulent claims. Further the Law Commission’s provisions on late payment of claims, which were removed from the Insurance Act to allow it to pass through Parliament using the special procedure for Law Commission bills, have been included in the Enterprise Bill, which is currently before Parliament.
Implications for reinsurance
Arguably, one of the consequences of the Act will be to re-balance the duty of disclosure, so that the onus on the reinsured is more narrowly prescribed. With this in mind, reinsurers will need to ask questions and consider their underwriting information. There is likely to be increased reliance on the reinsured to make more thorough enquiries on placement of the underlying insurance if they are put on notice of the need to do so. This is particularly the case for captives and fronting insurers who have been able historically to act more as a post box between insured and reinsurer. Captives will also need to be wary that any directors who hold positions on the board of both the insured and the captive may be deemed to have the knowledge of the insured. Non-disclosure issues in reinsurance usually concern (a) the claims record, (b) the make up of the account or (c) the direction of underwriting. Those making the fair presentation for the cedant will be expected to have a very detailed understanding of the account.
With this in mind, reinsurers will need to review their underwriting practices and guidelines. Whereas the Marine Insurance Act 1906 allowed reinsurers to take a “passive” role, going forward – and possibly for the January 2016 renewals - there will be a burden on reinsurers to be more proactive and undertake a due diligence exercise by asking the right questions and keeping a reliable record of the process including the answers given, particularly in relation to the usual treaty problem areas such as loss records and direction of the account. If reinsurers do not raise questions at renewal, they may find that failure to enquire counts against them in subsequent years.
In an era of more detailed electronic records, the onus will be on the reinsurer to show, by reference to his own systems and controls, that a fair presentation would have led to a different outcome. It will be of increasing evidential importance for the reinsurer to actually record his reasons for agreeing to write the risk on the basis of the presentation he has been given, including reference to underwriting guidelines, any written calculations and his thought process. We anticipate it being difficult for reinsurers to prove that he would have written the risk on different terms and, harder still, to show that he would not have written it at all.
Further, reinsurers will want their reinsureds’ underwriting processes to be informed by the new statutory regime, and may seek to take advantage of ‘change in underwriting policy’ clauses to control accounts being reinsured.
Reinsurers and reinsurance brokers will need to be alive to the potential mis-match between the legal regimes applying to reinsurance contracts written pre-August 2016 and risks ceded after the Insurance Act comes into force. With that in mind, consideration will need to be given by the reinsurer, the broker and the reinsured as to how the mis-match should be dealt with.
It should also be noted that, while treaty wordings rarely contain clauses that clarify the remedies for negligent non-disclosure or misrepresentation, reinsurers may wish to include them for clarity and particular where contracts are not subject to English law.
As for warranties, the changes will have limited impact for treaty reinsurance, where warranties are not common in any event.
Can reinsurers opt out of the Act?
The Act will apply to reinsurance contracts by default. With the exception of the prohibition of “basis of contract” clauses, reinsurers can opt-out of the Act. But to do so, reinsurers face two significant obstacles:
- If reinsurers continue to use terms reflecting the regime under the Marine Insurance Act 1906 (or any other terms), they will need to draw to the broker / reinsured’s attention in a clear and unambiguous way any terms (and their effect) that are more “disadvantageous” to the reinsured than under the Act. Given that the Act is generally perceived to be more advantageous to the reinsured, contracting out is likely to create an unwelcome burden of additional administration for the reinsurer; and
- The introduction of the legislation at a soft market phase of the cycle may make it unlikely that brokers allow reinsurers to “opt out” as it would not be in the interests of their clients (and their own E&O risk management).
Overall, the softening of reinsurers’ avoidance rights redresses the imbalance in legal remedies between English law and a number of other legal systems. Parties should therefore be less fearful of agreeing English law as the governing law of their contracts. In all technical coverage issues, English reinsurance has decided case law which provides greater certainty and reduces scope for unnecessary dispute.
The new regime creates a sophisticated framework of remedies bespoke to the insurance/reinsurance industry, which may, insofar as (inter)national laws facilitate freedom of contract, create a platform for the development of a universal remedies clause, regardless of the law applicable to the contract.