Since 2006, the Law Commission has been undertaking a consultation process for the reform of English insurance contract law and during the summer published its draft Insurance Contract Law Bill (the Bill).
The draft Bill may result in major changes to current insurance law, and would represent the first ever time that insurance law has been substantively altered in one sweep (the Marine Insurance Act 1906 being a codifying act which simply put the pre-existing common law position into the statute books). Using a new procedure whereby Law Commission draft Bills can enter into force as long as they have a broad consensus in Parliament, the draft Bill could come into force before the dissolution of the current government in March 2015.
The draft Bill proposes many changes that will apply to both marine and non-marine insurance and impact on insurance procurement, and the handling of claims, which is relevant to buyers and providers of property and liability insurance. However, there were several changes which were a part of the Law Commission’s consultation process that did not make it into the draft Bill, which raises the question as to whether the proposed reform is substantial enough.
What made it into the draft Bill?
At present, an insured has a duty to disclose all material facts prior to the conclusion of a marine insurance contract. The draft Bill replaces this. Under the proposed new regime the insured only must make a “fair representation of the risk” to potential insurers.
The draft Bill also provides for remedies for the breach of the “fair representation” requirement. In the case of deliberate or reckless breach, an insurer will be entitled to avoid the insurance contract. In other, more innocent breaches, an insurer’s remedy would be linked to what the insurer would have done had the information been disclosed – for example, the insertion of additional terms, or payment of an increased premium.
The current law in relation to warranties in marine insurance contracts often comes as some surprise when explained to those new to insurance. A warranty in a contract of marine insurance must be strictly complied with by an insured and failure to do so will result in the insurer being automatically discharged from further liability under the insurance contract, even if the breach of warranty is not causative of a loss. Take, for example, a warranty that “all insured locations will be fitted with working intruder detection systems” – if the system breaks, but is subsequently repaired, the insured would have failed to comply with this warranty, and under the current law the insurer would be able to avoid liability for the claim under the policy – despite the fact that the system had been repaired before a loss.
The draft Bill provides that a breach of warranty will no longer result in insurers being discharged of liability from the time of the breach, rather that liability under the policy is suspended until the breach is remedied.
What did not make it into the draft Bill?
Damages for late payment of claims
The Law Commission had considered giving insureds an entitlement to damages for losses suffered as a result of an insurer’s failure to pay a valid insurance claim within a reasonable time – a remedy which has not previously been available to insureds. However, because it was not considered that this was suitable for the special procedure for non-controversial Bills, this has not made it into the draft Bill.
In addition to the reform of warranties that have made it into the draft Bill, the Law Commission had also considered amending the effect of warranties, such that an insurer would not be able to avoid cover in the event of a breach of warranty if a loss was caused by a risk of a type not intended to be covered by the warranty. Again, it was considered that this amendment was not suitable for the special procedure and has not made it into the draft Bill.
By and large, the Law Commissions proposals will make insurance contract law slightly more favourable to insureds, with an application of fairness and common sense to disclosure and warranties. However, insureds should not treat this as a relaxation of the current law. We suggest that they should continue to work on the basis of the duty of upmost good faith, and make sure their brokers are provided with as much information as possible prior to placing insurance. The insureds must also ensure that they are fully familiar with the terms of their insurance.
Although perhaps an opportunity for more progressive reform may have been missed, the fact that there has been some change and review will probably be in insurers minds when handling claims and therefore have some effect.
The Law Commission has stated that it will continue to work with stakeholders to find a workable solution on the outstanding points, as a result this Bill, if passed, may not be the end of insurance contract law reform.