The Insurance Act received Royal Assent on 12th February and will come in to force in August 2016 following an 18 month transition period. The new Act brings about fundamental reform of the law governing commercial insurance in England and Wales, replacing the 109-year-old Marine Insurance Act 1906, which was widely considered to be out of date with the modern insurance market.
The Act seeks to redress the perceived bias of English law in favour of the insurer. The key changes to be brought about by the Act are as follows:
1. The insured’s duty of disclosure
Under Section 3 of the new Act an insured is under a duty to make a “fair presentation of the risk” to insurers prior to inception of the policy (and upon any change to cover or renewal). This means that the insured must:
- Disclose every material circumstance which it knows or ought to know; or
- Failing that, disclose sufficient information to put a prudent insurer on notice that it needs to make further enquiries in order to reveal those material circumstances; and
- Not make any misrepresentations.
The duty to make a fair presentation of the risk also requires the insured to disclose material information in a manner which would be “reasonably clear and accessible” to a prudent insurer.
Determining precisely what constitutes a “fair presentation of the risk” will no doubt give rise to early litigation, but it is hoped that the English courts will take the opportunity to set out clear and consistent principles for parties early on. The requirement that information be presented in an accessible manner is intended to prevent so-called “data dumping” and will be one area under the new Act where brokers can really add value by assisting their policyholder clients in the presentation of the risk.
2. The insurer’s remedies for non-disclosure
Currently, the sole remedy for non-disclosure or misrepresentation by the insurer is avoidance of the policy, even where that non-disclosure or misrepresentation was innocent. Section 8 and Schedule 1 of the new Act provide a range of more proportionate remedies, with the insurer having to demonstrate what it would have done had it been aware of the non-disclosed or misrepresented fact.
Avoidance will still be available if the insurer can show that it would never have entered into the contract had it known of the non-disclosed or misrepresented fact. If, however, the insurer would have entered into the contract, but on different terms (for example, with additional warranties or exclusions) or if the insurer would have charged a higher premium, then the insurer will not be able to avoid the policy but may treat it as including those additional terms or reduce the amount of any claim proportionately. So, if the insurer can show that it would have charged a premium of £500,000 but in fact it only charged £250,000, then it could reduce the amount due in respect of any claim by 50%.
As with the “fair presentation of the risk”, precisely what additional terms the courts would be willing to imply and how an insurer will go about demonstrating that it would have required those additional terms or charged a higher premium will no doubt be the subject of early litigation.
3. Warranties
Section 9 of the new Act abolishes so-called “basis of the contract” clauses, which convert an insured’s pre-contractual representations into warranties in the policy, thereby enabling the insurer to avoid liability where there has been some inaccuracy in a proposal form or other underwriting information. The effect of such clauses has long been considered unduly harsh on policyholders.
The Act also changes the current position with regard to warranties in an insurance policy. Presently, breach of warranty entitles an insurer to avoid liability entirely for a claim, even where the breach is unrelated to the loss which occurs. For example, breach of a “no-smoking warranty” would discharge an insurer’s liability for loss caused by a theft from the insured’s premises. The new Act provides that the insurer’s liability will be suspended while the insured is in breach of warranty, but will be reinstated once that breach is remedied. Section 11 also prevents an insurer from relying on a breach of warranty where the insured can show that such breach could not have increased the loss which actually occurred in the circumstances in which it occurred.
The changes to the law with regards to warranties certainly level the playing field as between insureds and their insurers. In particular, the reintroduction of Section 11 (Terms not relevant to the actual loss), which had previously been dropped from the draft Bill, is to be welcomed from a policyholder’s perspective.
4. Other amendments
The Act also sets out a statutory regime for dealing with fraudulent claims and amends the Third Parties (Rights Against Insurers) Act 2010 enabling that Act to also be brought into force.
Unfortunately, the Act does not include the Law Commissions’ suggested reforms to the English law regarding late payment by insurers of valid claims, which were perceived to be too controversial. In our view, the current law on late payment is based on a dated fiction that the insurer’s primary obligation is to prevent its insured from suffering a loss in the first place, and is out of line with both the commercial reality of insurance and the legal position elsewhere in the world.
Commentary
With the exception of the law on late payment of valid claims, the new Act will bring the English law on insurance in line with present day realities and should ensure that the UK insurance market remains competitive on a global scale. UK (and European) corporates, who may previously have opted for New York law (which is traditionally perceived as more policyholder-friendly) as the governing law of their global insurance programmes, may now consider adopting English law (once the Act is in force) to avoid some of the practical downsides of foreign governing law clauses.
From a practical point of view, the Act will have a significant impact on everyone involved in the underwriting process; risk managers and their brokers will now need to consider carefully whether any changes are needed to the way in which they have previously presented information to their insurers, and underwriters will need to play a more active role in the future, making enquiries of the insured and their broker where necessary. As we have noted above, some of the new concepts including the “fair presentation of the risk” will, however, no doubt give rise to early litigation.
Finally, it should be noted that the Act sets out the default position under English law and (with the exception of the prohibition on basis of the contract clauses) commercial parties will be able to contract out of its provisions.