We consider the impact of the Insurance Act 2015 (the Act) on the motor market.
The Act intends to bring into line non-consumer insurance regulation with the rules created under the Consumer Insurance (Disclosure and Representations) Act 2012. Both pieces of legislation were introduced to update the Marine Insurance Act 1906, which was widely considered to have stifled the development of insurance law.
Whilst the perception exists that the Act broadly tilts in favour of insurers, there are challenges to be alive to in the motor market for both the insurer and corporate client.
Duty of fair presentation
The existing pre-contract duty of utmost good faith is retained but subtly redefined. Any material presentation of fact must be substantially correct. An insured is required to disclose any material circumstance which would influence the decision of a prudent underwriter on whether to underwrite a risk and, if so, on what terms. The provision mirrors and codifies the common law approach set out in Pan Atlantic Insurance Co. Ltd and others v Pine Top Insurance Co. Ltd .
However, the Act introduces a number of changes:
- A greater obligation of disclosure to include information:
- That would have been known had the insured conducted a reasonable search internally.
- Held by a broker.
- Held by any party covered by the insurance arrangement.
- Provision for the insured to satisfy the duty by providing the insurer with sufficient information to place a prudent insurer on notice that it needs to make further enquiries in order to reveal any material circumstances. Therefore, even if the insured fails to disclose a material circumstance, the notice provision may come to its aid.
- A requirement for the insured to present the risk in an accessible way. This is unlikely to create significant problems in motor, as the obligation will usually be confined to claims experience, driver details, vehicles on risk and use.
Consequences of a breach
Where there is a breach of the disclosure obligations, the insurer may only avoid the policy if the breach is deemed deliberate or reckless or if the underwriter can establish the risk would not have been accepted on any terms. Otherwise, the insurer must pick up any claims by applying revised terms and/or adjusting the premium. The insurer may restrict its liability in proportion to the actual premium received as against the correct premium.
Therefore, going forward, where an insurer operates in a bespoke market like motor, the Act will make it harder for the insurer to demonstrate that it would not have accepted the risk. The insurer will need to produce evidence of its underwriting criteria, the application to the risk at inception, previous comparable risks and possibly even the matrix applied to premium calculation. Evidence that an underwriting manual has been followed will be powerful. There will be a compelling case for avoidance if the insurer is able to show its internal guidelines did not permit acceptance of the risk.
It is not too difficult to imagine how an insured might fall foul of this duty. Consider:
- A motor trader who decides to extend the use of pool cars to offer a courtesy car service to its customers.
- A transporter agreeing to undertake the carriage of hazardous material as a small part of its business activity.
- An employed driver who has only recently completed a drink driving ban and returned to the roads.
Each of these facts would render a risk as non-standard. Failure to disclose is likely to result in the insurer refusing indemnity on the basis of a breach of the duty of fair presentation.
How then should a company looking at its motor insurance provision respond to the fresh obligations created by the Act?
Establishing a robust knowledge management process is key. Creating a platform for collating and sharing details of the risk, determining how variations to the risk profile are to be reported and agreeing the internal process for senior management sign off are central to good risk management. Even if there is a breach of the duty of fair presentation, being able to establish a strong risk process should be sufficient to negate the suggestion that breach was reckless or deliberate (or at least invoke sympathy from the insurer).
Warranties and other changes
Any representations forming part of the insurance proposal will no longer be converted into warranties. Where a warranty exists and is breached, but is then remedied before the date of loss, the Act contemplates that the cover will continue as if the breach had not occurred.
Insurers will be carefully examining all remediation clauses to make sure they are consistent with the Act. Many have already chosen not to enforce warranties in existing contracts and to remove them from policies on renewal to avoid any conflict with the new provisions.
The advancement of a fraudulent claim will entitle the insurer to cancel the policy with effect from the date the claim is made, retaining any premium received. The insurer will be obligated to deal with any claims predating the fraudulent claim. For group policies, only the individual claim can be refused on the back of fraud so the impact is not to invalidate the insurance of other group members.
The changes introduced by the Act intend to create greater transparency around the presentation of an insurance risk.
The Act brings some welcome clarity to how and when they may do so. Some provisions will undoubtedly require judicial interpretation to ensure that all parties fully understand their obligations and the remedies available for a breach.