In 2006 the Law Commission of England and Wales and the Scottish Law Commission (the Commissions) commenced a review of insurance contract law. Many buyers of insurance and some in the insurance market had expressed concerns that the current law was unfair and should be updated.
The first phase of the review covered consumer insurance, culminating in the Consumer Insurance (Disclosure and Representations) Act 2012. The second phase dealt with business insurance: the Commissions have recently published a draft Insurance Contracts Bill (the Draft Bill) setting out draft legislation which covers business insurance and some aspects of consumer insurance not dealt with in the 2012 Act.
If enacted, the Draft Bill will only have legislative force in the United Kingdom. However, the number of insurance contracts worldwide governed by English law means its impact will extend beyond UK buyers and sellers of insurance. In this briefing, we look at the key changes to existing business insurance law contained in the Draft Bill.
Changes to the duty of disclosure and remedies for breach of duty
The Draft Bill replaces the insured’s duty of disclosure, long established under UK law, with a requirement that the insured “must make to the insurer a fair presentation of the risk”. The right to avoid an insurance contract for the breach of the duty of utmost good faith, as set out in section 17 of the Marine Insurance Act 2006, is abolished.
To make a “fair presentation”, the insured must either disclose every circumstance which would influence the judgement of an insurer in deciding to underwrite a risk, or provide information sufficient to put a prudent insurer on notice to enquire further.
The insured is obliged to disclose information held by its insurance broker or other agent, and the separate duty of disclosure imposed on brokers by section 19 of the Marine Insurance Act 1906 is repealed.
The insurer’s remedy for breach of the duty of fair presentation would depend on whether or not the breach was deliberate or reckless. If the breach is deliberate or reckless, the insurer would be able to avoid the insurance contract and retain premium. The insurer’s remedy for other breaches of the duty would be based upon what it would have done had a fair presentation been made. For example, if the insurer would have entered into the insurance contract but only on different terms then the insurer may require that the contract be treated as if it had included those different terms from the outset, for example meaning that additional warranties or exclusions are incorporated.
New entitlement to compensation for late payment of claims
English law currently states that insureds are not entitled to damages for losses suffered resulting from an insurer’s failure to pay valid insurance claims within a reasonable time. This has been criticised as plainly unfair and inconsistent with general contract law principles.
The Draft Bill provides an implied term in insurance contracts that the insurer will pay claims within a reasonable time. What constitutes a “reasonable time” depends on factors such as the type of insurance, the size and complexity of the claim, compliance with statutory or regulatory rules or guidance, and circumstances beyond the insurer’s control. Insurers can defend a late payment claim where they incorrectly refuse a claim, but can show that they acted reasonably in doing so.
Introduction of fraudulent claims regime
The Draft Bill does not contain a definition of fraud, but attempts to introduce a default regime. Under this regime, when an insured commits fraud in relation to a claim, the insurer:
- has no liability to pay the fraudulent claim
- may recover from the insured any sums paid by the insurer to the insured in respect of the claim
- may treat the policy as having been terminated with effect from the time of the fraudulent claim, and need not return any of the premium.
Where fraud is committed by persons entitled to make claims under group insurance policies, the Commissions propose that such policies will be treated as if the insurer and the fraudulent member had entered into a separate insurance contract. The other members of the group insurance scheme will be unaffected but, as far as the fraudulent member is concerned, the insurer will have no liability to pay the fraudulent claim. In addition, the insurer may terminate the policy for the fraudulent member with effect from the time of the fraudulent act.
Changes to law on warranties and abolishment of “basis of contract” clauses
The Draft Bill abolishes basis of contract clauses: if enacted, insurers will lose the ability to convert even minor representations by the insurerd into a warranty by a provision in the insurance contract. Insurers will no longer be relieved from liability if those representations are found to be untrue.
Insurers can still include warranties or similar provisions but they must each be expressly agreed with the insured.
Breach of warranty will no longer discharge insurers of liability from the time of breach. Instead, breach will suspend insurers’ liability, which can be restored if and when the breach is remedied.
If any contractual term (not limited to warranties) is intended to reduce the risk of loss of a particular kind or at a particular location or time, then if the insured is in breach of that term the insurer may only refuse claims for losses falling within that category of risk.
The Commissions intend the Draft Bill to be the default regime for commercial insurance. However,they have allowed insurers and insureds to contract out of the regime, with limited exceptions. Only two of the proposed reforms cannot be contracted out of or limited:
- The abolition of basis of contract clauses
- The provisions concerning the deliberate or reckless late payment of insurance claims.
There are procedural restrictions on contracting out, which require insurers to take sufficient steps to draw any provisions contracting out of the regime to the insured’s attention before the contract is entered into, and requiring any such provisions to be clear and unambiguous. The nature of the sufficient steps will depend on the type of insured.
If it becomes law, the Draft Billwill be a major change to the law regarding business insurance contracts, and will have a significant impact on underwriting and claims practice. It is far too early to say whether it will lead to a reduction in insurance coverage litigation and professional negligence claims against brokers: a number of potential ambiguities in the wording of the Draft Bill may continue to give rise to disputes.
The Commissions hope to publish a final draft Bill and report by summer 2014. It is currently unclear whether or not there will be sufficient time to put a Bill through Parliament and enact it as an Act of Parliament before the next election in May 2015. Even were this to happen, further time would be required for any legislation to come into force, with the result that any changes to the law may not take effect until 2016.