On June 18, the Law Commissions of England and Wales and Scotland published the complete draft of the Insurance Contracts Bill, together with explanatory notes. The draft Bill contains the proposals to revise the law in relation to aspects of non-consumer and consumer insurance contracts and follows over eight years of consultation.
The draft Bill, if enacted, would replace sections 18-20 of the Marine Insurance Act 1906 with the requirement for an insured to make a “fair presentation of the risk”. This duty would replace the existing duty of disclosure and misrepresentation but will retain certain familiar obligations such as the requirement to disclose material information that the insured knows or ought to know. The draft Bill will enable the insured to make a fair presentation where sufficient information has been disclosed to put a prudent insurer on notice that it must make further enquiries.
The draft Bill also changes the existing law in relation to warranties. In particular, the Bill would abolish “basis of the contract” clauses in non-consumer insurance (the Consumer Insurance (Disclosure and Representations) Act 2012 has already abolished the use of these terms in consumer contracts). Presently, where a warranty is broken by the insured, the insurer will automatically cease to have any further liability under the contract. The effect of the law can have severe consequences where a warranty is broken which is later remedied or has no connection to the cause of loss. The draft Bill does not change the definition of warranty but changes the law with the effect that a breach of warranty will suspend liability rather than end it. As a result, a breach of warranty may be remedied where the remedy will have the effect that the risk continues to be as originally intended under the contact.
The Law Commissions have proposed that where a warranty is designed to reduce a risk of a particular type or at a specific time, liability will only be excluded where a breach relates to losses of that type during the particular time. Where a loss occurs that does not relate to the risk identified by the warranty or during a different time the Commissions propose that the insurer should be liable for that loss.
Also included in the draft Bill are insurers’ remedies where the insured has made a fraudulent claim. Where fraud is committed by the insured, the insurer will not be liable to pay the claim to which the fraud relates. Any money already paid out for that claim may be recovered. The insurer will remain liable for claims made in relation to events that take place prior to the fraudulent act. Once the insurer has elected to treat the contract as terminated it can refuse to pay claims relating to “relevant events” (i.e. notice of claim or potential claim) that take place after the fraud.
The Law Commissions are consulting upon the wording of an implied term to the effect that an insurer has an obligation to pay valid claims within a reasonable time.
The draft Bill prevents insurers from contracting out of any provisions to the detriment of a consumer. In non-consumer contracts the Bill provides that, generally speaking, parties can agree to contract out of terms in the Bill. However, in order to do so the insurer must comply with transparency requirements. Importantly, it will not be possible for an insurer to contract out of the prohibition of the use of basis of the contract clauses or any deliberate or reckless breaches of the requirement to pay claims within a reasonable time.
Consultation on the draft Bill closes on July 2, 2014.
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