There has been much speculation since the Insurance Act 2015 was passed back in February 2016 as to whether the insurance market would embrace the new, more policyholder-friendly regime, or whether insurers would instead seek to contract out of the changes.
With the exception of the abolition on basis of contract clauses, parties are free to contract out of the provisions of the Act, all of which offer a greater level of protection to policyholders than the current law. The only caveat is that insurers wishing to contract out must comply with the "transparency requirements" set out in Section 17 of the Act, which provide that:
- The insurer must take sufficient steps to draw any disadvantageous term to the insured's attention before the contract is entered into; and
- Any disadvantageous term must be clear and unambiguous as to its effect.
With the Act due to come into force on 12 August 2016, the Lloyd's Market Association (LMA), which represents the interests of the Lloyd's members, has published a series of model clauses which, if adopted, would exclude the provisions of the new Act to policyholders' detriment.
With regard to the new proportionate remedies, the LMA has produced the following model clause (LMA5257):
"Section 8(2) and Schedule 1 of the Insurance Act 2015 are excluded in their entirety. If the Insured breaches the duty of fair presentation, and the Insurer shows that but for the Insured's breach it would not have entered into the insurance contract at all, or would have done so only on different terms, then the Insurer may avoid the insurance contract and refuse all claims. If the breach was deliberate or reckless, the Insurer need not return any of the premiums paid. If the breach was not deliberate or reckless, the Insurer must return the premiums paid."
Such a clause would remove all of the protection afforded to policyholders by the new Act in relation to the consequences of material non-disclosure and/or misrepresentation, bringing back the sole remedy of avoidance, which is widely perceived to be unfair.
Currently, breach of a warranty discharges the insurer's liability in its entirety, even if the breach is short-lived and is remedied almost immediately. The new Act seeks to protect the policyholder by making warranties "suspensive conditions", meaning that the insurer will only be "off risk" for the period that the warranty is breached and will be liable again once the breach has been remedied.
With regard to Warranties, the LMA has produced the following model clause (LMA5258):
"Section 10 of the Insurance Act 2015 shall not apply to any warranty in this insurance contract. If any such warranty is breached, the Insurer's liability shall be discharged from the time of the breach of warranty, regardless of whether the breach is subsequently remedied."
Policyholders, particularly those in the SME market who may be offered less opportunity to negotiate terms, must be alive to the possibility that insurers will seek to contract out of some if not all of the provisions of the new Act and should be very reluctant to agree to this. The Act is designed to re-balance the playing field between insureds and their insurers under English law which traditionally favours insurers. Policyholders must seize this opportunity to better protect their businesses going forward.