The legal framework
i Sources of insurance law and regulation
English insurance law is a mixture of common law (drawn from cases before the courts) and statute. Many of the principles developed during early insurance disputes, including the duty of ‘utmost good faith’ were codified in the Marine Insurance Act 1906 (the 1906 Act), which continues to influence insurance law in the United Kingdom, the United States and the Commonwealth jurisdictions. Although the 1906 Act expressly governs marine insurance, many of its sections and principles are also applicable to non-marine insurance contracts, and it was the most significant statute in English insurance law until the Insurance Act 2015 came into force on 12 August 2016.
Other key statutes regulate risk-specific insurance contracts. For example, the development of life and fire insurance contracts led to the Life Assurance Act 1774 and the Fire Insurance Duty Act 1782, key parts of which remain in force today. General consumer legislation, such as the Consumer Rights Act 2015, also applies to consumer insurance contracts.
Firms providing insurance, reinsurance services or insurance intermediation must be authorised to do so under the Financial Services and Markets Act 2000. The Prudential Regulation Authority is responsible for the authorisation of such firms. The Financial Conduct Authority (FCA) regulates the conduct of authorised firms and the FCA’s Insurance Conduct of Business Sourcebook applies to the sale of general and protection insurance products, outlining expected standards for insurers such as the maintenance of suitable customer information, appropriate product disclosure and fair claims handling. Commercial parties are not required to take out insurance with local providers, although any entities wishing to sell insurance products in England and Wales must be FCA-authorised.
We cover the recent developments in the common law in Section III below, but English insurance law has also seen substantial statutory revision (or restatement) in recent years. The four significant recent statutes are:
- The Enterprise Act 2016, which for the first time provides policyholders with a potential right to claim damages in the event of a late payment of a claim by an insurer. Before the Enterprise Act 2016, policyholders could not recover any additional losses they suffered as a result of undue delay in payment of a claim by an insurer.
- The Third Party (Rights against Insurers) Act 2010 (updating the 1930 legislation with the same name) updated and strengthened the regime whereby a third party with a claim against an insolvent insured can, following the insolvency, pursue that claim directly against the insolvent insured’s insurers. The insurer continues to have any defences available to the insured in the third party’s claim, and any defences that the insurers may itself have under the terms of the relevant policy.
- The Consumer Insurance (Disclosure and Representations) Act 2012 (or CIDRA), which applies only to consumer insurance contracts, limits the consumer’s duty of disclosure, establishing that an insurer must ask appropriate questions to which the consumer must answer honestly and carefully.
- The Insurance Act 2015 (the Insurance Act) applies to both consumer and business insurance contracts entered into from 12 August 2016. The most significant developments to English insurance law now codified in the Insurance Act are:
- The Insurance Act alters the policyholder’s duty of disclosure in non-consumer insurance. Before the Insurance Act, the insured was under an onerous duty to disclose all known material facts about the risk to be insured. A failure to disclose any material fact would entitle the insurer to avoid the policy (and so avoid paying any claims), if the insurer could show that, if that fact had been disclosed, it would not have written the policy on the terms it in fact did (or not written it all). The ability to avoid arose whether the non-disclosure was fraudulent, negligent or indeed innocent. As a result, insurance disputes in England were often characterised by searches for, and arguments over, alleged non-disclosures.The Insurance Act replaces that duty with a new duty on the insured to make a fair presentation of the risk to be insured. The insured must now disclose all material circumstances that it knows or ought to know, or provide sufficient information to place a prudent insurer on notice to make further enquiries. Thus the burden is shifted in part onto the insurer. For policies entered into after 12 August 2016, it will be enough for an insured to disclose sufficient information to place a prudent insurer on notice to make further enquiries. If the prudent insurer’s enquiries would have revealed a material circumstance that was not disclosed, but the actual insurer made no such enquiries, the insurer may no longer be able to avoid the policy for non-disclosure. Further, if the insurer can establish a breach of the duty to make a fair presentation of the risk that induced it to write the policy, it will no longer automatically be entitled to avoid the policy. To do so the insurer will now need to show either that the breach was deliberate or reckless, or that if a fair presentation had been made it would not have insured the risk at all. If the breach is not deliberate or reckless, and the insurer can only show that it would have insured the risk on different terms (e.g., for a higher premium), the insurer’s remedy is to treat the policy as though it were written on those different terms.
- The Insurance Act includes new provisions relevant to breach of warranties in insurance policies. Whereas a breach of warranty previously discharged an insurer from liability under a policy from the date of breach, the Insurance Act introduces proportionate remedies, abolishing any rule of law that maintains a breach of an express or implied warranty results in automatic discharge of the insurer’s liability. For example, if the breach is neither deliberate nor reckless and the insurer would still have entered into the contract, the insurer is only able to reduce cover on a proportionate basis; if breach is neither deliberate nor reckless but the insurer would not have contracted, the insurer is able to avoid the contract but must return the premiums to the insured. Any policy terms purporting to convert pre-contractual representations made by the insured into a warranty (known as ‘basis-of-contract’ clauses) will no longer have effect.
- The Insurance Act clarifies the remedies available to an insurer in the event an insured makes a fraudulent claim. If a fraudulent claim is made, the insurer is not liable for any part of that claim, and can terminate the policy from the date of the fraud. However, the insurer cannot avoid the policy altogether, and remains liable for genuine pre-fraud claims.
ii Insurable interest
English law has historically maintained that for an insurance contract to be valid the insured must have an insurable interest in the subject matter of the policy. An insurable interest is a legal or equitable interest in the subject matter of the insurance, or some interest short of a legal or equitable interest that means the insured would suffer disadvantage or be deprived of an advantage should the risk manifest.
The historic centrality of insurable interest to the concept of insurance in English law means that certain types of derivative contracts, such as credit default swaps, which in many ways economically mirror an insurance arrangement, are not considered (or regulated) as insurance contracts in English law.
Following recent legislative reform there is uncertainty as to whether an insurable interest is a common law requirement or an indirect statutory requirement. Before the Gambling Act 2005, there was a clear statutory basis for insurable interest. The 1906 Act codified the general rule of law (for marine insurance) into a statutory requirement; the Life Assurance Act 1774 rendered life and contingent insurance contracts void without an insurable interest; and the Gaming Act 1845 created an indirect requirement for an insurable interest in all other contracts of insurance.
The Gambling Act 2005, which was intended to regulate new types of gambling activities, removed the 1845 Act’s indirect requirement for insurable interest. As the Act did not intend to affect insurance, the impact of the 2005 Act on insurable interest may be limited. However, uncertainty now exists as to the exact legal basis of insurable interest, and proposals by the Law Commission of England and Wales to include a statutory definition of insurable interest in the Insurance Act were rejected. Nevertheless, the English and Welsh and Scottish Law Commissions are currently consulting on a draft Insurable Interest Bill to introduce a statutory definition of insurable interest.
iii Fora and dispute resolution mechanisms
Insurance disputes with a value greater than £100,000 will generally be heard at first instance in the High Court. The Commercial Court, a specialist court within the Business and Property division of the High Court, has specialist judges with insurance experience and will be the most common forum for large insurance disputes. If a claim is greater than £50 million and raises issues of general importance to financial markets, it may be heard on the Financial List, a specialist cross-jurisdictional list established to handle claims related to the financial markets. At first instance the dispute will be heard by a single judge.
Appeals from the High Court are heard in the Court of Appeal, usually by a panel of three Lord Justices of Appeal. To appeal to the Court of Appeal the appellant will need to obtain the court’s permission, and to obtain this he or she will need to show that, where the appeal is a first appeal (i.e., the decision being appealed is not itself an appeal from a lower court), the appeal would have a real prospect of success or there is some other compelling reason for it to be heard. Where the appeal to the Court of Appeal is a second appeal (i.e., the decision being appealed is itself an appeal from a lower court) the appellant will need to show that the appeal would have a real prospect of success and there is some other compelling reason for it to be heard.
Appeals from decisions of the Court of Appeal are heard in the UK Supreme Court (the United Kingdom’s highest court), usually by a panel of five Justices of the Supreme Court. Again, the appellant will need to obtain permission to appeal, which will only be granted if it can be shown that the appeal raises an arguable point of law of general public importance that ought to be considered by the Supreme Court.
Claims with a value less than £100,000 will be heard in the relevant county court (which is usually the local county court of the defendant). The Financial Ombudsman Service (FOS) can also independently review and settle non-contentious complaints between an insured and insurer. The FOS is primarily designed to deal with complaints by individual consumers, but complaints can also be brought by, or on behalf of, small businesses who, as customers, use financial services. To qualify, the business making the complaint must have an annual turnover of no more than €2 million and fewer than 10 employees. Decisions of the FOS are binding on insurers, and can only be challenged by judicial review.
The English courts encourage alternative dispute resolution (such as mediation) both before and during arbitral or litigation proceedings. An unreasonable failure to engage in alternative dispute resolution may lead to the refusing party being required by the court to pay more of the other party’s legal and other costs of pursuing the claim (or receiving less of their own costs if successful). Mediation is the most widely used form of alternative dispute resolution in insurance disputes, but other alternatives include expert determination, adjudication and early neutral evaluation.
It is common for English law-governed insurance contracts to contain a London-seated arbitration clause. The QMUL 2018 International Arbitration Survey identified London as the most popular choice of seat for arbitration and the London Court of International Arbitration as the most popular institution after the International Chamber of Commerce’s International Court of Arbitration. London also remains a popular choice of seat for arbitrations arising out of Bermuda Form excess liability insurance policies. Bermuda Form policies often achieve a transatlantic balance between the perceived insurer-friendly laws of England, and the perceived insured-friendly laws of New York, by providing for the policy to be governed by New York law but for disputes to be resolved in London-seated arbitrations (and thus in accordance with English procedural law).
Under the Arbitration Act 1996, an arbitral award issued by a London-seated tribunal can only be challenged in the English courts on the basis:
- that the arbitral tribunal did not have substantive jurisdiction (Section 67);
- of a serious irregularity affecting the tribunal, the proceedings or the award, and which has caused or will cause substantial injustice (Section 68). The types of serious irregularity are set out in Section 68(2) and range from the tribunal exceeding its powers to the failure of the tribunal to deal with the issues that were put to it; and
- of a question of law (Section 69). To challenge an award on this basis requires leave to appeal from the court (which is not required for a challenge under Sections 67 or 68), which will only be given if the decision of the tribunal on the question of law is obviously wrong, or the question is one of general public importance and the decision of the tribunal is at least open to serious doubt.
While it is common for London-seated arbitral agreements to exclude appeals on the grounds of a question of law, it is not possible to exclude appeals regarding substantive jurisdiction or serious irregularity.