The Insurance Act 2015 received royal assent this morning. The Act introduces key changes to the duty of disclosure in commercial insurance contracts, warranties and insurers’ remedies for fraudulent claims. These measures will come into force in August 2016. 

The Act is the outcome of nine years of consultation by the Law Commission and Scottish Law Commission which also resulted in the passing of the Consumer Insurance (Disclosure and Representations) Act in 2010. To read more on the Consumer Insurance (Disclosure and Representation) Act click here. In keeping with the Consumer Insurance Act, the provisions in the new Insurance Act affecting consumer insurance will be mandatory while the Act provides a default statutory regime for non-consumer insurance contracts. 

The Insurance Act also makes amendments to the Third Parties (Rights Against Insurers) Act 2010 to allow that Act to be brought into force. It is expected that the 2010 Act will come into force in October 2015.

Main changes introduced by the Insurance Act

  • Non-consumer insureds will have a duty to make a fair presentation of the risk and the requirements to satisfy the duty are set out in the Act.
  • There will be significant changes to the remedies available to insurers for non-disclosure and misrepresentation. Except where the breach of the duty to make a fair presentation is deliberate or reckless, proportionate remedies (based on what the insurer would have done if full disclosure had been made) will apply.
  • The concept of warranties remains but with important modifications.
  • In cases of fraudulent claims, insurers will have the option to terminate the cover from the date of the fraudulent act without returning premium.

Duty of fair presentation for non-consumer insureds

The existing duty to disclose every material circumstance known (or which ought to be known) to an insured is replaced by a duty to make a fair presentation of the risk. To make a fair presentation an insured must:

  • Either disclose all material circumstances of which it is or ought to be aware, or give the insurer sufficient information to put a prudent insurer on notice that it should make further enquiries;
  • Make the disclosure in a way that would be reasonably clear and accessible to a prudent insurer; and
  • Ensure that representations about material facts are substantially correct (and that representations that are expectations or beliefs are made in good faith).

Where an insured is not an individual, what is known or ought to be known to the insured means what is known to individuals who are part of its senior management team or responsible for its insurance. The insured is also expected to know what would be revealed by a reasonable search of information, including information held by the insured’s broker or a person covered by the insurance (but not confidential information acquired by the broker when acting for other clients). 

If the duty to make a fair presentation is breached, the insurer will be able to avoid the contract (and retain the premium) if the non-disclosure or misrepresentation is deliberate or reckless. In other cases a scheme of proportionate remedies will apply, depending on what the insurer would have done if a fair presentation had been made. If the insurer can show that it would not have entered into the contract on any terms, it will still be able to avoid the contract and refuse to pay claims (but will have to return the premium).

Warranties

“Basis of contract” clauses whereby pre-contractual information is converted into a warranty will be abolished for non-consumer insureds. This brings non-consumer insurance in line with the position for consumer insureds under the Consumer Insurance (Disclosure and Representations) Act. 

For both consumer and non-consumer contracts, breach of warranty will suspend rather than discharge the insurer’s liability. The insurer will be liable to pay claims that arise after the breach of warranty has been remedied (if it can be) and will still be liable for losses before the breach, as is currently the case. 

If a policy contains a term designed to reduce the risk of loss of a particular kind, or at a particular location or particular time, an insurer will not be able to rely on breach of the term if the insured can show that failing to comply with the term could not have increased the risk of the loss which actually occurred. For example, a lock warranty requiring the hatch of a yacht to be secured by a particular type of padlock is intended to reduce the risk of theft. Breach of the warranty would not, however, discharge the insurer from liability for loss of a different kind, such as loss in a storm. This clause was reintroduced into the Insurance Bill during its passage through Parliament, a similar clause having been omitted from the Bill last July as being too controversial as originally drafted.

Fraudulent claims

The Act will introduce a default statutory regime for fraudulent claims. Insurers will remain liable for claims arising before a fraudulent act is committed but will have the option of terminating the contract as from the date of the fraudulent act without returning premium. For group insurance, the Act provides that fraudulent claims made by one beneficiary under the policy will not affect the cover provided under the contract to other parties.

Contracting out

In the main the Act provides a default regime for non-consumer insurance contracts. With the exception of the abolition of “basis of contract” clauses (which is mandatory), parties to non-consumer policies will be able to contract out of the Act and substitute their own agreed terms providing the insurer meets certain “transparency requirements”. To be effective, however, policy terms that would put an insured in a worse position than they would be in under the Act must be clear and unambiguous and sufficiently drawn to the insured’s attention before the contract is entered into.

Comment

The Insurance Act will come into force on 12 August 2016. The Act introduces significant changes to insurance contract law and its impact will be felt in both commercial and consumer insurance, in particular with respect to how risks will be assessed and policy terms and wordings. In the 18 months until the Act comes into force insurers and brokers will want to review their placement processes and policy wordings in the light of the Act and put in place changes required.