Following the joint review of insurance contract law, commenced in 2006, by the Law Commission and the Scottish Law Commission, the Government has introduced the Insurance Bill for consideration under the special Parliamentary procedure for uncontroversial Law Commission Bills. As a result, some areas considered by the Law Commissions as ripe for reform but that are considered to be contentious have been dropped from the Insurance Bill for consideration at a future point. These include: damages for late payment of claims, description of loss warranties and insurable interest. Nonetheless, it is widely anticipated that the Insurance Bill will result in fundamental, potentially seismic, changes to established insurance law.
The Insurance Bill now covers:
- • Changes to the duty of fair presentation for non-consumer
insureds bringing the law into line with that applying to
consumer insurance following the introduction of the Consumer Insurance (Disclosure and Representations) Act 2012
- Fraudulent claims
- Amendments to the Third Parties (Rights against Insurers)
Changes to the duty of fair presentation for non-consumer insureds
The Insurance Bill replaces the insured’s duty to disclose to the insurer “every material circumstance” that it knows or ought to know “in the ordinary course of business” with a duty to “make to the insurer a fair presentation of the risk”. The duty to make a fair presentation will be satisfied if the insured discloses every material circumstance that it knows or ought to know either to enable the prudent underwriter to price and write a risk or to be sufficient to cause the prudent underwriter to ask further questions. Where the insured is not an individual, what is known or ought to be known to an insured will be material circumstances within the insured’s own knowledge or known to senior management or those responsible for taking out the insurance.
If the insured breaches this duty, the insurer will be able to avoid the policy and retain the premium where the non-disclosure was deliberate or reckless. In all other cases, it will depend on what the insurer would have done had a fair presentation been made. Avoidance will still be available where the insurer can show that it would not have contracted on any terms.
While the concept of warranties will be retained, the “sting” will be removed by two modifications:
- 1. “Basis of contract” clauses whereby pre-contractual information is converted into a warranty will be abolished;
- Breach of warranty will suspend, rather than discharge, the insurer’s liability such that the insurer will be liable for any valid claims that arise after the breach of warranty has been remedied.
The Insurance Bill introduces a default statutory regime for fraudulent claims. The Commissions made it very clear that they do not intend to define fraud or to introduce specific remedies; rather, the focus is on whether the insurer is liable. The insurer will remain liable for claims arising before the fraudulent act but, if the insurer elects to treat the contract as terminated, it would have no liability for future claims and would not have to return the premium.
Where fraud is committed by persons entitled to make claims under group insurance policies, the Commissions propose that such policies be treated as if the insurer and the fraudulent member had entered into a separate insurance contract.
The non-consumer law reforms will be a “default regime” and parties will generally be able to contract out of and substitute their own agreed terms. Conversely, all terms of the Insurance Bill in so far as they relate to consumers are mandatory and it will not be possible to contract out of the prohibition on “basis of contract” clauses whether the insurance is consumer or non-consumer.
Third Parties (Rights against Insurers) Act 2010
The Insurance Bill also amends the Third Parties (Rights against Insurers) Act 2010, which had not yet been brought into force. The 2010 Act was intended to simplify existing procedures under which victims can claim directly against insurers where the insured had become insolvent or otherwise ceased to exist. The 2010 Act had not been brought into force because it failed to cover the full range of insolvent or defunct wrongdoers, which will be amended by the Insurance Bill.
If brought into force, as widely anticipated, the Insurance Bill will result in wide spread changes to the insurance market across England and Wales, Scotland and Northern Ireland. Insurers will need to evaluate their internal policies and current practice as well as review their proposal forms and policy documents to ensure that they reflect the new duty of fair presentation of the risk.
While the Insurance Bill allows the parties to opt-out of its provisions in non-consumer insurance (save that the parties cannot elect to opt out of the abolition of basis of contract clauses) this itself could lead to much debate – as custodian of the wordings, what will the broker’s position be on opt out or not?
The above said, it will be some time before the Insurance Bill comes into force despite the use of the Law Commission’s special procedure for non-contentious Bills. The Act states that it will substantively come into force 18 months after receiving Royal Assent, which will be before Parliament is dissolved in advance of the next General Election (likely to be March next year).