On July 17 2014 the government introduced the new Insurance Bill to Parliament. The bill mostly applies to commercial insurance contracts, although certain provisions also apply to consumer policies. It will overhaul longstanding tenets of English insurance law, in particular the insurer's right to avoid a policy for breach of the insured's duty of disclosure and the law applicable to warranties. The bill applies to reinsurance as well as insurance contracts.
The bill represents the culmination of eight years of consultation by the Law Commission with businesses and insurers, and seeks to address aspects of the existing law that are considered unjust or not reflective of market practice, although commercial parties will be free to contract out of most of the provisions. Certain provisions mirror similar reforms brought in with respect to consumer insurance under the Consumer Insurance (Disclosure and Representations) Act 2012, which has been in force since April 2013.
The bill will pass through Parliament under a special procedure for Law Commission bills, which enjoy a "broad consensus of support". The bill is expected to receive royal assent before the end of the current Parliament. The bill will come into force 18 months from the date of enactment in order to allow insurers time to prepare. Insurers will need to analyse the impact of the reforms on their policy wordings, underwriting, reserving and claims handling procedures.
Provisions applying only to non-consumer insurance contracts
Duty of fair presentation
The bill imposes a new "duty of fair presentation" on insureds. Before entering into an insurance contract, insureds will be required to disclose either:
- all material circumstances which the insured knows or ought to know; or
- sufficient information to put a prudent insurer on notice that it needs to make further enquiries.
The existing statutory duty of disclosure under Section 18 of the Marine Insurance Act 1906 requires insureds to disclose every material circumstance. The application of the lower threshold (sufficient information to put the insurer on notice) reflects developments in case law, but in designing the bill the Law Commission determined that this was so fundamental that it needed to be set out explicitly in statute. Doing so would help to ease confusion among insured businesses, which often have difficulties judging how to comply with the current statutory disclosure requirement, given that the onus is on the insured to know which circumstances are material to the insurer and to volunteer all such information.
The bill also provides that the insured must make the disclosure in a manner which would be reasonably clear and accessible, so as to protect insurers from mass 'data dumping' by the insured.
Remedies for breach of duty of fair presentation
The proposals contained in the bill are intended to apply a more proportionate regime to breaches by business insureds of the disclosure requirements than the existing regime. Similar rules are already in force with respect to consumer policies under the Consumer Insurance Act.
The existing law provides insurers with the 'all or nothing' remedy of avoidance for the (business) insured's breach of its duty of disclosure or of the associated duty of good faith. This would be superseded by the provisions of the bill, which state that if the insured deliberately or recklessly breaches the duty of fair presentation, the insurer will still be entitled to avoid the policy and refuse all claims, and will not be required to return any premium. However, if the breach is not deliberate or reckless:
- where the insurer would not have entered into the contract on any terms, the insurer will still be entitled to avoid the policy and to refuse all claims, returning the premium;
- where the insurer would have entered into the contract but would have charged a higher premium, the insurer will not be entitled to avoid the policy but will have a right to reduce any claim payment proportionately; and
- where the insurer would have entered into the contract on different terms, other than premium terms, the insurer will again not be entitled to avoid the policy but will have a right to treat the contract as though entered into on those different terms.
Warranties: abolition of basis of contract clauses
'Basis of contract' clauses turn all factual statements by the insured into warranties as to the truth of those statements, breach of which will discharge the insurer from all future liability under the policy. Accordingly, basis of contract clauses can allow insurers to avoid liability as a result of minor inaccuracies or mistakes in the information provided to them.
In the consumer insurance context, such clauses have been abolished by the Consumer Insurance Act. The clauses are still common in non-consumer insurance policies, although they are often not enforced by insurers, and have been upheld as valid in recent cases. The bill provides that basis of contract clauses will be rendered void in non-consumer insurance contracts.
Provisions applying to consumer and non-consumer insurance contracts
Warranties: insurer may avoid claims only as long as breach of warranty is continuing
Presently, where an insured is required to comply with a particular warranty during the period of the insurance (eg, a warranty that it will maintain a fire alarm in operation), breach of that warranty may discharge the insurer from all future liability, even in respect of losses occurring after the insured has rectified the breach (eg, by reinstalling the fire alarm). The Law Commission considered the fact that temporary non-compliance with a warranty can serve to invalidate all future claims to be unfair on the insured.
The bill addresses this by providing that a breach of warranty will affect only the insurer's liability for events occurring after the breach and before the breach has been rectified. In other words, the insurer's liability will be suspended during the period when the breach is occurring, but if that breach is rectified so that the insured is in compliance, the insured will be entitled to claim for subsequent events.
Remedies for fraudulent claims
The bill seeks to clarify the law with respect to remedies for fraudulent claims. Under the existing law, insurers are entitled to terminate the insurance contract on discovering fraud. It is unclear whether the insurer is liable for unrelated claims before such discovery. The courts have generally found the insurer liable for legitimate claims before the fraud, but this is not settled law. The treatment of non-fraudulent claims made after the fraud but before discovery or termination by the insurer is also unsettled.
The bill provides simply that the insurer may choose to terminate the contract with effect from the date of the fraud. If it does so, the insurer may recover amounts paid in respect of the fraudulent claim or any events subsequent to the fraud, but is still liable for legitimate claims made in respect of events before the fraud.
The reforms will take effect as a default regime for non-consumer insurance contracts. Parties to non-consumer insurance contracts will be able to contract out of most of the provisions of the bill, provided that the insurer takes sufficient steps to draw the relevant term to the attention of the insured before the contract is entered into if it disadvantages the insured party. The term must also be clear and unambiguous as to its effect. As an exception, insurers will not be permitted to contract out of the provision abolishing basis of contract clauses and any term purporting to do so will be void.
Parties to consumer insurance contracts will be unable to contract out of any applicable provisions of the bill to the detriment of the consumer.
Provisions excluded from the bill
The government has decided not to include two provisions of the bill which were included in the Law Commission's draft:
- a rule that where the insured breaches a warranty relating to a particular type of loss or loss at a particular time or in a particular location, the insurer may seek to avoid payment only where the claim in question relates to that type of loss or loss at that time or place. This was recommended by the Law Commission to address the perceived injustice under the existing regime that insurers may avoid liability where the insured has breached a warranty, even if the warranty has no relation to the risk of the type of loss which is claimed (eg, an insurer avoiding liability in respect of a burglary claim because the insured has breached a warranty to maintain a fire alarm); and
- a contractual right for the insured to receive claim payments from the insurer within a reasonable period of time, together with a consequent right to claim damages for unreasonable delay. Insureds are presently not entitled to damages for unreasonable delay in payment (ie, damages over and above the amount of the claim itself plus interest). The change would bring insurance contract law into line with general contract law, where an injured party may seek damages for losses caused by the other party's default, within certain boundaries.
The omission of these provisions has disappointed some commentators representing insureds' interests. According to press reports, the Treasury, which is sponsoring the bill, has omitted the provisions in order to ensure smooth passage through Parliament, indicating that there has been opposition to the provisions which might have made it difficult for the bill to qualify for the special procedure or which would otherwise have delayed progress through Parliament.
Martin Membery or Max Dannheisser
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.