The Insurance Act 2015 was given royal assent on 12 February 2015 and will take effect as of 12 August 2016. The Act will apply to all contracts of insurance that are subject to English law. The aim is to increase confidence in the UK Insurance markets by modernising the law that underpins it. The intended result is to afford the insurer a greater deal of certainty around the duty of disclosure and the operation of warranties, in addition to clarifying the position on fraud.
Insurance is presently governed by the Marine Insurance Act 1906 (the “MIA”) which is a codification of Victorian insurance case law, to a greater or lesser extent, and required updating more than 100 years later.
This article explores the key legislative changes and the repercussions (if any) on the marine insurance markets.
The law as it stands imposes a very onerous duty of disclosure on the assured affording the insurer the rather draconian option of voiding the policy where that duty is not met. In the case of Kausar v Eagle Star, Lord Justice Staughton was particularly critical of the insurers’ ability to avoid the policy ab initio:
“Avoidance for non-disclosure is a drastic remedy. It enables the insurer to disclaim liability after, and not before, he has discovered that the risk turns out to be a bad one: it leaves the insured without the protection which he thought he had contracted and paid for… I do consider that there should be some constraint in the doctrine”
The Act no longer requires the assured to disclose all information material to the risk being insured. Instead there is a ‘Duty of Fair Presentation’ and the onus is on the insurer to understand the risks involved, ask the right questions and most importantly to record the factors that have underpinned their assessment of the risk. It is more about the proposer i.e. the insurer and/or the broker who knows or ought to know what would have been revealed from a reasonable inspection. The changes reflect technological advancement so as to allow an underwriter to make his/ her own reasonable assessments as opposed to relying on representations transmitted from the assured to the broker.
The Act addresses the perceived issue of ‘data dumping’, the proverbial needle in the haystack, by requiring disclosure to be made in a manner reasonably clear and accessible to a prudent insurer. In particular, brokers will now need to consider structured presentations and signposting.
The exceptions in the MIA are retained so that an assured is not bound to disclose circumstances that:
- diminish the insurer’s risk;
- the insurer knows or ought to know; and/or
- the insurer is presumed to know or has waived information about.
If the assured breaches the duty of fair presentation the insurer will now only be able to void the policy if it can be shown that the assured’s failure to disclose was ‘deliberate or reckless’. This is likely to be a very difficult burden to discharge.
Where the non-disclosure is neither reckless nor deliberate the insurer will have to show that: a.) the nondisclosure would have made a difference to the insurers’ decision and b.) the insurer would have acted differently if he had known the truth i.e. decline the policy in its entirety, change the terms of the policy or charge a higher premium.
The remedy available will largely depend on the finding at point b.) and will be administered proportionately. There will be a greater emphasis on the underwriter’s evidence to ascertain the consequences of non-disclosure from an objective expert view.
The current position in the MIA allows the insurer to discharge all liability under the policy from the date of the breach, even if that breach is immaterial to the risk and ultimate loss. This is the position even if the breach is subsequently remedied.
Under the new Act, losses arising prior to the breach of warranty are still recoverable. However the contract will now be suspended from the date of the breach and losses incurred after the breach are capable of recovery from the date that the breach is remedied. A breach is remedied when the risk becomes ‘essentially the same as that originally contemplated by the parties’. There will be scope to dispute what the risk originally contemplated by the parties June have been and whether that risk was essentially the same.
In relation to fraud, the new Act will not significantly change the current position. Insurers will have no liability to pay out fraudulent claims and they will be entitled to recover sums already paid out for fraudulent claims. Insurers will be able to treat the policy as terminated from the date of the fraud but will need to give written notice.
Premiums do not need to be returned but any loss occurring prior to the fraud will still be covered by the policy.
For group policies, fraud by a person covered by, but not a party to, the policy only entitles insurers to avoid against the fraudster alone.
In non-consumer contracts insurers can contract out of the above-mentioned provisions but this is subject to certain transparency requirements. Insurers must take ‘sufficient steps’ to draw any terms less advantageous than the Act to the assured’s attention before the risk incepts. Marine markets June be able to carry on ‘business as usual’ and insurers are likely to insist on full disclosure from the outset and continue trading on that basis.
There is greater scope for the assured to challenge denials of coverage under the new Act, particularly where the insurer has failed to carry out due inspection and to then expressly state the position under the new Act.
The Act will bring about significant changes in the presentation of risks. There will be a greater emphasis on insurers to fully understand the risk presented rather than rely on brokers to provide all relevant information. There will be a greater need to follow procedures and best practice guidelines. Insurers June consider adopting these provisions prior to the Act entering into force in August 2016 together with necessary amendments to existing internal procedures.
The Act seeks to redress the perceived imbalance between insurers (who were entitled to call for all material information) and assureds.
Also, pursuant to new transparency requirements, the insurer must now draw more onerous terms, which the parties June have traded on for many years, to the assured’s attention.