The Insurance Bill is set to reform business insurance law in the UK. The Bill had its final reading in the House of Commons on 3 February and now awaits Royal Assent. It is expected to come into force in mid-2016 and will have a range of potential implications for insurers, brokers and insureds.
The Duty of Disclosure
The Bill sets out the duty of disclosure on an insured. That duty is to make “a fair presentation of the risk” and to disclose “every material circumstance which the insured knows or ought to know”. However, the duty will also be satisfied if the insured provides the insurer with sufficient information to put a prudent insurer on notice that it needs to make further enquiries.
- There will be a specific onus on the insurer to make further enquiries about facts which should put it on notice. Insurers might want to consider in advance what enquiries would routinely be relevant to specific classes of business.
- The Bill specifically requires that the disclosed information is provided by the insured in a manner which is reasonably clear and accessible. This requirement is directed against the practice of “data dumping” by insureds at inception or renewal. Insureds and brokers might need to put thought into the content and structure of presentations to the insurer to ensure this requirement is satisfied.
- The Bill sets out particular circumstances in which insurers and insureds will be taken to have deemed knowledge for the purposes of a fair presentation. It will be necessary to ensure that lines of communication are sufficient to avoid acting without regard to information which a company is deemed under the terms of the Bill to have.
A significant change introduced in the Bill is the remedies available to insurers if the insured fails to discharge its duty of fair presentation (or commits a misrepresentation).
Where the non-disclosure is fraudulent or reckless, the remedy of avoidance will remain. Where the non-disclosure is not fraudulent or reckless, the burden is on the insurer to show what it would have done if a “fair presentation” of the risk had been made:
- If the insurer would not have entered into the contract, it can avoid.
- If the insurer would have entered the policy, but on different terms, then the insurer can treat the policy as having included those terms from the outset.
- If the insurer would have entered into the contract but at a higher premium, the insurer can reduce the amount paid out on a claim proportionately.
- The availability of specific remedies might well depend on whether the insurer can show how it would have treated the risk had it known the full facts. Proving this could be challenging. The effect could be significant – especially in relation to large claims. For example, a small addition to the premium which would have been charged could mean a large reduction in the amount of the claim paid.
There are three key changes: First, “basis of the contract” clauses are to be abolished. These clauses have the effect of converting every statement in a proposal form into a warranty. They will no longer be valid. Parties cannot contract out of this.
Secondly, warranties will become “suspensive” conditions meaning that a breach of warranty suspends cover until the breach is remedied. Under the current law, a breach of warranty automatically terminates insurance as at the date of the breach.
Thirdly, in some instances a breach of warranty will only prevent a claim if it had a causative effect on the loss. The Law Commission originally proposed that insurers should not be discharged from liability where the breach is unrelated to the loss. This proposal was initially omitted when the Bill was put before Parliament. But a revised clause has now been included, which applies to terms which reduce the risk of (1) loss of a particular kind (2) loss at a particular location or (3) loss at a particular time. An insurer will not be able to rely on non-compliance with the term if the insured shows that the non-compliance could not have increased the risk of the loss.
- Insurers might prefer to remove, as out of date, any reference to “basis of the contract” clauses from their documentation, including any statements in proposal documents to the effect that inaccurate information will necessarily prevent cover.
- Underwriters will be less able to rely on warranties to control the risk being taking on. This could lead to increased scrutiny of underwriting information and pre-inception questions.
The Bill provides that when an insured commits a fraudulent claim, the insurer: (1) is not liable to pay the claim; (2) may recover any sums paid already under the claim; and (3) can give notice to terminate the insurance from the time of the fraudulent act.
- This clarification of the law provides protection to insurers. However, the main challenge for insurers remains the difficulty in proving fraud. No guidance or assistance on this is contained in the Bill.
Parties are able to contract out of some of the default statutory provisions. Any clause which would have the effect of contracting out must comply with transparency requirements, which provide that it must: (1) be drawn to the insured’s attention and (2) be clear and unambiguous.
- Any contracting out wording will need to be carefully drafted. The transparency requirements are vague and there is no case law to provide specific guidance on how they should be applied in practice.
Insurers might wish to consider on which (if any) classes of business they would prefer to contract out of any aspects of the Bill. This could involve arrangements being reached with brokers and key account insureds.
The Bill gives rise to a number of practical implications which insurers, brokers and insureds will need to address prior to it coming into force – a few of which we have identified here. The Bill will also have a potential impact beyond the direct application of its terms to insurance contracts. For example, it could affect the regulatory framework, including the requirement to treat customers fairly, and will have potential consequences for reinsurance arrangements. There is much to consider before the Bill completes its journey and the long awaited reforms come into force.