All change for UK insurance law
March 2016 | SPECIAL REPORT: INSURANCE COVERAGE
Financier Worldwide Magazine
August 2016 will see the most important changes to UK insurance law for over 100 years with the coming into force of the Insurance Act 2015. The Act introduces key changes to the duty of disclosure in commercial insurance contracts, policy terms and insurers’ remedies for fraudulent claims.
Under the Insurance Act, non-consumer insureds will have a duty to make a fair presentation of the risk and the requirements to satisfy the duty are set out in the Act. There will also be significant changes to the remedies available to insurers for non-disclosure and misrepresentation. Except where the breach of the duty to make a fair presentation is deliberate or reckless, proportionate remedies (based on what the insurer would have done if full disclosure had been made) will apply. In addition, the concept of warranties remains, but with important modifications. Further, in cases of fraudulent claims, insurers will have the option to terminate the cover from the date of the fraudulent act without returning premium.
Duty of fair presentation for non-consumer insureds
The existing duty to disclose every material circumstance known (or which ought to be known) to an insured will be replaced by a duty to make a fair presentation of the risk. To make a fair presentation an insured must: (i) either disclose all material circumstances of which it is or ought to be aware, or give the insurer sufficient information to put a prudent insurer on notice that it should make further enquiries; (ii) make the disclosure in a way that would be reasonably clear and accessible to a prudent insurer; and (iii) ensure that representations about material facts are substantially correct (and that representations that are expectations or beliefs are made in good faith).
For corporate insureds, what is known or ought to be known to the insured means what is known to individuals who are part of its senior management team or responsible for its insurance. The insured is also expected to know what would be revealed by a reasonable search of information, including information held by the insured’s broker or a person covered by the insurance (but not confidential information acquired by the broker when acting for other clients).
If the duty to make a fair presentation is breached, the insurer will be able to avoid the contract (and retain the premium) if the non-disclosure or misrepresentation is deliberate or reckless. In other cases, a scheme of proportionate remedies will apply, depending on what the insurer would have done if a fair presentation had been made. If the insurer can show that it would not have entered into the contract on any terms, it will still be able to avoid the contract and refuse to pay claims (but will have to return the premium).
‘Basis of contract’ clauses, whereby pre-contractual information is converted into a warranty, will be abolished for non-consumer insureds. This brings non-consumer insurance in line with the position for consumer insureds under the Consumer Insurance (Disclosure and Representations) Act.
For both consumer and non-consumer contracts, breach of warranty will suspend rather than discharge the insurer’s liability. The insurer will be liable to pay claims that arise after the breach of warranty has been remedied (if it can be) and will still be liable for losses before the breach, as is currently the case.
If a policy contains a term such as a warranty or condition precedent that is designed to reduce the risk of loss of a particular kind, or at a particular location or particular time, new rules will apply. The insurer will not be able to rely on breach of the term if the insured can show that failing to comply could not have increased the risk of the loss which actually occurred. For example, a lock warranty requiring the hatch of a yacht to be secured by a particular type of padlock is intended to reduce the risk of theft. Breach of the warranty would not, however, discharge the insurer from liability for loss of a different kind, such as loss in a storm.
The Act will introduce a default statutory regime for fraudulent claims. Insurers will remain liable for claims arising before a fraudulent act is committed but will have the option of terminating the contract as from the date of the fraudulent act without returning premium. For group insurance, the Act provides that fraudulent claims made by one beneficiary under the policy will not affect the cover provided under the contract to other parties.
In the main, the Act provides a default regime. With the exception of the abolition of ‘basis of contract’ clauses (which is mandatory), parties to non-consumer policies will be able to contract out of the Act and substitute their own agreed terms providing the insurer meets certain ‘transparency requirements’. To be effective, however, policy terms that would put an insured in a worse position than they would be in under the Act must be clear and unambiguous and sufficiently drawn to the insured’s attention before the contract is entered into.
The Act introduces significant changes to insurance contract law and its impact will be felt in both commercial and consumer insurance, in particular with respect to how risks will be assessed and policy terms and wordings. With five months until the Act comes into force, commercial insureds will want to review their insurance arrangements and policy wordings in the light of the Act and put in place changes required.
Simon Garrett is a partner at CMS Cameron McKenna LLP. He can be contacted on +44 (0)20 7367 2786 or by email: firstname.lastname@example.org.
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