On 12 August this year, the Insurance Act 2015 will introduce the most significant changes to insurance law in 110 years – how will it affect the shipping industry?
The Act applies to all insurance policies taken out by businesses which are subject to the laws of England and Wales or Scotland. Because so many marine policies are subject to English law, regardless of where the Insurer is situated or regulated, the Act has far reaching implications for everyone involved in marine insurance This is especially the case regarding what insureds are required to do before taking out a new policy, renewing or varying existing policies. The Act applies to all shipping risks including hull, P&I, FD&D and cargo.
New Duty to Make a Fair Presentation of the Risk
Presently, an insured is obliged to disclose all material facts to insurers prior to entering into a contract of insurance. This duty to disclose material facts is based upon the Marine Insurance Act and has, historically, been perceived to be onerous in that insurers had the right to avoid policies even where the insured had innocently failed to disclose material facts.
From August, unless the parties contract out of the Act, insureds will be under a new duty to make a fair presentation of the risk and the remedies available will be proportionate to the breach by the insured.
The Act anticipates that insureds will agree with insurers what they have done to satisfy the new duty and which sources of information insureds have searched in order to identify material information (the test of materiality remains very similar under the Act as under the existing law). If, on investigation of a claim, material information is subsequently discovered in an area which insurers have agreed was not to be searched, insurers may not be able to rely on this in arguing a breach of the new duty.
Further, in the event of a breach of the duty to fairly present the risk, insurers’ remedies will generally be proportionate and based on what they would have done had the risk been fairly presented. This will be an additional benefit to insured parties in many cases, as insurers will only be able to avoid a policy if the breach was deliberate or if they would not have written the risk had it been fully presented.
Warranties, Conditions Precedent and Other terms - Contracting Out
Aside from the new duty to make a fair presentation, the Act contains other provisions which, in general terms, can have the effect of watering down insurers’ ability to decline paying claims. For example, if the Act applies to a policy, insurers will no longer be able to rely on breach of a condition precedent in declining a claim, unless that breach has increased the risk of the loss which actually occurred in the circumstances in which it occurred. So, to take a simple example, if an insured breaches a condition precedent by failing to pay, or is late in paying, the premium, insurers are unlikely to be able to rely on that breach in declining a claim, whereas under the existing law insurers have that right.
As we mention above, insurers can contract out of the Act subject to complying with transparency requirements. It is anticipated that it will very much depend on the particular insurance market whether insurers will be routinely seeking to contract out of the Act or whether this will be a point for negotiation on a risk by risk basis. What is clear though is that parties purchasing insurance will need to carefully review insurance policies, and negotiate them where appropriate.
From insurers’ point of view, they will need to consider whether they wish to adopt the Act in part or in full, review wordings and obtain advice so as to ensure their policies to reflect their desired position.