Insurance and Financial Services Update
Insurance Act 2015
The Insurance Act 2015 in the UK came into force on August 12, 2016, 18 months following its enactment last year. The reforms to insurance contract law brought in by the Act apply to insurance and reinsurance contracts entered into on or after August 12, 2016. We revisit the key provisions and highlight some of the uncertainties around the impact on underwriting, policy wording and claims handling.
Parties to non-consumer insurance contracts will be free to contract out of most of the reforms. If the insured would be in a worse position as a result of the contracting-out term, the term will only be valid if the insurer has taken sufficient steps to draw it to the attention of the insured before the contract is entered into and its effect is clear and unambiguous.
New duty of fair presentation and remedies for breach (non-consumer contracts only)
The new duty of fair presentation now covers the insured’s duty to disclose material facts and not make material misrepresentations.
The insured must disclose every material circumstance that it knows or ought to know, but can now discharge this duty by disclosing sufficient information to put a prudent insurer on notice that it needs to make further enquiries for the purpose of revealing those material circumstances. The insured must also disclose matters in a manner that is reasonably clear and accessible.
For the purposes of the insured’s disclosure requirements, the Act now provides that an insured “ought to know what should reasonably have been revealed by a reasonable search of information available to the insured.” The intention of this provision was to improve the level of information provided to insurers. But many insureds (and reinsureds) and their brokers are already looking to clarify or otherwise limit this requirement, for example, by agreeing the scope of the information available to the insured.
The insurer’s “all or nothing” remedy of avoiding the contract for an insured’s non-disclosure or misrepresentation is now superseded by a matrix of remedies intended to be proportionate to the breach:
- If the insured deliberately or recklessly breaches the duty of fair presentation, the insurer will still be entitled to avoid the policy and refuse all claims and will not be required to return any premium.
- If the breach is not deliberate or reckless, the remedy depends on how the insurer would have treated the contract had it been given the relevant information:
- where the insurer would not have entered into the contract on any terms, the insurer will still be entitled to avoid the policy and refuse all claims, returning the premium
- if the insurer would have entered into the contract but would have charged a higher premium, the insurer will not be entitled to avoid the policy but will have a right to reduce any claim payment proportionately
- where the insurer would have entered into the contract on different terms, other than premium terms, the insurer will not be entitled to avoid the policy but will have a right to treat the contract as though entered into on those different terms
The logic of requiring proportionate changes to policy terms or reductions to claims payments where the insured has innocently failed to disclose material facts is clear in theory. However, it introduces a new degree of uncertainty for insurers in claims handling. The extent to which insurers will, in practice, be prepared to dispute claims for innocent non-disclosure by reference to the hypothetical terms on which they would have underwritten the policy remains to be seen.
Warranties: the insurer’s remedy for breach is that its liability is suspended, not discharged
Prior to the reforms, a breach of warranty by the insured would discharge the insurer from all future liability under the policy as from the date of the breach. Technically the insurer could refuse payments in respect of events occurring after the insured rectified the breach.
The Act addresses this by providing that a breach of a warranty will only affect the insurer’s liability in relation to events occurring after the breach and before the breach has been rectified. In other words the insurer’s liability will be suspended during the period when the breach is occurring, but if that breach is rectified so that the insured is in compliance, the insured would be entitled to claim for subsequent events.
Warranties: remedy for breach of warranty now contingent on relevance to risk of loss
The Insurance Act 2015 now provides that the insurer may not refuse a claim on account of a breach of warranty if the insured can show that the breach did not increase the risk of loss.
For example, where an insured suffers loss through burglary, but has breached a warranty that it would maintain a fire alarm in working order, the insured should be able to show that had the alarm been operational it would have made no difference to the risk of burglary, and therefore the insured should be able to make a claim under the policy.
Previously, an insurer would be discharged from future liability upon a breach by the insured, regardless of whether the breach was relevant to the loss, which was widely thought to be commercially counterintuitive and unfair.
Linking the breach to the risk of loss is, however, a new concept in English law and is likely to prove a fertile area for dispute. The Act specifies that the insured must show that the non-compliance “could not have increased the risk of loss which actually occurred in the circumstances in which it occurred.” The drafting of this provision has been criticized for lack of clarity. Although it may be reasonably obvious that the test is satisfied in the burglary situation described above, there will no doubt be circumstances where this is less clear cut.
Damages for late payment
Following a recent amendment to the Act, insurers will be subject to an implied term that they must pay claims within a reasonable time. This will only apply to contracts entered into on or after May 4, 2017. It will allow a policyholder to claim compensation for losses resulting from an insurer’s delay, in addition to any interest owed on the claim amount. We previously considered the issues arising from this development here.
Third Parties (Rights Against Insurers) Act 2010
The Third Parties (Rights Against Insurers) Act 2010 improves the position of third parties that have a liability claim against an insolvent insured, replacing the 1930 Act of the same name. It came into force on August 1, 2016 (after more than six years of delays) and applies where either the insured’s insolvency proceedings have commenced or the insured’s liability was incurred on or after that date. The key changes brought in by the 2010 Act are summarized below.
Right of the third party to bring proceedings directly against the insurer
The principal reform brought in by the 1930 Act was to transfer the rights of an insolvent insured under a liability policy directly to the third party claimant, so that the claimant would not be prejudiced by having to prove in the insolvency of the insured and potentially receiving a reduced payment. However, the third party was required to establish the insured’s liability before it could enforce its right to payment under the policy.
Under the 2010 Act, a third party may now bring proceedings directly against the insurer, without first having to obtain judgment against, or settlement with, an insolvent insured. The third party may seek to establish the claim against the insured and the insurer’s liability under the policy in the same proceedings.
A third party may now also bring proceedings against the insurer where the insured company has been dissolved, without having to restore the insured to the register so as to establish its liability.
Right to request information
Third parties also previously faced difficulties in obtaining information with respect to whether the liable party had insurance, and the details of such insurance, prior to establishing the insured’s liability. These difficulties were substantially reduced following the 2004 case Re OT Computers, where the Court of Appeal ruled that the third party had a right to obtain information from the insured upon its insolvency, and did not need to establish liability first.
Now, under the 2010 Act, a third party may request information relating to an insurance policy from any person where the third party reasonably believes that it has a liability claim, that the claim is covered by an insurance policy and that such person is able to provide the information.
Insurers and brokers should note that the recipient must provide any such information (where it is able to do so) within 28 days. The information that may be requested includes the identity of the insurer, the terms of the contract, details of any proceedings that have commenced and the extent to which any aggregate limit has already been used.
Limitations on the defenses available to the insurer
The 2010 Act introduces several limitations on the defenses available to the insurer, preventing the insurer from denying liability on certain “technical” grounds:
- The insurer may not require that the insured fulfill a condition in the policy (for example, a claims notification condition) where the condition has been fulfilled by the third party.
- The insurer may not rely on a condition that requires the insured to provide information or assistance where the insured cannot fulfill such condition because the insured has died (if an individual) or has been dissolved.
- The insurer may not rely on a condition that requires the insured to pay the liability claim before being entitled to payment under the insurance (a “pay first” clause). In the case of marine insurance, this rule is limited to claims for personal injury or death.
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|Martin Membery |
|Max Dannheisser |
|+44 20 7360 3614 |
|+44 20 7360 2030 |
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