On 12 February 2015 the UK Insurance Act 2015 (the Act) received royal assent and will take effect on 12 August 2016. It is one product of the longstanding review undertaken by the Law Commission and the Scottish Law Commission which sought to identify what areas of insurance law were in need of reform. It was preceded by the Consumer Insurance (Disclosure and Representations) Act 2012 which related solely to consumer insurance.
The Act applies mainly to non-consumer contracts of insurance although some of its provisions will apply to consumer and non-consumer policies alike.
The Act introduces reforms in several significant areas and arguably also stands to impact Australian insurers that find their contracts governed by UK law.
Duty of ‘fair presentation’
Prior to the Act’s inception, an insured was obliged to disclose every material fact / circumstance before entering into a policy of insurance, even including facts that an insurer had not specifically asked for. The duty was an onerous one, penalties for breaches were arguably harsh and it had been subject to criticism for many years.
The Act, in the context of non-consumer contracts, imports a new ‘duty of fair presentation’. The duty is detailed in Part 2 of the Act. Essentially, an insured is required to disclose any and all information which it “‘knows or ought to know” or failing that, disclosure which is sufficient “to put a prudent insurer on notice that it needs to make further enquiries…”. Information which an insured ought to know is that which might have been discovered by an insured engaging in a “reasonable search”. Additionally, the new duty also dictates the manner in which the information must be presented – namely that disclosure must be both sufficient and fairly presented, in a manner that is reasonably clear and accessible to a prudent insurer.
Remedies for breach of the duty are also substantially altered. If the breach is either deliberate or reckless, and the insurer can demonstrate it would not have otherwise entered into the contract, then it is permitted to void the contract and retain any premiums paid to it. If the breach is negligent or innocent (not deliberate or reckless) the remedy is contingent on what action the insurer would have taken if the breach had not occurred.
One can surmise that this new duty will require insurers to take a more proactive and diligent approach when it comes to pre-contractual disclosure by an insured. No longer will an insurer be able to point to an insured’s failure to provide material information if in fact the insured has provided information sufficient to put the insurer on notice of the need for further enquiries.
Previously a breach of warranty had enabled an insurer to escape any liability from the time of breach onwards, even if an insured had taken steps to remedy the breach.
Part 3 of the Act deals with warranties and, in essence, affords an insured an opportunity to ‘make good’ its breach of warranty (provided it does so before an insured loss occurs). Specifically, in the event of a breach of a contractual term, an insurer’s liability will be reinstated once the insured has remedied the breach. The insurer also remains liable for the period of time preceding the breach. Liability is suspended from the time of the breach to the time it is remedied, so an insurer might refuse to pay a claim for a loss occurring during this period (provided the breach is relevant to the loss).
Previously a fraudulent claim entitled an insurer to avoid the entire policy from its outset which meant that an insurer might, prima facie, recover any sums previously paid to its insured for earlier genuine claims.
Part 4 of the Act provides that an insurer will not be liable to pay a fraudulent claim. In the case of fraud, an insurer will be entitled to terminate the policy, but only from the time of the fraud onwards.
Option to ‘contract out’
There is provision in the Act for the parties to contract out of the Act’s application in certain respects.
In the context of consumer contracts, section 15 of the Act provides that any term of the contract, which would see the insured in a worse position other than they would find themselves in under the Act, is invalid.
Parties to non-consumer contracts will have some scope to contract out of the Act’s application, however, the insurer must comply with transparency requirements and provide clear notice to the insured as to the possible implications of opting out.
The Australian experience
The Act will apply to all contracts of insurance governed by UK Law. In the context of reinsurance contracts, for example, Australian insurers may therefore find themselves bound by the provisions of the Act although the highly sophisticated nature of reinsurance might see the parties to such contracts electing to opt out of the Act’s application in certain instances. At the very least, however, the parties will need to turn their attention to the reforms and consider whether modifications to internal processes (for example, adopting a more proactive approach to disclosure) or even policy wordings are required.
In the wider context, the Act may also serve as something of a catalyst for further reform to Australian insurance law. While a number of the new provisions now simply align more closely with Australian law, others (in particular the remedies for breach of policy terms and the new duty of fair presentation) are considerably different and may in turn encourage further revision of the Insurance Contracts Act 1984 (Cth) or even more drastically, the Marine Insurance Act 1909 (Cth). The Act reforms the Marine Insurance Act 1906 (UK) in several important ways. Given the Australian equivalent was modelled entirely on the original UK version, it remains to be seen whether this latest reform will also now draw attention to what is labelled by some as a draconian piece of legislation in many respects.