The Insurance Act 2015 (the “Act”), which comes into force on 12 August 2016, is the most significant reform of English insurance contract law for over 100 years. The provisions of the Act apply to all (non-consumer) contracts of insurance and reinsurance that are governed by English law regardless of the country in which the policy is underwritten. It also applies to any variations to existing insurance contracts made after 12 August 2016. The Act tries to help the level the commercial playing field in the English insurance market by addressing what is perceived to be a legal imbalance in favour of insurers. It also updates existing (and arguably outdated) rules which no longer reflects good market practice in the 21st century.
- Introduces a new duty of fair presentation of a risk to be insured by the insured to the insurer before the insurance contract is entered into and reforms the law relating to knowledge of insured and insurer for the purpose of defining what must be disclosed before the inception of a policy;
- Brings in new, proportionate remedies available to an insurer if there is a breach of the duty of fair presentation by the insured. The existing remedy of avoidance of the policy – the insurer’s ability to act as if policy never existed- is therefore abolished as sole remedy for breach of the former duty of good faith; and
- Reforms the law relating to warranties and terms that are not relevant to the loss. Breach of warranty by an insured will no longer completely discharge an insurer’s liability; if the breach of warranty is remedied prior to the loss then insurance cover remains in place.
The new duty of fair presentation of the risk
The insured must disclose every “material circumstance” which the insured knows or ought to know to insurer. Or failing that, the insured must provide the insurer with sufficient information in relation to those material circumstances as would put a prudent insurer on notice that it needs to make further enquiries.
Proportionate remedies for breach of the duty of fair presentation
If an insured fails to make a fair presentation of the risk, then new remedies are available to insurer. A distinction is drawn between a deliberate or reckless breach of duty when the insurer can avoid policy and any claims monies have to be repaid to insured; and other types of breach of duty (e.g. innocent/negligent).
The Act introduces a new regime of proportionate remedies for the breach as opposed to inflexible, sole remedy of avoidance. The onus will be on the insurer to show what it would have done if it had known about the breach. If it can show it would not have entered into the contract of insurance, then it can avoid the policy (but must return the premium). If it can show that it would have entered into the contract but on different terms, the insurance contract is treated as if it included those different terms.
Reform of warranties
“Basis of contract” clauses (a declaration in the policy and/or proposal that certain representations made by the insured want to be true and accurate and that the statements made “form the basis of the contract”) are abolished.
The other changes of note to insurance warranties are that an insurer may not rely on a breach of warranty where that warranty relates to a risk that is irrelevant to the type of loss that actually occurred. Further, an insured’s breach of a warranty suspends, and no longer necessarily discharges, the insurer’s liability under the policy. Going forward, warranties will become suspensive conditions. That means that the insurer is not liable for losses occurring while the insured is in breach of the warranty, but liability restored once the breach is remedied (f it is capable of remedy).
In my next post I will look at the potential for disputes arising out of the Act and how insurers can look to manage the risks.