The Insurance Act 2015 (UK Act) was passed on 12 February 2015. The vast majority of the UK Act’s provisions enter into force on 12 August 2016. The UK Act reforms both marine and non-marine insurance. Conversely, Australia’s principal legislative reform of insurance contracts, the Insurance Contracts Act 1984 (Cth) (Aus ICA), does not apply to marine insurance. The Australian Marine Insurance Act 1909 (Cth) (Aus MIA) governs Australian marine insurance and is a substantive copy of the English Marine Insurance Act 1906. Australia now trails England in marine insurance law reform.
This article compares the UK Act, the Aus ICA and the Aus MIA; describes, based upon Australia’s experience, what UK Act’s stakeholders might expect to result; and considers what is next for Australian marine insurance law.
Key UK Act’s reforms
The UK Act’s key reforms include:
- Enacting a “duty of fair presentation”. This “duty of fair presentation” requires that, “[b]efore a [non-consumer insurance contract] is entered into, the insured must make to the insurer a fair presentation of the risk”. The Aus ICA and the Aus MIA also imposes a duty of disclosure on insureds. The Australian Law Reform Commission (ALRC)’s May 2001 review of the Aus MIA (ALRC review) suggested that Australia reform the duty of disclosure in the Aus MIA, so that an insured is only required to disclose those factors which it knows to be material, or which a reasonable person in its position ought to know. Under this formulation, if a reasonable person in the insured’s position would make the same mistaken non-disclosure, the insured will not be in breach. This recommendation is un-enacted.
- Creating a new system of proportionate remedies where the duty of fair presentation is breached, except where the policyholder has breached the duty deliberately or recklessly. This replaces the current single remedy, which is avoiding the contract. In comparison, the Aus ICA provides that, in certain circumstances, an insurer may avoid a contract of insurance if an insured’s breach of its duty of disclosure involves fraud or a misrepresentation. Otherwise, an insurer cannot avoid the contract for non-disclosure. Australian marine insurance law, in this respect, now stands apart, retaining the traditional remedy of avoidance for innocent non-disclosure.
- Like the Aus ICA’s reforms, the UK Act effectively abolishes clauses that convert an insured’s representations about a proposed non-consumer insurance contract into warranties1 (which are often referred to as “basis of contract clauses”). The ALRC review also recommended this abolition in respect of marine insurance, but this reform has not yet been enacted.
- The UK Act provides that, if the insured shows that its non-compliance with a contractual term could not have increased the risk of the actual loss, an insurer may not rely on that non-compliance to deny cover. In this respect, the Aus ICA is different. Some contracts of insurance may allow an insurer to refuse to pay a claim because of the insured’s post-contractual conduct (such as breaching a contractual term). In this case, the Aus ICA ensures that the insurer may only refuse to pay the insured’s claim if the post-contractual conduct “could reasonably be regarded as being capable of causing or contributing to” the relevant loss. The insurer may not refuse to pay the claim on the basis of that conduct alone, but its liability is reduced. Unlike the UK Act and the Aus ICA, under the Aus MIA, an insurer can deny a claim because of non-compliance with policy terms, including breach of warranty or non-compliance with a condition precedent.
- The UK Act provides that, if an insured’s claim is tainted by fraud, the insured forfeits the whole claim. Before the Aus ICA was enacted, an Australian insurer was entitled to avoid a contract of insurance upon which an insured had made a fraudulent claim. The Aus ICA now ensures that, if a claim is made fraudulently, the insurer may not avoid the contract, but may refuse payment of the claim.
- The UK Act removes the remedy of avoiding the contract for breach of the duty of good faith. Before Australia enacted the Aus ICA, the only remedy for breach of this duty was rescission of the contract and refund of the premium. The Aus ICA, in effect, provides that breach of that duty gives rise to an action for damages, not rescission of the contract. In contrast, under the Aus MIA, the only remedy for a breach of the duty of utmost good faith is avoiding the policy.
What can UK stakeholders expect?
Based on Australia’s almost 30-years of experience with the Aus ICA, UK stakeholders can expect that it will take some time for courts to settle the correct interpretation of the UK Act’s provisions. In 2014, after 29 years of the Aus ICA, the High Court of Australia (equivalent to the English Supreme Court) revisited the operation of the Aus ICA’s provisions that seek to limit an insurer denying liability on the basis of an insured’s post-contractual conduct. These provisions, and accompanying factual issues, are oft-litigated. Similar experiences can be expected in respect of the UK Act’s provisions.
What next for Australia?
Australian marine insurance law finds itself without the benefit of considerable reform. There is much force in the comment of the Chief Justice of Australia’s Federal Court, James Allsop, that,
“[w]hilst the [Aus MIA] has served the community for a century, one wonders whether the marine insurance markets would not be better served by a more up to date and comprehensively adopted contemporary model.”