The Insurance Act 2015 has received Royal Assent and will come into force in August 2016. The Act has followed a special Parliamentary procedure for uncontroversial Law Commission bills and marks the most significant change in insurance law in the UK for over a century.
The Act also includes a number of amendments to the Third Parties (Rights Against Insurers) Act 2010 which received Royal Assent five years ago but has yet to be brought into force. With amendments in the Insurance Act to address concerns with the statute, it is likely that the Third Parties (Rights Against Insurers) Act will finally come into force later in the year.
What does the Insurance Act 2015 do?
Making a fair presentation of a risk
The Act reforms the effect of the duty of utmost good faith on contracts of commercial insurance. The Act requires that insureds make a “fair presentation of the risk” to insurers. This duty would replace the existing duty of disclosure and misrepresentation but will retain certain familiar obligations such as the requirement to disclose material information that the insured knows or ought to know. The Act will enable the insured to make a fair presentation where sufficient information has been disclosed to put a prudent insurer on notice that it must make further enquiries concerning the risk. The Act also requires that insureds ought to know what would be revealed through a reasonable search of information available to them.
Where an insured has deliberately or recklessly failed to make a fair presentation the insurer will be entitled to avoid the policy and must return premiums paid. In all other circumstances, remedies proportionate to the effect of the failure to present the risk fairly will be applied. For example, where the insured has failed to mention a particular fact the insurer may have a remedy to apply terms or conditions to the contract that they would have applied had the true position been presented to them. Similarly, where the insurer would have required a higher premium to cover the risk, a proportionate deduction will be made to any claims paid under the policy.
Warranties become ‘suspensive conditions’
The Act changes the existing law in relation to warranties. Presently, where a warranty is broken by the insured, the insurer will automatically cease to have any further liability under the contract – the breach once made cannot be remedied. The Act enables a breach of warranty to be remedied where the remedy will have the effect that the risk continues to be as originally intended under the contact. The Act also abolishes “basis of the contract” clauses in commercial agreements.
In addition, where a loss occurs the insurer will not be able to deny liability where a breach of a contractual term did not have the effect of increasing the risk of the loss that actually occurred. In other words, it will no longer be possible for an insurer to deny liability for a burglary claim where the insured did not have a working sprinkler system.
Insurers’ remedies for fraudulent claims
The Act also introduces remedies where the insured has made a fraudulent claim. Where fraud is committed by the insured, the insurer will not be liable to pay the claim to which the fraud relates. Any money already paid out for that claim may be recovered by the insurer. The insurer will remain liable for claims made in relation to events that take place prior to the specific fraudulent act. Once the insurer has elected to treat the contract as terminated it can refuse to pay claims relating to “relevant events” (i.e. notice of claim or potential claim) that take place after the fraud.
For commercial insurance the changes introduced are a default regime. If insurers propose to alter the default regime with any term which would have a more disadvantageous impact on the insured, the term must be sufficiently drawn to their notice. It will not be possible to contract out of the law concerning basis clauses, which are now effectively outlawed in either commercial or consumer contracts.
Insurers will now need to start preparing revised policy terms which take the Act into account. Furthermore, the change in obligations in relation to what information is deemed to be known to an insurer may require a review of internal processes to ensure that it is clear what types of information will be taken to be known by underwriters. Underwriters must now make further enquiries where they are provided with information that should put them on notice that things may not be quite as described.
Brokers should also consider their obligations under the Act and should ensure that they are prepared to provide information in a manner which will make a fair presentation of the risk to underwriters. It will no longer be possible to disclose everything in order to discharge the duty of good faith. The quality of the information and its presentation to the underwriters will be crucial.
Clearly, there are some things that insurers and brokers cannot prepare for. The new law will be an unknown judicial territory. Although much criticised, the current law is at least familiar to the industry and to judges alike. New law brings new uncertainties, even if the change is overall a positive one.