The drafting of the Insurance Contracts Bill is nearing completion and a further version of the draft legislation has now been published for consultation by the Law Commission and the Scottish Law Commission. Amongst other things, the draft Bill will bring the law relating to disclosure and misrepresentation for non-consumer insurance into line with consumer insurance following the introduction of the Consumer Insurance (Disclosure and Representations) Act 2012, which came into force in April 2013.
The draft Bill covers changes to the duty of fair presentation in non-consumer insurance, damages for late payment of claims, fraudulent claims, utmost good faith, warranties (including ‘basis of contract’ clauses, breach of warranty, and terms relevant to particular descriptions of loss), and contracting out. The Law Commissions have said that most of the clauses in the draft Bill, following previous consultations, are to be regarded as settled but that two clauses are still being discussed with some stakeholders: terms relevant to particular descriptions of loss, and implied terms about payment.
Terms relevant to particular descriptions of loss
As drafted, the Bill provides that if a contractual term is intended to reduce the risk of loss of a particular type, or at a particular location or time, then a breach of such a term may not be relied upon to exclude, limit or discharge the insurer’s liability for loss of a different kind or at a different location or time. If, however, the loss is within the same category of loss as the contractual term is designed to protect against, whether or not there is a direct causal link between the breach and the loss, breach of the term would suspend the insurer’s liability. For example, if the insured breaches a term requiring it to have a fire safety system, the insurer’s liability for fire-related losses will be suspended but not its liability for flood or earthquake related losses.
If the breach is remedied, the insurer’s liability will be restored.
This is not limited to warranties and may also apply to, for instance, conditions precedent or exclusion clauses so long as they relate to losses of a particular type, or at a particular place or time. If the relevant term is a warranty, however, a breach would suspend liability under the whole contract, unless the warranty is caught by the particular exceptions.
Implied term about payment
The draft bill introduces into every contract of insurance an implied term that the insurer must pay any claims within a reasonable time. This would change the law in both England and Scotland, where currently there is no such obligation.
A reasonable time will include time to investigate and assess the claim and may take into account the type of insurance, the size and complexity of the claim, compliance with statute, or regulatory rules or guidance, factors outside the insurer's control or other relevant issues. This would allow claims, for example, under business interruption policies or concerning events occurring abroad, a longer time. Factors beyond the insurer's control may include the policyholder or a third party not providing information in a timely manner.
If there are reasonable grounds for disputing the validity or quantum of a claim, the insurer will not breach the implied term by failing to pay, but their conduct will be relevant in determining if and when the term was breached. If the insurer was reasonable but ultimately wrong in refusing, more must be shown before they will be found in breach.
Remedies for any breach of this term, including damages, will be separate from any usual rights to enforce payment or claim interest.
If, as expected, the final draft Bill essentially mirrors the draft clauses published by the Law Commissions this would bring about significant changes to the law – in particular, with the clauses relating to fair presentation of risk and damages for late payment of claims. The draft Bill also contains provisions allowing parties to non-consumer contracts to opt out of the default regime.
HM Treasury will be the sponsoring department for the Bill and are consulting on whether there is a sufficiently broad consensus of support for the draft legislation to allow the Bill to be considered under the special procedure for uncontroversial Law Commission Bills. As part of that consultation they are also seeking views on the draft clauses relating to terms relevant to particular description of loss and implied term about payment. HM Treasury are seeking responses by 2 July 2014.
The full draft of the Bill, together with draft Explanatory Notes and details of the consultation, is available on the Law Commission’s website.