The Insurance Bill 2015 received royal assent on February 12 2015, becoming law as the Insurance Act 2015. The act overhauls certain fundamental areas of UK insurance law and applies to both insurance and reinsurance contracts. The reforms will come into force in August 2016, giving the industry a period of 18 months to prepare.
Remedy for breach of warranty now contingent on relevance
The bill was introduced to Parliament under a special procedure for Law Commission bills that enjoy a broad consensus of support and received relatively few amendments following its introduction in July 2014 (for further details please see "Commercial insurance law reform bill introduced to Parliament"). However, a significant additional provision has been included that will mean that insurers will be unable to rely on a breach of warranty by the insured if the breach is irrelevant to the risk of loss. An insured will be able to make a claim, despite having breached a warranty, where it can show that its breach could not have increased the risk of the loss occurring. For example, where an insured suffers loss through burglary, but has breached a warranty that it would maintain a fire alarm in working order, the insured should be able to show that had the alarm been operational, it would have made no difference to the risk of burglary and, accordingly, the insured should be able to make a claim under the policy.
As with certain other reforms introduced under the act, parties to non-consumer insurance contracts will be able to contract out, provided that:
- the insurer takes sufficient steps to draw the contracting-out term to the attention of the insured before the contract is entered into; and
- the term is clear and unambiguous as to its effect.
Existing law on breach of warranties
Under the existing law insurers are, as a general rule, discharged from all liability under a contract of insurance following a breach of a warranty by the insured, irrespective of the subject matter of the warranty. This is codified in Section 33(3) of the Marine Insurance Act 1906, which states that a warranty "must be exactly complied with, whether it be material to the risk or not". The insurer is discharged automatically as of the date of the breach (this was confirmed in the 1991 case of Bank of Nova Scotia v Hellenic Mutual War Risks Association ('The Good Luck')). The principle technically applies to both consumer and non-consumer contracts, although consumers are afforded a degree of protection under the Financial Conduct Authority's claims handling rules, which prohibit insurers from rejecting a claim where the breach is unconnected to the circumstances of the claim, other than in the case of fraud.
New Section 11
Section 11, which addresses the subject in the act, provides that the insurer will be liable for a claim only where the breach of warranty is totally irrelevant to the risk of the loss occurring; warranties which relate to the overall risk under the policy must be complied with by the insured, in addition to warranties more specifically related to the particular type of loss in question. The wording of Section 11 is intended to make this clear, stating that the insured must show that "the non-compliance with the term could not have increased the risk of the loss which actually occurred in the circumstances in which it occurred". The government initially omitted the original version of Section 11 from the bill, but it was reintroduced by the House of Lords following the provision of revised wording by the Law Commission.
Some in the insurance industry have questioned how easy it will be to draw a line between terms which are and are not relevant to the risk of a loss in a particular circumstance, and have predicted that this may lead to disputes. Overall, however, the reforms have received support within the industry since they are seen as reflecting good practice and should help to maintain the UK insurance market's international competitiveness.
Amendments to Third Parties (Rights Against Insurers) Act 2010
The Third Parties (Rights Against Insurers) Act 2010, which is not yet in force, was enacted in order to make it easier for persons with liability claims against parties which become bankrupt or insolvent to claim against those parties' insurers. The 2010 act will allow a third party to claim directly against the insurer without first having to establish liability as against the insured, and also makes it easier for the third party to obtain information about the insured's policy. However, the 2010 act as drafted contained deficiencies with respect to the range of applicable insolvency procedures and did not fully reflect developments in insolvency law. Further legislation was therefore considered necessary before the 2010 act could be brought into force.
The Insurance Act 2015 includes amendments to the 2010 act to allow the government to make the necessary changes by way of secondary legislation (which will also allow future changes in insolvency law to be incorporated more easily), following which the 2010 act should be brought into force. The government has stated that the draft regulations are being prepared and that it is committed to bringing the 2010 act into force as soon as practicable.
For further information on this topic please contact Martin Membery or Max Dannheisser at Sidley Austin LLP by telephone (+44 20 7360 3600?), fax (+44 20 7626 7937) or email (firstname.lastname@example.org or email@example.com). The Sidley Austin LLP website can be accessed at www.sidley.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.