All change in the London insurance market
The insurance landscape in England is about to change fundamentally with the biggest shake-up for over a century. On 12 August 2016 the Insurance Act 2015 will come into force and will amend the Marine Insurance Act 1906 in areas such as warranties and disclosure. Furthermore, the Enterprise Act 2016 will come into force on 4 May 2017, and will, among other things, impose an obligation on insurers to pay claims promptly.
The Insurance Act 2015 amends certain key sections of the Marine Insurance Act 1906 (MIA). Its aim is to create a fairer balance between the insured and insurer. The main changes under the Act include:
- A duty of fair presentation in place of the absolute obligation to disclose all material information.
- Depriving insurers of the right to avoid the policy on the grounds of a breach of warranty unrelated to the loss.
- The abolition of ‘basis of contract’ clauses.
- New remedies to insurers following a breach of the new duty of disclosure.
- Clarification of remedies for insurers in the event of fraudulent claims.
- The maintenance of the duty of good faith, but with the insurer no longer being able to avoid the contract solely on this ground.
Duty of fair presentation
The MIA imposed a heavy duty of disclosure on insureds requiring them to disclose everything that they knew, or ought to have known, which would influence an insurer when accepting or rating the risk. The Act introduces a new duty based on a fair presentation of the risk aimed at encouraging active engagement by insurers, as well as clarifying matters which ought to be known by the insurer.
Under the Act, insureds are required to disclose every matter which they know - or ought to know - that would influence the judgement of an insurer or sufficient information to put insurers on notice that they need to make further enquiries about potentially material circumstances.
Insureds will be considered to know matters that can be revealed by a reasonable search for information. Insureds will also be deemed to have the knowledge of anyone who is a part of the organisation’s senior management and those responsible for insurance.
Insurers will be considered to know matters known to their employees or agents; information which is available to them within their organisation’s records; and matters of common knowledge or which an insurer offering insurance in a particular field would be expected to know. Brokers will no longer be subject to disclosure duties.
The disclosure itself must be made in a reasonably clear and accessible manner, and representations must be made in good faith. This is to discourage ‘data-dumping’ or bombarding insurers with large amounts of information with no effort to identify its relevance.
Warranties and Basis of Contract clauses
A ‘basis of contract’ clause has the effect of converting representations made by the insured into contractual warranties. Such clauses are now prohibited. Further, under the Act, a breach of warranty now results in insurance cover being suspended for the duration of the breach and reinstated once the breach has been remedied. An insurer will not be able to rely on non-compliance with a warranty if it does not increase the risk of loss. This is a welcome change in the law and it will now no longer be possible for an insurer to reject a claim on the grounds that there is a breach of warranty unrelated to the type of loss that has been suffered.
Remedies for insurers
Under the MIA, an insurer was able to deny liability in the event of a material non-disclosure. The Act has now introduced a range of proportionate remedies to replace this rather draconian right. The remedies available to insurers are now tailored to the nature of the breach and what insurers would have done had they been aware of the information on placing.
Thus, for a deliberate or reckless breach, the insurer can avoid the contract and retain the premium. The contract can also be avoided for non-deliberate or reckless breaches if the insurer would not have entered into the contract, but the premium must be repaid. If the insurer would have entered into the contract on different terms, the insurer will be able to treat the contract as if those terms applied. Where the rate would have been increased, there will be a proportionate reduction in cover.
In order to exercise any remedy for non-disclosure, insurers will need to prove how they would have acted differently if the breach had not occurred. Disclosure of underwriting guides and other relevant documents may be required to support the insurer’s position, as well as evidence of the factors considered in taking on the risk.
In the event of fraud, insurers will be entitled to not pay the claim, recover any sums already paid to the insured, treat the policy as terminated with effect from the fraudulent act and retain all premiums paid. Previous claims paid are not affected. Where there is group insurance policy, then these provisions only apply to the insured responsible for the fraudulent acts.
Duty of utmost good faith
Insurers will no longer be able to avoid the insurance contract solely on the grounds of a breach of the duty of utmost good faith. However duties of utmost good faith will remain at the heart of the insurance and the insured’s obligations will be construed in a way that favours compliance with this duty.
The parties can agree contracts on less favourable terms than those in the Act but such provisions must be clear and unambiguous and sufficient steps must be taken to draw them to the attention of the insured before the contract is concluded.
Both insurers and insureds will have to respond to the new provisions in the Act in a practical manner. Insureds should review their processes for placing insurance to ensure that the risk is presented fairly and that all material matters within their knowledge are disclosed.
Insureds may wish to agree in advance with insurers what constitutes a reasonable search. It would be sensible to keep internal records of the names and roles of individuals responsible for arranging insurance cover, involve senior management in disclosure, and establish demonstrable search procedures. Where appropriate, insurers will need to look closely at their standard terms to ensure that they too comply with the transparency requirements, particularly if they wish later to rely on remedies in the event of non-disclosure.
It will be another year before the provisions of the Enterprise Act relating to insurance contracts come into force. However when they do it will be a radical departure from the current position regarding the payment of claims. The Act will amend the Insurance Act by introducing an implied term that an insurer will pay a claim within a reasonable period of time and to require damages to be paid in the event that the insurer fails to do so. The Act defines what is meant by reasonable and in the main this will turn on the size and the complexity of the claim and the type of insurance.
Insurers are also permitted to contract out where it is a non-consumer insurance contract and providing the breach was neither deliberate nor reckless. Once these provisions come into force they are likely to have an impact on the manner and speed on which insurance claims are handled.