Draft bill expected by the summer as clauses reforming warranties, fraudulent claims and contracting out rules are published

The Law Commissions have followed up the limited consultation published in January with further draft clauses from the Insurance Contracts Bill. The draft clauses covered in the latest consultation address warranties, insurers’ remedies for fraudulent claims by members of group insurance schemes and contracting out.

In relation to contracting out, the Law Commissions propose a mandatory regime for consumer insurance but only default provisions for business insurance. Commercial parties should be free to contract out of the reforms and substitute their own agreed regimes.

Warranties

Basis of contract clauses

Clause 8 has the effect of abolishing ‘basis of contract’ clauses in non-consumer contracts. This mirrors the Consumer Insurance (Disclosure and Representations) Act 2012 that prohibits such clauses in consumer contracts. This means that it will no longer be possible to convert all representations by an insured during the placement process into warranties. Parties must expressly agree warranties in respect of particular matters to be effective.

Warranties to suspend liability

There was strong support for proposals that some warranties should be treated as suspensive conditions so that an insurer’s liability would be suspended for the duration of the breach but not terminated. Draft clause 9 removes the existing rule that breach of warranty discharges an insurer’s liability. A new remedy suspending liability for breach of warranty is introduced for both express and implied warranties. The effect of clause 9 is that an insurer has no liability for losses occurring, or attributable to something happening, after a warranty has been breach but before the breach has been remedied (if it can be remedied). The insurer’s liability is merely suspended during the period the warranty is breached.

Terms to reduce particular risk

Clause 10 introduces ‘type of loss’ proposals to reflect that, where a term is designed to reduce the risk of a particular type of loss, breach of that term should suspend cover only in respect of losses of that type. Similarly, if a term is intended to reduce the risk of loss at a particular time or location, then breach of that term should only suspend cover in relation to such losses. If the breach is capable of remedy, full cover would be restored when fixed. For example, breach of a term requiring a policyholder to have certain fire safety systems in place would result in suspension of the insurer’s liability for fire-related risks. The insurer would not be liable for any loss falling within the particular category with which the warranty or other condition is concerned. The accompanying notes provide an example of how the suspension/remedy and type of loss provisions would work together.

Fraudulent claims under group insurance schemes

Broadly, the Law Commissions propose that where a fraudulent act is committed by one or more group members, the member(s) concerned should be treated as if they are a party to the contract. The effect of this would be that the statutory remedies would apply: a group member who commits fraud to obtain a benefit under the group scheme would forfeit the entire benefit of the claim and, at the insurer’s option, any subsequent benefit under the contract. Only the fraudulent member would be affected; innocent group members would not be prejudiced. Draft clauses 11 and 12 address fraudulent claims.

Contracting out

Consumer and non-consumer contracts

Draft clause 15 prohibits contracting out of the default provisions in the consumer context, therefore, provisions on warranties, remedies for fraudulent claims, late payment of claims and good faith will apply to all consumer contracts as a mandatory regime. Any term that seeks to change the default rules, with the result that the consumer is worse off than under the default regime, will be of no effect.

For commercial parties, the changes proposed by the draft Bill are intended only to be a default regime. Non-consumer market participants are able to contract out of the reforms and substitute their own agreed regimes, subject to the transparency requirements under draft clause 17.

Transparency requirements

A disadvantageous term (i.e. a term that puts the insured in a worse position that they would be under the default rules) will have no effect unless the insurer takes sufficient steps to draw the disadvantageous term to the insured’s attention before the contract is entered into and the term is clear and unambiguous as to its effect. In determining whether the transparency requirements have been met, the nature of the insured person in question and the circumstances of the transaction should be taken into account. The Law Commissions accompanying notes provide examples of how this is expected to work in practice.

Exceptions

There are two exceptions from contracting out: basis of the contract and similar clauses; and deliberate of reckless late payment of insurance monies. Insurers cannot contract out of the rule prohibiting basis of contract clauses. Draft clause 16 also provides that any attempt by an insurer to contract out of liability for a deliberate or reckless breach of the implied term to pay within a reasonable time will be of no effect. A breach is deliberate or reckless if the insurer knew it was in breach of term or did not care whether or not it was in breach.

Settlement agreements and cancellations rights

The Law Commissions do not wish to prevent valid settlements and so the contracting out provisions do not apply to settlement agreements. In addition, the ability of parties to make provisions for cancellation is not affected and the transparency requirements do not apply to cancellation clauses.

The deadline for comments on these clauses is March 21, 2014. The Law Commissions hope to publish a final draft Bill and report by summer 2014.

View Insurance Contract Law Draft Bill: limited consultation on draft clauses, 10 March 2014