In this article, Partner Paul Wordley and Associate Ciara Jackson look at dispute resolution in the insurance industry and, in particular, the impact of the Insurance Act 2015.
The use of arbitration as a means of dispute resolution in the insurance and reinsurance markets is increasing, particularly on an international level. A number of mainstream arbitration forums have seen a significant increase in insurance activity, namely ICC, SIAC, DIFC and LCIA. In addition, there are specialist insurance and reinsurance arbitration forums such as ARIAS.
What has not changed is the law parties choose to govern their disputes. In the context of global insurance programmes, facultative reinsurance and business in expanding markets (Latin America, Middle East, Africa and Asia), where permitted, English law is the law of choice for insurance and reinsurance contracts. This is because there is a well-defined body of statute and case law supporting interpretation.
The Insurance Act 2015 (the act), which received Royal Assent on 12 February 2015, is the first full review of English insurance law for over 100 years. It applies to insurance contracts entered into from 12 August 2016. It brings in significant changes to English insurance contract law, with reforms in areas such as pre-contractual disclosure, conditions, warranties and fraudulent claims. It will impact the resolution of insurance and reinsurance disputes significantly. Some key changes are outlined below.
Fair presentation of risk
The current duties regarding disclosure and representations are replaced by a new requirement for the insured to make a “fair presentation of the risk”. Disclosure must be made in a manner that would be “reasonably clear and accessible to a prudent insurer”, the intention of which is to prevent the practice of “data dumping” on insurers.
The insured must disclose every material circumstance which it knows or ought to know, or alternatively must give the insurer “sufficient information to put a prudent insurer on notice that it needs to make further enquiries” to reveal such material circumstances. The definition of “material circumstance” remains the same:
- Something that would affect the judgement of a prudent insurer in deciding whether to accept the risk and if so on what terms.
- Something that induced the actual insurer to accept the risk.
There are certain exceptions to the duty of disclosure, such as where the insurer knows, ought to know or is presumed to know something.
Importantly, the act introduces proportionate remedies for breach of the duty of fair presentation: if the insurer would not have written the risk, the remedy of avoidance is still available; if the insurer would have imposed additional terms and conditions, these are deemed incorporated into the contract; if the insurer would have charged a higher premium, the insurer is entitled to a pro rata claim reduction.
Basis of contract clauses and warranties
In terms of warranties, one of the key changes under the act is the abolition of the use of “basis of contract” clauses. These clauses elevated all information provided to insurers to material significance.
There is also a significant change to insurers’ remedy for breach of warranty. The current law provides for a complete discharge of the insurer’s liability from the time of the breach of warranty. Under the act, breach of warranty will suspend an insurer’s liability from the time of the breach until such time as the breach is remedied. The insurer will not be liable for any loss which occurs during this period, or which can be attributed to something which occurs during this period. However, provided the breach is capable of being remedied, the insurer’s liability will be reinstated once the breach is remedied.
Where a term is designed to reduce the risk of a particular kind of loss, or loss at a particular place or time, an insurer will only have a remedy if the loss suffered is of the particular kind, or at the particular time or place, contemplated by the term.
The act provides that an insurer is liable for losses up to the time of the fraudulent act, but can treat the policy as terminated from the time of the fraudulent act. Previously, fraudulent acts voided the insurance from the outset.
The most complex part of the act concerns the introduction of a new “knowledge regime” in terms of new legal and factual tests for both insureds and insurers. An individual insured is treated as knowing (and must therefore disclose) what he knows and what is known to the individuals responsible for his insurance. An insured who is not an individual must disclose what is known to senior management and to the individuals responsible for its insurance. The individuals responsible for insurance include employees of the insured (such as risk managers and those involved in negotiating the insurance) as well as the insured’s agents (such as brokers).
Knowledge deemed to be held by insurers does not need to be disclosed. An insurer is deemed to know:
- What is known to the individuals who decide whether to accept the risk.
- Information which is held by the insurer and readily accessible by the individual underwriter.
- Common knowledge and information which an insurer offering the particular class of business would reasonably be expected to know.
The act introduces features from many international insurance regimes and negates some of the draconian features of current English insurance law. The “all or nothing” nature of insurer remedies is replaced by one which provides remedies that are proportionate to the breach. Many of these new provisions have been incorporated into bespoke policy wordings for corporate insureds and cedants over the last 15 years as brokers/insurance lawyers have seen the benefit of proportionate regimes in other jurisdictions.
Although the act does not come into force until August 2016, insureds, insurers and brokers should be seeking to adopt its provisions now and should be considering the impact it is likely to have on the outcome of any disputes they may enter. Parties should also be prepared for an inevitable lack of certainty while the new provisions are clarified by case law, particularly as regards the new remedy regimes and the knowledge regime.