Following the implementation of the Consumer Insurance (Disclosure and Representations) Act 2012 in April 2013, the English and Scottish Law Commissions’ Insurance Bill was introduced in Parliament in July 2014 (the Bill). When enacted, it will mark a significant change in business insurance.
Mills & Reeve have set out the highlights of the Bill. This article analyses the impact of the proposals for insurance brokers and specifically those placing commercial risks. They will not take effect for 18 months from enactment, which will give insurers the opportunity to consider and amend their procedures, policy wordings and, if applicable, proposal forms; there will also be time for brokers to get ready.
Pre-inception impact - current position
As the law stands, the proposer is under a duty to disclose all material facts and information to an insurer before inception of the policy, that is to say, any fact that would influence the judgment of a prudent insurer in fixing the premium or determining whether they will accept the risk. The proposer must consider and identify what is and is not material and the broker will usually be approached for advice and guidance. A breach has severe consequences even if the result of an honest mistake because the insurer can avoid the policy from inception.
The existence of a “basis clause” may also entitle insurers to treat the policy as ineffective if the information supplied by the insured before inception is incorrect. This was affirmed by the Court of Appeal’s decision in Genesis Housing v Liberty (see our briefings Accuracy is the best policy and Genesis Housing v Liberty - the appeal for more information).
These provisions have produced an environment where insurers can deny claims and provides a fertile ground for claims against brokers. Many commentators view the existing law as unfair.
There are several key points impacting on brokers:
- When the Bill is enacted the proposer will be required to make a fair presentation of the risk. This does not mean however that the proposer can withhold material information. If the failure to disclose is deliberate or reckless, insurers will still have the right to avoid the policy and retain the premium. For any other failure to make a fair presentation, insurers will have a range of proportionate remedies reflecting what would have happened if a fair presentation had been made. So:
- If insurers would not have accepted the risk they may still avoid the policy but will have to return the premium
- If the risk would have been written on different terms, those terms will apply
- If a higher premium would have been charged insurers will be entitled to reduce any claim payment by the proportion by which the premium that would have been charged exceeds the actual premium
From the broker’s perspective, these changes are positive: insurers will be required to pay claims (either in full or a greater share) that might otherwise be avoided under the current law. It follows that clients should have less cause to pursue their brokers because any shortfall in recovery under their policy should be avoided or significantly reduced.
- The modification of insurers’ remedies for breach of a proposer’s disclosure obligations does not reduce the steps that a broker will need to take. A broker still has obligations under ICOBS to know their client and to recommend a product that is suitable for their demands and needs. This means the broker must know their client’s business sufficiently well to be able to elicit the key material information that needs to be disclosed to insurers.
- As the law stands, an individual employee’s knowledge can be imputed to the insured. This can have disastrous effects if a dishonest employee intentionally (or an honest employee unintentionally) withholds information from those responsible for procuring the insured’s insurance. That may provide insurers with grounds to avoid claims. The Bill provides that the insured’s knowledge will be limited to what is known by one or more of the individuals who are (a) part of the Insured’s senior management, or (b) responsible for the insured’s insurance. This is helpful as far as it goes but the insured is still required to make a “reasonable search” so it is important that the broker ensures that the proposer has proper systems in place to capture accurate information (and to make a fair presentation of the risk to insurers).
- Potentially the most favourable development is that “basis clauses” will be prohibited in business contracts. This reduces the risk for insureds that their claim will be rejected because inaccurate information was contained in their proposal. However, insurers may still require the insured to warrant the accuracy of relevant information and brokers will still need to check the terms of the policy, any reference to such warranties and advise their clients about their implications.
- It will be possible for business insureds to contract out of the new provisions, except the prohibition of the “basis” clause. Brokers will need to fully consider the terms of the policy to ensure that if insurers do intend to contract out, their clients are fully advised of the consequences. The policy wording is likely to be less favourable to them. Brokers may also need to prepare a standard form letter explaining how contracting out will affect the client. The good news is that any contracting out must confirm to the “transparency requirement” so insurers must (a) draw it to the insured’s attention before entering the policy and (b) ensure the wording is clear and unambiguous. Where insureds are sophisticated and/or advised by brokers, insurers’ obligation to draw a contracting out clause to the insured’s attention may be less strict. In any event, brokers must ensure a clear explanation is provided to the client since it is unlikely to be sufficient for a broker to rely on the insurers’ wording to discharge the duty to give proper advice.
Impact at the claims stage - the consequences of a breach of warranty
Breach of warranty is currently the “trump card” because the insured’s breach of warranty discharges the insurer from any liability under the policy from the date of the breach. There are no second chances for the insured; a3 breach is final and a remedied breach does not dilute or displace the insurer’s right (unless the breach is waived). A pre-inception breach means that the policy never existed. The good news, in the light of the abolition of the “basis clause” is that this should now be very rare.
Under the Bill, the position will be different because cover will be reinstated from the date that the breach is remedied (provided it is capable of remedy). This will be a significant development for insureds but it may possibly create an additional burden for brokers who will have to advise their clients that they may be able to restore their cover if they have breached a warranty. In that scenario, the broker may have a potential exposure if they fail to advise the insured to immediately remedy the breach and the consequences of not doing so.
Proposals not (yet) adopted
There were two proposals which have not seen the light of day in the Bill:
- Where a term was aimed at reducing the risk of losses of a particular kind or loss at a particular place or time, the insurer would not be entitled to rely on the breach to discharge its liability for a different type of loss. For example, a breach of warranty to maintain a fire alarm would not have entitled insurers to decline to cover a claim for burglary.
- The insurer would have had to pay damages if it failed to pay a claim within a reasonable time. At the moment, the only remedy for late payment is an award of interest. This can result in injustice if the insured is impecunious and becomes insolvent as a result of the delay or suffers other economic loss. The proposal would still have allowed the insurer a reasonable time to investigate and assess the claim but it would have given brokers a much stronger argument to maintain pressure to pay a claim in the event of an unreasonable delay.
It remains to be seen whether the Law Commissions reintroduce these two proposals in future legislation. They would both be of assistance to brokers and their insured clients.
From the brokers’ perspective, little will change immediately in terms of their day to day work. Their obligations to know the client and provide proper advice will not change. However, the Bill will place the parties to an insurance contract on a more equal footing. This should mean that fewer claims are denied and claims that would otherwise have been avoided will be paid in part. If so, fewer clients will suffer total losses and have reason to claim against their broker. It should also mean that brokers will no longer be viewed as an insurer of second resort as they have become in recent years. The cautionary note, however, is that the consequences for non-disclosure and breach of warranty will still be severe, so total losses will still occur and the big claims will not go away completely.