The Insurance Act 2015 (“The Act”) received the Royal Assent in February 2015 and comes into force on 12 August 2016. It has generally been acclaimed by all participants in the insurance business as a much needed reform of previous legislation which, although appropriate in 1906, was not fit for purpose in the 21st Century, and was giving rise to a serious risk of the London market losing business to overseas competitors whose regimes were less insurer-friendly. The draconian remedy of avoidance for all non-disclosures and misrepresentations, and termination for non-compliance with a warranty of whatever description had come in for particular criticism from affected parties.
The industry’s reaction is a work in progress. Some policies are simply removing references to warranties and basis of the contract clauses, and others are expressly incorporating the wording of the new proportionate remedies provisions of the Act which follow from non-compliance with the new duty of fair presentation. The new law provides that where a breach of the duty of fair presentation is deliberate or reckless, the insurer may avoid the contract, refuse all claims, and not return any of the premium paid. That may put the insurer in a better position than under previous law in relation to premium, which could only be retained where the non-disclosure or misrepresentation was fraudulent. Nevertheless, such cases are hopefully few and far between, and it is not thought that there was any intention to change the law here in a major way.
Where the breach was neither deliberate nor reckless, but the insurer’s position is that they would not have entered into the contract on “any terms”, the insurer may avoid the contract and refuse all claims but must return the premium paid. If the insurer would have entered into the contract on different terms, other than those relating to premium, then the contract will be treated as if it had been entered into on those different terms if the insurer so requires.
Further, if the insurer would still have entered into the contract but the premium would have been different, then the insurer may “reduce proportionately the amount to be paid on a claim”, by reference to the percentage relationship between the premium actually charged and that which would have been charged had a fair presentation been provided.
These provisions give rise to some uncertainty, in that much will depend on the evidence of the actual underwriter, and experts who support or contradict his views. Underwriting guidelines and internal policies are likely to become more relevant. So far as the insured is concerned, assessing whether and how much of a claim will be paid when these defences are raised is going to give rise to considerable difficulty. Reliance by an insurer on the premium increase provisions will presumably constitute an offer to pay at least part of the claim.
For this part of the Act, there may be some advantage to the market in not rejecting all of the pre-Act clauses as part of the overall revision of policy wordings. Both pressure from insureds (and their brokers) and soft market conditions in the last few years have given rise in many policies to innocent non-disclosure clauses setting out a dilution of insurers’ rights in relation to avoidance and termination.
These vary from almost complete abolition of such rights in solicitor’s professional indemnity policies to maintenance of a right to adjust the terms of the policy or reject a particular claim. There is no standard wording, but the clause often reads along the following lines:
“The insurers will not exercise their rights to avoid this insurance on the grounds of misrepresentation, mis-description or non-disclosure of any information material to the risks insured by this policy if the insured can establish that the mis-description, misrepresentation, or non-disclosure was committed innocently, unwittingly and in good faith”.
It appears that such clauses have not been the subject of any judicial decision, but they are used across all types of business, particularly where there are financing arrangements in place for a transaction. The addition of an unqualified right on the part of the insurer to vary policy terms does devalue the benefit of the clause for the insured’s perspective, and all versions put the burden of proof on the insured to establish that they had not acted dishonestly or fraudulently (in practice difficult to prove). However, this clause has the advantage drawing a clear line between dishonest and fraudulent misrepresentations (where avoidance is an option for the insurer), and other situations where the insurer remains committed to the policy on the existing terms, whether or not the insurer would have assessed the matter differently at the time had the relevant information been provided.
The clear line drawn between dishonest misrepresentations and non-disclosure and others may create hard cases, but at least there is a line which the parties can consider and accept. The Marine Insurance Act 1906 provided no line at all. The Insurance Act 2015 provides a flexible line and its precise whereabouts may have advantages and disadvantages for both parties.
Commercial parties can contract out of these provisions of the Act, and before everyone rushes wholesale to ditch existing policy wording, it is perhaps worth insureds, insurers and brokers considering whether retention of existing innocent non-disclosure provisions is actually to their advantage.