Emily Monastiriotis, partner and head of construction disputes, and Jonathan Spencer, managing associate, at Bond Dickinson LLP explain what construction lawyers need to know about the Insurance Act 2015 (IA 2015), which comes into force on 12 August 2016.
What is the significance of IA 2015 for the construction sector?
IA 2015 radically overhauls areas of UK insurance law. The construction sector is closely linked to insurance as construction projects have the benefit of insurance policies. For example, architects are required to maintain professional indemnity policies, as are quantity surveyors. Those involved in procuring and dealing with insurance policies will need to get up to speed swiftly with the changes. For example, the law on warranties is radically altered by IA 2015 and these amendments are key to insureds on construction projects claiming under their commercial insurance policies. Often losses on construction projects are substantial and many major contractors will have reinsurance policies. IA 2015 applies equally to those types of policies.
What changes will IA 2015 introduce to the insurances held by the various parties involved in construction projects?
The various parties involved in construction projects are likely to be insured by non-consumer insurance policies. IA 2015 has introduced a default statutory regime for such policies. There are a number of fundamental changes that have been introduced all of which will have an impact on insureds and insurers involved in construction projects. These include:
- so-called ‘basis of contract’ clauses—which converted pre-contractual information supplied to insurers into warranties—are abolished and it is not possible for the parties to opt out of this
- a breach of warranty simply suspends the insurer’s liability, it no longer discharges it—so an insurer will still have to pay claims that arise after a breach of warranty has been remedied (insurers/insureds should keep records of when a warranty has been breached and when it has been remedied)
A new provision has been introduced which provides that insurers are unable to rely upon a breach of a warranty by an insured if the breach is irrelevant to the risk of loss. The test that applies is that ‘the non-compliance with the term could not have increased the risk of the loss which actually occurred in the circumstance in which it occurred’. For example, if on a construction project a flood occurs but a contractor has breached a warranty that it was to secure a site with a mesh wire fence to protect against trespassers, if the insured can establish that even if the fence had been erected the flood damage would still have occurred, insurers will be liable.
An insured has a new duty to make a fair presentation of the risk. This means disclosing every material circumstance which the insured knows or ought to know, or giving the insurer sufficient information to put a prudent insurer on notice that it needs to make further enquiries. If this duty is breached deliberately or recklessly the insurer is able to avoid the policy (which means it is treated as if it never existed), retain the premium and not pay any claims. If the breach is not deliberate or reckless then proportionate remedies will apply—these will depend upon what the insurer would have done had full disclosure been given.
What are the proportionate remedies that might now apply?
If an insured has breached its duty of fair presentation but the breach was not deliberate or reckless then the following remedies may apply if underwriters would:
- not have written the policy at all—insurers can avoid the policy and not pay the claim but must return the premium
- have accepted the risk but on different terms (other than premium)—the contract is to be treated as if it included those terms
have accepted the risk but charged a higher premium—insurers may reduce proportionately the amount to be paid on the claim (for example, if insurers charged a premium of £10,000 but would have charged £15,000 had the insured made a fair presentation, insurers could be entitled to reduce the amount paid on a claim by one-third
Will this have an impact on the insurance provisions in construction contracts and professional appointments?
IA 2015 may have more of an impact on the procedures during placing, renewal and claims, rather than on the wording in the insurance clauses themselves. This is because we anticipate that insurers will have to tighten up their risk surveys as a result of the relaxations on breaches of warranty. If parties to a non-consumer contract want to contract out of IA 2015, they can agree to do so (although they cannot opt out of the abolition of basis of contract clauses) but only if terms that are less favourable to the insured than those provided in IA 2015 are sufficiently brought to the insured’s attention and are clear and unambiguous.
What are the key considerations for contractors, developers and consultants arising out of IA 2015?
One of the key changes from an insured’s point of view is the new duty to make a fair presentation of the risk. Construction entities will need to review how they have conducted their disclosure to insurers and make sure that they comply with the new requirements. The question of what is known or ought to be known by an insured means:
- what the insured has told its broker
- what is known by individuals who are part of its senior management team or responsible for its insurance
- what would be revealed by a reasonable search of information available to the insure
It should be made clear from the outset to insured and insurers who is responsible for the insurance, and who is considered to be part of the ‘senior management’ for the purpose of disclosure. This could be recorded on the proposal form/policy documentation to avoid the scope for dispute.
What should construction lawyers be brushing up on in relation to IA 2015?
Construction lawyers need to familiarise themselves with the changes implemented by IA 2015 as they will have to advise clients how to prepare for the changes and to ensure that proper procedures are in place to deal with the new requirements.
Yes, from 4 May 2017 the Enterprise Act 2016 will insert sections into IA 2015 which will imply terms into insurance contracts which allow insureds to claim damages against insurers for late payment of insurance claims if not paid within a reasonable time. A ‘reasonable time’ allows insurers time to investigate and assess the claim but what is reasonable will depend on all the relevant circumstances, such as the type of insurance, the size and complexity of the claim, compliance with any relevant statutory or regulatory rules or guidance, or factors outside the insurer's control. Insureds will be able to claim late payment damages for up to one year after a claim has been paid or settled. Construction entities should be aware of these new provisions (once in force) so that they do not miss the one-year cut-off. Claiming damages for late payment of the claim may be a useful tactic in any coverage dispute to put pressure on the insurer and seek disclosure of privileged legal advice.
Are there any other points of interest?
IA 2015 also included provisions which enabled the Third Parties (Rights Against Insurers) Act 2010 (TP(RAI)A 2010) to come into force on 1 August 2016. TP(RAI)A 2010 has simplified the procedure for parties with a liability claim against a party that has become bankrupt or insolvent to claim against that party’s insurers. Insolvency is still impacting the construction industry so the introduction of TP(RAI)A 2010 has been welcomed by many in the industry.
Bond Dickinson have prepared a coverage flowchart to assist insurers undertaking investigations relating to the new duty of fair presentation.
This article was first published on Lexis®PSL Construction analysis on 9 August 2016.